Stock Market Video The Three Monsters Under Growth Investors'
Beds
In Case of Doubt Sound Convincing
Stock Market Video
The Three Monsters Under Growth Investors' Beds
In Case of Doubt Sound Convincing
In Case You Missed It
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In this week's Cabot Weekly Review video,
Cabot Market Letter
editor Mike Cintolo reviews his generally positive stance on the
market and most leading stocks. He highlights one bullish sector
and a couple of buy ideas, and also looks at a handful of names
that could help lead the way should the market really kick into
gear in September. Stocks discussed include:
Lennar (
LEN
), SolarWinds (
SWI
) and LinkedIn (
LNKD
).
Click below to watch the video!
Three Monsters Under Growth Investors' Beds
If you were looking at a roomful of stock investors and wanted to
figure out which ones were growth investors and which preferred
the value discipline, it might be pretty easy, especially if the
stock markets were open at the time.
All you'd have to do is look for which ones were nervously
checking their smartphones to see how their stocks were doing.
And then re-checking them 15 minutes later. Then again. And
again.
The value investors, in the meantime, would be reading magazines,
napping or quietly flipping through annual reports in search of a
scrap of useful information about projected market share or free
cash flow.
So why are growth investors jumpier than value investors?
Well, in general, growth stocks are just more volatile than value
stocks, almost by definition. Charts of growth stocks show more
movement and their up and downswings cover more ground. Plus,
growth investors have more-concentrated portfolios than value
investors. The growth investor wants any big win to have a
significant effect on his total portfolio, while the value
investor aims to spread the risk around so that a big loss will
have a negligible effect on performance.
As a growth investor, I've spent years studying the things that
drive growth investors crazy, and I have a little list I'd like
to share with you. I even have some recommendations for how to
keep your blood pressure down while playing the growth game.
Earnings Misses
Four times a year, following requirements set down by the
Securities and Exchange Commission, all companies whose stocks
trade on U.S. exchanges must tell people how they did during the
previous three months. The report must include revenues, earnings
and events such as acquisitions that might have affected the
results.
Analysts covering the companies predict what those numbers will
be, and that sets up a very dramatic event. If analysts'
"consensus" estimate is that the company will earn 30 cents per
share on sales of $100,000,000 and the earnings come in at 31
cents and revenue at $101,000,000, it's a triumph! That's labeled
a "beat" and the stock (generally) goes up.
If, on the other hand, earnings are only 29 cents per share
and/or revenues are only $99,000,000, it's a "miss," and the
stock (usually) drops significantly.
How can you stay calm during earnings season?
First, you should know exactly what your loss limits are on each
of your stocks. If a stock falls out of bed and hits your maximum
loss limit, you sell it. When there is no doubt about what to do,
there is no hesitation in doing it.
Second, you should know exactly when a company is reporting and
avoid buying a full position in a stock just ahead of earnings;
quarterly reports are too much of a coin flip to make big bets
on. And third, you might consider taking a little profit in a big
winner ahead of the report.
Bad News
Even outside earnings season, bad news can take a toll on growth
stocks. Losing a big contract, being confronted by a new
competitor, natural disasters, labor problems … all these can
undercut investors' confidence in a stock. Many industries have
built-in opportunities, especially pharmaceutical stocks, which
face intense scrutiny when clinical trial results on candidate
drugs are announced.
Then there's the Bad News that rises to the level of scandal,
which can be near-fatal for stocks. Any hint that a company is
under investigation for fudging its results or otherwise fiddled
with its accounting can send investors toward the exit in a
stampede.
As with earnings season, the best response to bad news lies in
how you prepare for it. If your sell disciplines are in good
shape, especially your loss limits, you won't have to worry about
controlling losses. When a stock drops below your limit, hit the
sell button.
Missing the Big Winner
Often the biggest pain a growth investor feels isn't caused by a
loss; growth investors get used to taking an occasional left hook
to the ribs. Some of the most plaintive questions we get from
subscribers involve stocks that have run away to the upside. "Is
it still buyable?" "Will it pull back to let us in?" The pain of
missed opportunity is real for growth investors, who get huge
pleasure out of riding a big winner.
Unfortunately, there's no perfect cure for this problem. Big
winners can make astonishing runs while you're having your second
cup of coffee. But remember that a majority of a growth
investor's gains comes from the action of just a few winners
every year. So even if you miss a winner, there will be others,
especially if the general trend of the market is up.
Sometimes you can get in on a big gainer after a pullback or
consolidation. After all, one of the Cabot rules of growth
investing is that trends can go on for much longer than you
think. If you need confirmation of this, just take a look at the
chart for
Apple (
AAPL
)
since the beginning of 2009. Besides soaring from 91 to 660, the
stock also presented plenty of dips along the way that
represented buying opportunities.
The other tip for not missing big winners is, predictably, a
subscription to Cabot Top Ten Trader. This publication is
legendary for finding big leaders early in their advances and
letting subscribers know why they are strong, what the chart
tells us and where to buy them. It's an exciting weekly read for
growth investors and you can give it a try with a trial
subscription by clicking
right here.
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Here's this week's Contrary Opinion Button. Remember, you can
always view all of the buttons by
clicking here.
In Case of Doubt Sound Convincing
The original quote, apparently born in the ivory towers of
scientific academia, was, "In case of doubt, make it sound
convincing." That it can work for a salesman is obvious, but how
does it work for investors?
Like this: When everyone knows something about a stock, it's too
late to invest based on that fact; the price of the stock
reflects that knowledge. It's only by investing in things about
which there is doubt (like next quarter's earnings) that you can
succeed. To do that, you've got to wrestle with doubt, use
rational thinking to project the future, and then invest with
confidence, whether you talk about it convincingly or not.
Note: This is the only non-circular button in the entire
collection.
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In case you didn't get a chance to read all the issues of
Cabot Wealth Advisory
this week and want to catch up on any investing and stock tips
you might have missed, there are links below to each issue.
Cabot Wealth Advisory 8/27/12 - How a Growth
Investor Thinks about Valuation
In this issue,
Cabot Market Letter
editor Mike Cintolo explains why measures of value like P/E
ratios aren't of much use to growth investors, as they don't
predict performance very well. Stock discussed:
LinkedIn (
LNKD
).
Cabot Wealth Advisory 8/30/12 - Eight Stupid
Rules That Are A Drag On The U.S. Economy
In this issue, Tim Lutts, who edits the
Cabot Stock of the Month
letter, lays out an assortment of rules that are keeping the U.S.
economy from gathering steam … and he wants your opinions on
them, too! Stock discussed:
SolarWinds (
SWI
)
.
Have a great Labor Day weekend!
Paul Goodwin
Editor of
Cabot Wealth Advisory
and
Cabot China & Emerging Markets Report