There are many things I enjoy about the stock market, and one
of them is the fact that the slate is wiped clean at the start of
every year. In a way, it's like a sport-there's a big
scoreboard that, at the end of the day, is how we measure our
performance. Once the game is over, it's on to the next
one. There's no carryover effect.
In other words, it doesn't matter how you did last year in the
stock market-whether you made 50% or lost 10%, that performance
really has no bearing on how you'll do in 2011. That's why
they call it a new year! So whether you're overjoyed with
2010's performance, or disappointed, it's all about putting last
year behind you and starting from scratch as 2011 dawns.
On that note, I want to list a handful of New Year's resolutions
for investors-some are relatively basic, but all are useful and
should keep you on the right track this year.
#1: I will track my performance.
I am starting to take up golf (just got a set of irons for
Christmas; can't wait to test them out), might take a lesson or
two this spring and play a few rounds this summer. It's a
hobby for me. I enjoy it. But the fact is ... hobbies
For golf, the expense is know, and I judge it worthwhile.
But if you treat investing as a hobby, it will cost you more
money than you expect. Thus, try to be more professional
about it-no one's saying you have to obsess over every penny, but
creating a basic spreadsheet that enters weekly or monthly values
for your portfolio (and adjusts for money you put in or take out)
is necessary to know exactly how you're doing.
After all, if you know how you're doing, you have an idea of what
(if anything) needs to be changed. But if you don't ...
well, you're likely to just dabble in a couple of stocks that
will eventually cost you money. So if you haven't yet, put
together that spreadsheet and start tracking your results.
#2: I will not allow any one stock to do great
damage to my portfolio.
I realize that, while I'm all about growth stocks, you might have
a mix of growth, value, dividend payers, and so on in your
portfolio. And with some of those non-growth stocks, you
don't have to be an adamant loss-cutter as you do with growth
But whatever system you're using, you want to make sure that no
one or two stocks ever does great damage to your portfolio-that
means making sure losses don't get out of control, and it also
means you won't put a huge chunk of your portfolio in one
security. In other words, watch your risk!
#3: I will not take positions that are "too small"
Many individual investors I talk to will talk about some winner
they own, saying "yeah, I bought 200 shares of XYZ around 20 per
share; now it's up to 40!" But then, after a few minutes,
they mention how their total portfolio is worth $400,000.
So let's do the math-200 shares of a $20 stock equals $4,000 ...
which is exactly 1% of the total $400,000 portfolio. So
this investors' reward for doubling his money in this stock is
that his portfolio gained a whopping 1%. And that's likely
Not only does setting a minimum position size help emphasize your
winners, it's also likely to boost your winning
percentage-knowing that every position counts, you're less likely
to take flyers on total speculations, many of which don't work
out. Instead, you'll concentrate on your best ideas.
So what's a good minimum position size? It's really up to
you, but I would say smaller than 4% and you're getting close to
meaningless. Some aggressive investors won't go below 5% to
#4: I will consider the tax impact of my stocks
BEFORE, not AFTER, I purchase a stock.
Most people buy a stock, ride it, and then somewhere down the
road start thinking of the tax impact (taking the profit or the
loss). But what you should do instead is take that into
account before you buy a stock ... which will lead you to take
larger position sizes. Here's how.
Let's say that you know from your history that 95% of your trades
are held for less than a year, and let's also assume that, over
time, you're going to make money at this. And let's also
say that your combined short-term capital gains tax rate is 30%.
Knowing this information, you'll know that 30% of any gains or
losses you take over the long-run will be snatched by Uncle
Sam. (Yes, one year, you might have "too many" losses to
deduct them all, but they'll carryover to the next year.)
So if you made/lost $1,000 on a trade, you really only made/lost
Because of that, you can take bigger positions than you would
otherwise. If you're comfortable losing, say, $700 on a bad
trade, you can actually lose $1000 and it's a wash. Sorry
about all the math, but the bottom line is that you should think
about this stuff before you trade, not afterward; remember that,
in the end, it's AFTER-TAX profits that count, not pre-tax
#5: I will focus on the process, not necessarily
OK, OK ... you're obviously going to focus on your results
(that's what I wrote about in #1). But at the end of the
day, every system, no matter how sound, is going to have good
periods and bad periods. So when evaluating how you are
doing, you need to focus on how well you followed your rules, not
necessarily whether you made money in a given week or month.
For example, sometimes you might follow all your rules, yet lose
money. That's OK; the goal isn't to make money on every
trade (impossible), it's to put the odds in your favor on every
trade (very possible). If you focus on doing that, you'll
avoid some of the emotional decisions every investor makes ...
most of which lead to losses.
#6: I will take some of my profits on the way up in
I've written and even chatted (via a Chart School video
) about this a lot, so suffice it to say that if your sole
selling tool is waiting for a stock or the general market to pull
back sharply, you can probably do better by selling some stocks
(or portions of some stocks) on the way up in price, booking some
profit while everything is rosy.
#7: I will focus on only the very best set-ups,
stocks and stories I can find.
We all dream of striking it rich and feeling smart by latching
onto some small, unknown name with a great story and riding it
for a quick move higher. But these stocks are like lottery
tickets, and they occasionally give us a thrill-but over time,
just cost us money.
Thus, instead of thinking "if I had only bought XYZ stock ... "
think about "if I had only avoided a handful of trades, look at
how much better my portfolio would look!" Be more
selective-oftentimes the best investors spend weeks doing
nothing, only to pounce when the true high-probability set-up
I could go on, but we all know how hard it is to keep just a
couple of real resolutions, never mind seven, eight, 10 or
more. So I'll leave it at that. Printing out this
list and keeping it near your computer should help you stick with
some of these throughout 2011.
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For my stock idea in this Wealth Advisory, I'm actually going to
go with two ideas, both from the same industry ...
staffing. That's right-despite all the talk of
our jobs recession, I think there's a good shot that the job
market is going to pickup in a big way during 2011. And
that view is bolstered by the action of some of the top stocks in
In particular, I like both
Monster Worldwide (MWW)
, operator of the Monster.com job search site (it's become a huge
global brand), and
Korn Ferry (KFY)
, which is more on the executive recruitment side of things.
Korn Ferry has actually been showing some pretty stunning growth,
with sales up 55%, 49% and 32% during the past three quarters,
and earnings leaping 267% in the latest quarter. The stock
catapulted out of a base four weeks ago and is tightening up in
the 23 area. I think it's a decent buy here, but note that
the stock is thinly traded, so expect some volatility.
Monster Worldwide has yet to see business really accelerate, but
in the prior quarter, management mentioned that advanced
bookings-a reliable sign of future growth-were at the highest
levels in quite some time. The stock has been pausing just
south of 25 for a few weeks, and while a shakedown to 22 or 23
isn't out of the question, I think it's poised for higher prices.
All the best,
For Cabot Wealth Advisory
Editor's Note: Mike Cintolo is Vice President of Investments for
Cabot, as well as editor of Cabot Market Letter, a Model
Portfolio-based newsletter of the best leading growth stocks in
the market. Thanks to top-notch stock picking and market
timing, Mike's simple to follow and concentrated (no more than 12
stocks) portfolio has crushed the market by 14.4% annually since
the start of 2007; he was up 24% in 2010. If you want
to own the top leaders in every market cycle, be sure to give
Cabot Market Letter