Stock Market Video
Winning in Baseball … and the Markets
This Weeks Fortune Cookie
In Case You Missed It
In this week's Cabot market video, Mike Cintolo talks about
the market's split personality--overall, the bull market looks
fine, but among the bigger leaders, he's seeing some abnormal
action. The good news is that "fresher" (as Mike calls them)
names that got going just during the past month are acting great,
and a few new leaders have emerged during earnings season, with
more likely on the way.
Winning in Baseball … and the Markets
I don't know if the rest of the country is as interested in the
World Series as the citizens of Red Sox Nation are, but with the
Series on, I had an idea about how to explain growth investing.
Hall of Fame baseball manager Earl Weaver of the Baltimore
Orioles used to say, "You win games with good pitching and
three-run home runs." And I think that's a pretty good analogy
for the way you win at growth stock investing, too.
In growth stock investing, good pitching means keeping the other
side from scoring runs, which is another way of saying that you
keep losses small. The Cabot growth disciplines teach you to
control losses in two ways.
First, our market timing indicators-the medium-term Cabot Tides
and the longer-term Cabot Trend Lines-keep us on the right side
of the major market trends. When the indicators are positive, as
they are now, we advise you to move toward heavier investment in
strong growth stocks. But if the indicators turn negative,
Cabot's growth advisories will advise you to keep your stocks on
a very short leash, selling any that break down before they hand
you a big loss.
Second, the most important thing that separates successful growth
investors from the wannabes is having explicit sell disciplines
in place on all your growth stocks. When you buy a stock, you
should make a note of the downside price at which you will sell
it. Cabot uses a maximum 20% loss from your original investment
price (and a 15% limit if markets are in a downtrend), but those
are absolute maximums; we often cut our loss in the 8% to 12%
range You may also consider using trailing stops or declines from
a stock's peak price.
But whatever you do, you shouldn't be undecided. It's the days
that you spend watching a stock drop and hoping that it will come
back up that can kill your portfolio's performance. So be
cold-blooded and be decisive and keep the discipline in sell
The three-run homer part of Weaver's philosophy is just as easy
to understand. While some baseball teams use stolen bases,
sacrifice bunts and singles to manufacture runs one at a time,
that wasn't Weaver's way. He wanted to get some men on base and
then let one of his power hitters bring them home in bunches!
And Cabot's growth advisories are like that, too. We want to buy
some good stocks and let them turn into big winners! Some
investors are satisfied by pecking away with small returns, just
as some baseball teams are satisfied with scoring a run here or
there. But we have found that there is no substitute for a growth
stock that goes up like a rocket and then keeps on going.
Some of our long-term subscribers will remember the stocks that
put people's children through college back in the days of the
Tech Bubble! But there's nothing wrong with this year's winners
like LinkedIn (
), which has gained 109% for Cabot Market Letter subscribers,
Qihoo 360 (
), a 108% winner for Cabot China & Emerging Markets Report
readers, and Tesla (
), where profits topped 500% for Cabot Stock of the Month
followers. These stocks are the stock market equivalent of the
three-run home run.
Really, when you do the math, it's not unusual to get the lion's
share of your profits for the year from just a handful of stocks.
Growth investing is skewed that way. That's why it's so important
to develop (and hang onto) some big winners.
In theory it's simple to "cut your losers short and let your
winners run." But I know that it's not easy to do in practice.
Psychologically, it's especially hard to let go of your losers.
You have to give up a little hope and admit that your judgment
isn't always perfect. We always say there's a reason why we talk
of buying opportunities but sell disciplines. Right now, markets
are a little choppy as this year's big bull market is in one of
its periodic bouts of indigestion (earnings season will do that).
But our timing indicators are still positive, and leading stocks
continue to gain.
If you're a growth investor, it's a perfect opportunity for you
to bring in better pitching (review those thorny sell
disciplines) while letting your successful growth stocks swing
for the fences!
Here's this week's Fortune Cookie. Remember, you can always
view all previous
Fortune Cookies here
Contrary Opinion buttons here.
Quibbling slightly, sometimes at least one of them is scared,
frustrated, so nervous he can't sleep, or simply responding to
his broker's margin call. However, in the "normal" condition when
both think they are astute, the market will in time prove one
more astute than the other-and this is not a problem. It's not a
contest. Your goal in investing should be to find and practice a
system that fits your risk tolerance and meets your investing
goals. That's all.
I'm sure Mr. Feather, a Cleveland publisher who wrote The
Business of Life and was known for his pithy aphorisms, thought
he was mocking the delusions of stock investors when he wrote
this. But it's only the literal truth. And given the different
aspirations and tactics of growth, value and income investors,
the standards of astuteness are quite broad enough for both buyer
and seller to be absolutely right!
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 10/21/13-Fama, French and
Roy Ward, Chief Analyst of Cabot Benjamin Graham Value Investor,
writes about two economists who used measures of price to book
value (P/BV) ratios to find great value investments, a method
that he uses himself. Stock discussed:
Nissan Motor (
Cabot Wealth Advisory 10/22/13-Finding the Next
Cabot Stock of the Month's Chief Analyst Tim Lutts writes about
how to find the next big winner (like Tesla), and comes up with
three criteria that mark the best candidates. Stock discussed:
Cabot Wealth Advisory 10/24/13-The Money Pit
Cabot Market Letter Chief Mike Cintolo writes in this issue about
the mixed blessing of buying a house that needs a little work. He
also draws the parallel between remodeling projects and buying
growth stocks: schedule, flexibility and the ability to rise
above the occasional reversal. Stock discussed:
ProShares Ultra Russell 2000 Index Fund (UWM)
SPDR Oil &Gas Fund (XOP)
Financials Select SPDR (XLF)
Have a great weekend,
Chief Analyst of Cabot China & Emerging Markets Report
and Editor of Cabot Wealth Advisory