Today I'm not going to beat around the bush. I'm jumping
right into investing, because I think the market is at a critical
On the one hand, the world is a mess. Arab governments are being
overrun by crowds whose actions threaten to throw a monkey wrench
into our oil-addicted economy.
And here in the U.S., where only one new deep-water drilling
permit has been issued since the moratorium was lifted last
October (!), it's becoming clearer day by day that our debts are
excessive, and that we simply cannot continue to spend as we did
in previous decades. Individuals and corporations, to their
credit, have cut back. But governments at all levels are
finding it far more difficult to cut spending, and the longer
they delay, the more likely we are to see the word "bankruptcy"
in stories about towns, cities, even states.
On the other hand, those Arab crowds are taking steps toward
democracy, which in the long run means they'll be more productive
members of the global economy.
And here in the U.S., auto sales are up, unemployment is down,
productivity is up and foreclosures are down.
Faced with conflicting information like this, do you invest
defensively, because things might get so much worse? Do you
invest aggressively because the future has so much potential for
improvement. Flip a coin? Go with your gut? Ask
Nouriel Roubini or Ben Bernanke?
No, you consult the one oracle that is always right … the
omnipotent stock market itself.
The market has recently completed a crackerjack five-month run
that added 25% to the Dow Industrials and 29% to the S&P
500. It was quite profitable for Cabot investors, and even
fun, as breadth was superb and the leading stocks were far
stronger than the broad market, helping us to pile up profits
But now some cracks have begun to appear. It's nothing
major, mind you, but it does appear to be the start of the
inevitable top-building process. Volatility is increasing.
Leadership is growing more selective. And this follows a
notable increase in the level of investor sentiment, which
contrarians know can be dangerous.
Thus, the odds are very good that the next five months won't be
as profitable as the past five. The odds are that the
market will be substantially more selective, and that the most
successful investors will be those who manage their portfolios
wisely, selling their weakest stocks and shifting into stronger
Finally, the odds are very good-no, the odds guarantee-that at
the very top of the bull market, there will be buying by
investors getting into the market for the very first time … or
just getting back in after selling in disgust near the bottom in
So here's my first piece of advice today.
Don't be the guy who buys at the top and sells at the
Now, obviously, no one wants to be that guy. We all want to
buy low and sell high. But the only way to do that is to
think independently-to work hard to avoid the groupthink that is
so prevalent at market bottoms and tops-and to listen carefully
to the messages broadcast daily by each stock you're interested
The fact is that the market is a two-way street … and in the heat
of the moment, some people forget that. In strong bear
markets, like the end of 2008, many people lose hope, ignoring
the fact that all bear markets eventual turn into bulls.
And in strong bull markets, like the one that's floated virtually
all boats over the past five months, many people forget that
stocks can go down quickly too.
As a result, they put caution aside when buying. They buy
stocks that are overextended, stocks that have low liquidity, and
stocks that, frankly, have simply come too far, too fast.
Don't be one of them.
And if, despite all your best efforts, you find yourself holding
a loser that's headed down, don't hold on in blind faith,
watching your losses escalate. Sell! There's no shame
in being wrong. I expect to be wrong many times in the year
ahead. The sin lies in staying wrong, and in ignoring the
message of the market.
So that's the second piece of advice today.
When a stock proves you wrong, sell.
Remember that the goal, particularly after great bull markets, is
not to keep piling on profits. It's to preserve profits, so
you have plenty of ammunition to use when you want to buy the
leading stocks of the next uptrend!
And which stocks will you buy?
Not the winners of yesteryear!
Sure, conservative investors can sit with stodgy dividend-paying
companies like Johnson & Johnson, General Electric or
Wal-Mart. But growth-oriented investors need to keep
switching mounts, shifting to the fastest horses in the current
race … ideally backing high-potential stocks that aren't well
Consider the computer industry, particularly since it remains a
fertile breeding ground for great growth stocks.
Back in the 1970s, the big winners included Computervision, Data
General, Hewlett-Packard, Intel, Loral and Prime Computer.
In the 1980s, the winners included Circuit City, Compaq Computer,
Computer Associates, Cray Research and Novell.
The 1990s were especially profitable … until the whole sector
exploded in 2000. Big winners included Cisco, Dell, Intel,
JDS Uniphase, Microsoft, Network Appliance and Sun Microsystems.
And in the past decade, the market made millionaires out of
investors in Apple, Baidu, Google, Research in Motion and Sina.
The message: If you want to own the top-performing stocks, you've
got to adapt to the times; you've got to always be looking for
the emergence of the next big thing.
Look for the next big thing.
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Today, the action is in cloud computing, social networks, smart
phones and tablets. Which brings me to the Apple iPad, a
device that is changing the world faster than anyone-except
perhaps Steve Jobs-thought possible.
Apple sold more than 15 million iPads in the nine months of 2010
the device was available. This year it may sell 45 million.
has been a fine stock, even more profitable have been some of the
relatively unknown companies supplying the guts of the device.
One of these is
, which I've mentioned here four times since August. The company
makes precision-engineered polymer membranes that regulate the
flow of electrons between the anode and cathode in
batteries. Some of these are traditional lead/acid
batteries that go into automobiles; the U.S. market is rather
dull, but the Chinese market is booming. But the real
growth lies in the lithium battery business, which is hot, in
part because of smart phones, but above all because of the Apple
iPad. Polypore keeps beating estimates and expanding capacity,
and subscribers to Cabot Stock of the Month, who bought when I
first recommended the stock last year, have seen their investment
grow 140%! And the stock is still chugging upward!
For details, click here.
Another attractive stock is a fast-growing little company that
designs high-speed digital interface technologies, and licenses
them-frequently as emerging standards-to major
manufacturers. Because it doesn't actually manufacture, its
profit margins can be plump. And because it's still
relatively small, with annual revenues less than $200 million, it
can grow very fast. The chips are believed to be in the
iPad (which explains the company's rapid growth), and the stock
is strong right now, trading just under $10.
But I can't reveal its name here because it's currently
recommended by Cabot Small-Cap Confidential (our
limited-circulation service), and broadcasting its name to all
the readers of this Cabot Wealth Advisory email might disrupt
orderly trading … which helps no-one.
For details, click here.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory