Stories that involve good advice tend to get re-told, and the
ones with real value pop up again and again.
One of my favorites is the story of the legendary admiral who has
a lock-box in his stateroom. Every day before he takes the
bridge, he opens the lock-box, takes out a small piece of paper,
reads it and puts it back.
Over the years, this quirk is noticed by many people, and there's
lots of speculation about what's on the paper: an inspirational
quote, a personal sentiment or some gritty piece of military
When the admiral dies, his executors open the lock-box and read
It says "Port is Left, Starboard is Right."
I've heard this story at least three times, and in one telling it
was a merchant captain, in another an unnamed admiral, and in the
third, a specific admiral of some fame.
But while the information on the slip of paper would undoubtedly
be useful for a man in charge of a ship, I've never seriously
considered that the story might be true. (Although I'd love
to be wrong; let me know if you have any supporting evidence.)
As someone who plies the sometimes choppy waters of the stock
markets, I know that there are similar sentiments that can help
put things in perspective.
If I had to look at one little piece of paper every morning, I'd
"Remember: When markets are going up, you're not a genius.
When markets go down, you're not an idiot."
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With earnings season just beginning-
is the traditional first reporter, and it's announcing results
today (October 7) after the NYSE closes-there will be plenty of
both agony and ecstasy to go around. And that will make it
even more important than usual to keep your emotional
I know that taking an earnings hit can be very painful.
I've had personal holdings that dropped up to 25% after a
disappointing earnings report. The stocks that have been
the strongest (which means they had attracted the most hot money)
usually drop farther and faster than more sedate issues.
And I felt like an idiot for not taking profits the day before
the earnings announcement.
So here are a few observations on earnings season to help you
maintain an even keel as the news gaps stocks both up and down
with no warning.
1) It's Not the Number, It's the
If all companies had to do to stay in favor with investors was to
keep growing revenue and earnings, quarterly reports would be a
piece of cake. But investors pay close attention to the
earnings estimates provided by analysts, who, in turn, get to set
the bar where they think a company should perform. So a
company can lose money and still "beat expectations" by losing
less than analysts thought it would and investors will view that
as a victory and bid the stock up. But even a 100% jump in
earnings can kill a stock if analysts had predicted 101%.
2) Companies Make Predictions,
Even if a company comes up to the mark on revenue and earnings,
it can get dinged because its projections for results in the next
quarter (or year) are subpar. The result is often as bad as for
an earnings miss.
3) Stormy Weather Is Expected.
After the rosy Q2 results that put a booster seat under
investors' confidence, advance guidance for the Q3 season has
been running about two-to-one to the downside. Among
S&P 500 stocks, pre-announcements now total 77 on the
negative side and 34 on the positive side.
4) Don't Fight the Chart.
A stock that disappoints on revenue or earnings or guidance or
margins or anything and gaps down huge on above-average volume
should probably be sold. Big damage that shows up in a
stock's chart can take a long time to heal. You may be able
to pick up a few points by waiting for the bounce that sometimes
follows a big down day, but statistically, you're better off
selling than waiting for the stock to get going again.
5) Catch a Rising Star.
On the upside, a big gap up on volume typically gives a stock a
head of steam that will continue to push the price higher.
So don't let a big gain in a stock that soars on good results
keep you from jumping on the bandwagon. Stocks get good
mileage out of good results.
6) Keep a Razor Edge on Your Sell
I've said this before, but it's too important not to
repeat. When you buy a stock, you should calculate your 15%
and 20% loss limits and write them down where you can see
them. This will help you to keep your head when bad news
hits. If a stock hands you a 20% loss from your buy price
at the close of trading, kick it out!
Here's to a great earnings season with positive surprises in each
and every one of your holdings (and mine, too, as long as we're
ordering up good luck)! And as always, I will be rooting
for the stocks in the portfolio of the Cabot China & Emerging
Markets Report, most of which have scheduled their announcements
for November, as is typical for smaller, emerging market
stocks. I'll tell all of my subscribers how to handle the
ups and downs for each holding, and I'd be glad to tell you, too.
A quick click right here
will get you started on a guided tour of the hottest markets on
If you take the responsibility seriously, recommending any stock
is a genuine risk. After all, mutual fund managers who can
pick 51% winners-even with all the research and analysis
resources in the world-are considered real gunslingers. For
me, if a stock doesn't meet all of my requirements, it goes on
the Watch List, not into the portfolio.
That's why I won't be recommending
, the Chinese recruiting and human resource company, for the
readers of Cabot China & Emerging Markets Report.
The company has lots of things going for it, including its
admirable earnings line (up 300%, 233% and 120% from terrible
2008/09 levels) and revenue growth (gains of 15%, 43% and
37%). After-tax profit margins have been over 20% for the
latest four quarters, with an juicy 24.9% in the latest
quarter. And earnings estimates are running at $1.14 per
share for 2010, well up from $0.73 in 2009.
51job is a pretty seasoned company for China, founded in 1998 and
based in Shanghai, which is the heart of China's commercial
zone. The company serves both potential employers and job
seekers, using both online and print media. The 51job
Weekly is a recruiting publication that's customized for
particular cities and distributed in newspapers or as a
stand-alone. 51job also offers executive search and
business process outsourcing services, and will train clients in
job skills from secretarial and manufacturing to management and
JOBS has been on a roll since April 2009, with a seven-month
basing period from December 2009 to July 2010 under resistance at
20. The blastoff from that base began in July, but really
picked up speed (and volume support) in September.
All in all, it's a great package, and the prospects for the
company are excellent as China's need for better-trained
employees and executive talent heats up. 51job is a very
direct play on the growth of China's domestic economy.
So what's the problem? It's the discouragingly low volume
the stock trades at. With only an average of 150,000 shares
changing hands per day, the stock's volatility is just too high
to recommend to a large group of people. It's an
appropriate vehicle for the nimble individual investor, but its
float of seven million shares will have to increase to make it
attractive to institutional investors … and to me, of course.
For Cabot Wealth Advisory