I've been answering reader questions from our survey for the
last couple of weeks and today I have one more to share with you.
What is the Cabot philosophy?
I really liked this question and have been toying with how to
answer it for a few weeks. I think it could have several different
answers, so I'm not sure if I'm picking the "right" one, but to me,
the Cabot investment philosophy is our growth investing rules that
we've fine-tuned over the last 40 years and that are employed by
our flagship newsletter, Cabot Market Letter (and our other growth
newsletters). So I'm going to take a piece of education information
from our website, written by the Cabot Market Letter Editor Michael
Cintolo himself, because I couldn't say it better myself:
1. Invest in Fast-Growing Companies
You'll usually find them in today's fast-growing industries, where
revolutionary new technologies and services are being created. As
you study the stocks in these growth industries, you should favor
lesser-known stocks that have yet to reach the point of peak
perception. Frequently these will be smaller stocks, where growth
potential is greater!
2. Buy Stocks with Strong RP Lines
Relative performance (
) studies-which chart how well stocks are performing against the
broad market-are a superb way to identify successful companies and
to avoid problem companies. You should buy stocks that are
consistently outperforming the market. This is a good indication
that they are under accumulation, week after week, month after
month, and that the companies are succeeding. The best investing
tips come from the performance of the stocks themselves. So ignore
3. Use Market Timing to Guide Your Investing
Be cautious when the broad market is against you and aggressive
when it's with you. Don't underestimate the power of the market to
move stocks, both up and down. When Cabot's market timing
indicators are signaling a bull market, don't delay. The trend is
up, so stocks will be going up! Buy your favorite stocks and hang
on as long as the ride is profitable.
4. Once You've Invested in a Stock, Be Patient
Recognize that time is your friend. Frequently stocks don't go up
as fast as you might want them to. But if you can develop a
persistent and tolerant attitude coupled with plenty of patience,
you'll have a great advantage. We call this STAYING POWER! (The
need for patience does not apply to losses. Read Rule 6.)
5. Diversify Your Portfolio
For the Cabot Market Letter's Model Portfolio, 12 stocks provide
plenty of diversification. Smaller investors can do well with as
few as five stocks, but you should never have all your eggs in one
6. Cut Losses Short
This is the key to ensuring that you retain enough capital to stay
in the game. No matter how hard you try, you are going to select
stocks that go against you as soon as you buy them. Get rid of
these stocks quickly! Never let your loss of your original money
invested exceed 20% in a bull market or 15% in a bear market, based
on the closing price of the stock. This is a most important rule,
and yet we repeatedly hear from new subscribers who ignore it, hold
on and suffer far greater losses. They learn the value of this rule
the hard way.
7. Sell a Winning Stock When it Loses its Positive
This is a clear indication that other investors are selling too.
And a lot of them know more than you do. So don't wait for the
company to tell you about the bad news. Sell first and read the bad
news later. You can usually tolerate RP line corrections of as long
as eight weeks but seldom more than 13 weeks before concluding that
the stock's momentum has turned negative. When these limits are
exceeded, sell the stock without regret.
8. Let Your Profits Run
The power of compound growth can swell your account dramatically-if
you are patient. Long-term investments make more money than
short-term investments. So learn to develop staying power. Let your
profits run and run and run. This is how big money is made in the
market. Not by taking 10% and 20% profits but by thinking big-in
terms of 100%, 200% and larger profits.
9. As Time Passes, Buy More Shares of Your Best-Performing
Add a modest number of shares to your winners from time to time,
trying to do this during corrections in the stock, not after the
stock has posted a major run-up. Called "averaging up," this is a
great way to reinforce your investments in your best stocks.
10. Be An Optimist
In our nearly four decades of publishing the Cabot Market Letter,
we've seen many ups and downs for both the market and our country.
But after every tough event our dynamic country and economy have
eventually rebounded. So no matter how bleak the situation, always
stay optimistic because our country and stock market will give you
some dazzling opportunities!
If growth investing isn't your thing, Cabot does offer nine other
newsletters that cover a wide range of investment strategies, from
value investing to Green investing and emerging markets investing
to small-cap stocks.
This week, a stock came to my attention that we've written about
many times here before, but that fell out of favor a few months
ago. The company is
Green Mountain Coffee Roasters (
, maker of the Keurig coffee brewing system and single-serve
Green Mountain operates under the classic razor/razor blade model:
It sells the Keurig coffee brewing system at cost and makes the
majority of its profits from the pods (containing hot or iced
coffee or tea and cocoa) that fit into the machine. And the pods
are far cheaper than buying a cup of coffee at Starbucks, or even
our New England favorite: Dunkin' Donuts. (We even have a Keurig in
the Cabot office!)
The company has worked hard to build its brand strength, which has
kept it ahead of the competition. It has also increased earnings at
least 33% in each of the last nine quarters and logged triple-digit
gains on five occasions during that time.
More recently, Green Mountain reported a fiscal Q3 profit of 19
cents a share. This was up 58% from a year ago and a penny above
Wall Street estimates. The company's sales climbed 64% to $311.5
million, also coming in above forecasts. And management raised 2011
earnings estimates by 15% to 20%.
GMCR hit new highs not too long after the stock market bottomed in
March 2009 and was a huge winner until March of this year. The
stock has been advancing nicely in recent weeks after suffering a
steep correction in the spring. And GMCR had a strong move after
its stellar earnings report. We're still not diving into the market
with both feet, but taking a small position here could work out
Green Mountain Coffee Roasters was recently recommended in Cabot
Top Ten Weekly.
Until next time,
Editor of Cabot Wealth Advisory