Simplicity is the Ultimate Sophistication
King of Kiosks
I am on Twitter (my tag name is @cabotdude if you want to
follow) and I occasionally tweet about what I'm seeing, but I also
enjoy reading opinions from others. The following is an actual
chart some investor linked to on Twitter a few days ago:
Now, first, let me say this-I don't know who posted this (it was
"retweeted" by someone I follow), and for all I know, the person is
a highly successful trader, so I have nothing personal against him
or her. But as soon as I saw the chart I saved a copy of it and
decided to write about it here.
Why? Just look at it! There are so many lines, notes, angles and
indicators it's hard to discover any meaning. Of course, its an
extreme example (I've never seen a chart so filled with notes), but
my point is that, whether you're dealing with stock charts or
systems as a whole, it's usually best to follow the KISS method
(Keep It Simple, Stupid).
I think all investors go through a "Treasure Hunt" process when
they first become interested in the market. I know I did. For the
first two years or so I worked at Cabot I backtested a couple dozen
stock and market timing indicators while paper trading a handful of
systems. It was fun and a great learning experience ... but I can't
say I actually ended up using much of what I tested.
If anything, such a process clarified the fact that there is no
Holy Grail-i.e., there is no perfect system or indicator that's
going to crank out wins eight or nine out of 10 times. Some people
seem attracted to the truly arcane and complex methods (as
illustrated by the chart above) but I never found much use in them.
When evaluating stocks, here is what I use: A bar chart with price
and volume. I usually include the 25-day and 50-day moving
averages. And I also have a relative performance (
) line in there, which graphically depicts how the stock is doing
compared to the market.
And that's it! No stochastic readings or RSI or Elliot Wave counts
or candlesticks or anything like that. Not that I have anything
against these measures; heck, I think fellow editor Paul Goodwin,
who sits about eight feet behind me, likes the look of a
candlestick chart. But it's not for me.
In my view, there's enough data out there to make your head spin.
So I like to keep things as clean and as clear as possible. That
reduces the chance that I will be confused by what is actually
happening in the market.
As for market timing systems, I also think keeping it simple is
your best course of action. That's why I prefer to rely on
trend-following market timing indicators-yes, they can give you a
few unpleasant whipsaws, but they will always keep you in major
upmoves and out of major downmoves. That's most of the ballgame
But time and again I see pundits talking about random indicators
like manufacturing reports, the U.S. dollar, overbought/oversold,
valuation metrics and the like. Again, to each his own, but what do
you do if the market is cheap, but overbought, and manufacturing is
weak? I have no idea! I prefer to just follow two or three,
red-light or green-light type of indicators and invest accordingly.
The upshot of all this: Investing is not easy, but it shouldn't be
mind-bendingly complex, either. Really, the key to success isn't in
some exotic, proprietary system, but in sticking to basic
principles (cutting losses, holding winners, watching risk,
following the trend, etc.) and to always keeping them in the
forefront of your mind.
As for the current environment, it's been challenging-in fact, I
think the timeframe of February 2011 through June 2012 has been
about as tough a 16-month period as you'll find. During that
period, there was a little money to be made after the Japan nuclear
accident in April and May 2011, and of course, some morsels to be
found in February and March of this year. But that leaves about 12
months that have been either trending down or very choppy.
Not surprisingly, the mood among investors I talk to is very glum.
Whether it's a subscriber on the phone or an acquaintance at a BBQ,
if the topic of the market's future comes up, the words that
normally are spoken include "tough," "difficult," and even
"minefield." The message ... be safe, keep your head down. Most
people are happy earning 3% or so in an income investment.
However, while I won't predict we're now embarking on a major new
bull market, I do like the look of the recent market action. Since
the top in late-March, the Nasdaq had a failed rally attempt in
late April, and another that got going in early June that fell
But the rally that launched Friday, June 29, looks like it could
have legs. The timing seems about right--most leaders have had at
least two or three months to re-build sound launching pads. And
we're finally beginning to see the market's worst sectors
(financials, industrials, commodities) come off their duffs, which
is needed for a sustained upmove.
My guess is that it will come down to earnings season; if earnings
are well received, I think there could be a few dozen high-quality
leaders to sink your teeth into. If not … well, we'll deal
with that if it happens. The upshot is that, if you've been
defensive for the past couple of months like us, you should start
coming off the sideline and, if you make money, look to extend your
line in the weeks ahead.
My stock idea for today is a stock that is one of the first to
reach new high ground during the past couple of weeks. It's
, which has made hay with its coin-counting machines and its
popular Redbox DVD rental kiosks. Here's what I wrote about the
company in the June 25 issue of
Cabot Top Ten Trader:
"Coinstar started many years ago with its namesake coin-changing
machines; for a fee just under 10%, people can bring their change
to a Coinstar kiosk and get cash back, gift cards to popular
retailers like Amazon.com, or even recently, fund their PayPal
account. Then came the firm's move into DVD rentals with its
Redbox kiosk, allowing users to rent new, popular movies for just
$1 per night; the company went from a few hundred locations to more
than 20,000 in just a few years. That has been the main
driver of the company's tremendous sales and earnings growth in
recent quarters. At this point, analysts see earnings
flattening out after 2011, as Redbox growth slows and as streaming
video possibly takes a bite out of business. However, we're
not so sure-the company is aiming to be the King of Kiosks in a
sense. Coinstar's next avenue of growth could be its coffee
kiosks; called Rubi, there will be 500 placed by the end of the
year, offering Seattle's Best coffee (a Starbucks brand) and other
specialty drinks, starting for just a buck. Management
eventually thinks it could have 15,000 of them around the
U.S.! Other than that, Coinstar is testing video game rentals
and even "eco-ATMs" that give cash for used, old cell phones.
The company clearly has expertise in rolling out these kiosks, so
if Rubi is a hit (so far it's garnering more than $10,000 in annual
revenue per test machine) expect it to blanket the country in no
time. Said another way, we think this growth story has legs."
Interestingly, the day after I wrote that, the firm announced that
earnings this year would take a hit because of a recent
acquisition; it was a short-term negative, long-term positive sort
of announcement. The stock opened down but closed higher that day
on good volume, and since then, CSTR has moved to new highs. There
hasn't been blowout-type volume on the upside, but there have been
solid buying trends.
If you're game, I think you could buy some around here, with a stop
near 64. Earnings should be out around the end of the month.
All the best,
Cabot Market Letter