Small-Cap Stock Investing
Versus Growth Stock Investing
Versus Value Stock Investing
What's the best investing system?
I'll tell you in a minute. But first I'd like you to study
this chart-courtesy of Google Trends-that depicts the level of
interest in investing.
Specifically, it depicts the popularity of search terms
related to investing, like "stock", "gold", "fidelity", "oil",
"stock market" and "scottrade."
To me three patterns are evident in this chart.
First, interest in investing has shrunk over the past five
Second, interest in investing falls off in late December every
year, and then pops higher in January.
Third, and most germane to today's discussion, is that the two
big spikes in the chart reveal that people become more interested
in learning about investing (though not actually doing it) when
bad things happen.
The late 2008 spike coincided with the end of the housing
crash that threatened to bring down our banking system, while the
mid-2011 spike coincided with the worst of the European debt
The reasons for this increased focus on investing in times of
perceived crisis are simple.
Fear is a stronger emotion than greed, and the pain of loss is
felt more deeply than the joy of gain.
Thus in the peak crisis moments of 2008 and 2011, people were
hungry for news about investing because they were worried about
their own assets and ultimately, their own safety.
You can see the dominance of fear-based thinking in the
outside the investing world as well.
As I write this on Friday, for example, on a beautiful sunny
afternoon, enormous amounts of attention are being paid to the
coming "Frankenstorm," which has the potential to devastate vast
positions of the eastern seaboard.
At the same time, very little attention is being paid to the
fact that Saturday will be a beautiful day!
The bottom line is that we humans are born and bred to notice
danger and to act to protect ourselves from it.
Sadly, we're not as well designed to notice opportunities for
profit, particularly when doing so means running in the opposite
direction from the herd.
Which takes us back to investing, and the task of identifying
the best investing system.
Taking the human element out if the picture, the very best
investing system is that which produces the best long-term
returns, and that's small-cap investing. A small-cap stock, by
one definition, has a market cap of less than $2.5 billion and
greater than $500 million, but there are no hard and fast
According to Royce, which manages several small-cap mutual
funds, since 1925, small-cap stocks have grown an average of
11.3% per year while the S&P 500 has grown 9.5%. That may not
seem like a huge difference, but over time, the magic of compound
growth yields major differences.
If you'd put $10,000 in the S&P 500 in 1925, your
portfolio would now be worth more than $23 million, but if you'd
invested in small-cap stocks, it would be worth more than $100
And the trend continues today!
In fact, at Cabot, we have our own small-cap investing guru.
His name is Tom Garrity, and he's got a great track record.
Of the 31 stocks he's recommended since the start of 2009, Tom
still owns 20, with an average open profit of 31.50% per stock.
He's holding these because he's optimistic they can move higher
from here. And he recommends a new stock every month.
For details, click here.
Trouble is, you need a cast iron stomach and ice in your veins
to tolerate the volatility of some of Tom's small-cap stocks. Tom
has these qualities, and those who follow his advice do very
But if you don't have a cast iron stomach, small-cap investing
is not the best investing system for you. If you let your
feelings take control-it's only human-you'll find yourself
selling at the exact bottom of one of those crisis points and
then sitting on the sidelines as stocks rebound. And that's no
way to make money.
So if you've got an appetite for growth, but holding on
through waterfall plunges is not your cup of tea, then Cabot
Market Letter is probably your best choice, It's our flagship
publication, combining stock selection and market timing into a
system that gets you into leading stocks for major market
uptrends, but ushering you to the safety of cash when the
environment turns nasty.
Big winners readers have enjoyed in recent years include
Amazon.com, Baidu, eBay, Ulta Salon and First Solar.
Since the start of 2007, while investors in the S&P 500
have earned nothing but heartache, followers of
Cabot Market Letter
have earned an average of 8.3% per year. And a large part of that
gain came from sitting in cash while the market was going done.
That's a great feeling!
Note: According to Hulbert Financial Digest, which tracks
performance of investment newsletters a little differently, the
Cabot Market Letter
earned 5.6% annualized over the five years ending 9/30/12, while
the Wilshire 5000 is up 1.3%%. That's still a great difference,
especially when you compound it.
I think it's a great system (it's been refined over the past
42 years), and if you haven't seen it, I urge you to give it a
For details, click here.
But if you really can't stand the volatility of stocks like
these-even when most of the action is on the upside-then this is
not the best investing system for you.
In that case, I recommend value investing.
Now as we all know, when it comes to value investing, the
epitome of the breed today is Warren Buffett. Trouble is, Warren
Buffett's style isn't exactly appropriate for smaller individual
investors. Warren likes to buy the whole company (or at least
controlling interest) and then simply hold it. He says, "Our
favorite holding period is forever,"
If you're like most investors, you're probably counting on
selling your investments during your retirement years, so you
can't invest like Warren. But you can invest like the guru who
taught Warren, and that's Benjamin Graham, author of the bibles
of value investing, "Security Analysis" and "The Intelligent
And the best way to do that is by following the very clear buy
and sell advice in Cabot Benjamin Graham Value Letter, edited by
Roy likes high-quality stocks that pay dividends, representing
well-managed companies that are practically guaranteed to be in
business, and larger, in the years ahead. But he only buys them
when they're on sale!
Recent recommendations of Roy include such stalwarts as
Metlife, Omnicare, Xerox, Caterpillar, Schlumberger, Celgene and
And his results have been excellent!
Roy's Classic Value Model has advanced 27.6% during the past
12 months compared to an increase of 23.8% for the Dow. Since its
inception on 11/30/02, the Classic Model has achieved a total
return, not including dividends, of 184.0% compared to a return
of just 51.9% for the Dow Jones Industrial Average.
And Roy's Modern Value Model-slightly more growth-oriented-is
up an amazing 43.7% during the past 12 months compared to an
increase of 27.7% for the S&P 500. During the past decade,
the Model has increased a remarkable 118.6% compared to an
increase of 58.5% for the S&P 500. And the Model continues to
set all-time highs!
To see more, check it out.
And what if holding individual stocks makes you uneasy? What
if what you really want a simple system for benefiting from
market uptrends and avoiding market downtrends?
Then the best investing system for you is the
Cabot ETF Investing System
When you follow this system you invest in three or four ETF
sectors (like health care or utilities or financials) when the
market trend is favorable, and you retreat to the safety of cash
when the market trend is unfavorable.
That way you avoid the risk of owning individual stocks, and
you avoid the risk of being invested when the market is going
Yet you benefit by being in the most favorable sectors when
the market is going up.
For example, followers of this system, guided by editor Robin
Carpenter, bought four ETF sectors back on June 20, when the
system signaled a buy. And they remained invested until October
23, when the system signaled a sell.
Result: again of 6.9% while the S&P 500 is up 5.7%. It
doesn't seem like a big difference, but it compounds over time,
particularly if you're sitting safely in cash during the market's
Over the past five years, the system is up 27.9% while the
S&P 500 is up 5.0%.
Over the past 10 years, the system is up 149.2% while the
S&P 500 is up 91.9%.
If that sounds like the best investing system for you, I
invite you to try it out.
For details, click here.
Yours in pursuit of wisdom and wealth,
Cabot Stock of the Month