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Advantages of Being an Individual Growth Investor

Stock Market Video

Advantages of Being an Individual Growth Investor

Who Knows What's Hiding In The Bushes

In Case You Missed It


In this week's Stock Market Video, I talk about the challenge of getting into a bull market early enough to make good use of it. It's always easier if you have a way (like Cabot's market timing indicators) to recognize the bull early on. A bull market is a great opportuniy, but it also makes it necessary to pick your spots. Stocks discussed: Zillow ( Z ), Five Below ( FIVE ), LinkedIn ( LNKD ) and Lions Gate Entertainment ( LGF ).Click here to watch the video!


Advantages of Being an Individual Growth Investor

If you've ever thought about how you-one lone individual out there making your investment decisions on your own-can possibly hope to beat the results of a large mutual fund, here's how.

Yes, it's true that a big investment company has enormous resources. Analysts can dissect every number about the target company, figuring out the history of the company's revenues, earnings, cash flow, free cash flow, working capital, debt, overhead, liabilities, taxes, expenses, productivity, raw materials, competition, etc. They can figure every valuation ratio in the book and even invent more. They can also visit every company whose stock is under consideration, getting face time with management and taking the temperature of employees. In other words, they have access to lots of information.

In the final analysis, however, big mutual funds have three disadvantages that give a small, individual investor a fighting chance.

First, most mutual funds operate under guidelines that require them to remain invested at all times.

Investment guidelines are contractually binding and specify what money managers may and may not invest in. Most stock funds are required to have 95% or more of the fund's money invested in the prescribed asset classes at all times.

The advantage for you, the individual investor, is that you can jump out of the market and go to cash when stocks are sinking like a rock. The manager of the small-cap value or large-cap growth fund, on the other hand, can only move toward the best stocks in that class. Lots and lots of stocks are doing well right now, but the whales will still be in the market even when it rolls over and dies.

The subscribers to Cabot growth stock newsletters, by contrast, spent much of the worst of the Big Bear Market of 2008 sitting in cash-the much better alternative.

Second, mutual funds are big.

When they buy, stocks go up and when they sell, they go down. This is a problem for a big fund that wants to dump a stock. But they have very skilled people who can unwind a position over a period of weeks without having the market notice … much.

Unfortunately, the stock market often doesn't wait weeks to knock a stock off its pedestal and grind it into the dust. So while you're pushing the button to sell a plunging equity, the big investor has to decide whether to join you in selling immediately (thus pushing the stock lower and probably scaring off potential buyers) or trying to parcel out sells in hopes of avoiding a price collapse.

The real disadvantage for the big investor here is that they must try to predict the future, steering their funds toward where they think markets will be months from now. As I've said here many times before, predicting the future is not something anyone has ever been able to do consistently over time.

So, your first two advantages are that you can go to cash and you're nimble.

Your third advantage is that you're really trying to make money, while the mutual fund manager is just trying to beat an index.

This may not sound important, but it's actually an enormous difference.

The mutual fund manager has an index that has been designated as the benchmark for the fund. So a large-cap growth fund manager is trying to earn a few percent more than the S&P 500 Index, which will put the fund into the top quartile of funds in that asset class.

To beat a benchmark, the manager uses most of the fund's money to buy exactly the same stocks in the same weighting in the relevant index, right down to a 10th of a percent, stock for stock. Then the manager makes bets by under- or overweighting the fund's holdings of a few stocks versus the index. Some managers, especially those of small-cap funds, will sometimes make out-of-benchmark calls by buying stocks that aren't in the benchmark.

Ultimately, however, it's the benchmark that's setting the course, with the manager just trimming the sails a bit.

As an individual growth investor, your advantage is obvious. Not only are you not charging yourself a management fee, you're free to buy whatever you want, regardless of index, sector, industry, country, capitalization or style.

So, to summarize, what are your advantages as an individual investor?

You can go to cash when market conditions deteriorate.

You can move in and out of stocks quickly.

You can manage your money to make money, not just beat a benchmark.


Here's this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.

Who Knows What's Hiding In The Bushes

Tim's Comment: No one knows. The future is unwritten. All you can do is play the odds, by being aware of what investment systems work, by being aware of the fundamentals (past, present and possible-future) of the company you are investing in, and by being aware of what the charts are saying, about both the broad market and your particular stock.

Paul's Comment: The only reliable way to predict the future is to wait until it becomes the present. That's cheating, of course, because then it's the present. But if you think of how many people there are who don't even know what's going on in the present, you're still ahead of the game.


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 3/4/13-The Future of the Stock Market

Editor Chloe Lutts of Dick Davis Investment Digest looks at the future of stocks using the work of several of the investing writers who appear in the Digest. The consensus is that bull markets can always last longer than experts think they can.

Cabot Wealth Advisory 3/5/13-Apple: Not Measuring Up to Expectations

In this issue, I took a look at how quarterly earnings announcements can be the source of huge unexpected movement in stocks, both good and bad. I also wrote about two companies- Qihoo 360 ( QIHU ) and Seaspan (SSW) -that were reporting that day. (Seaspan came out on top).

Cabot Wealth Advisory 3/7/13-Fiscal Cliff, Sequester, Wolf!

Cabot Stock of the Month editor Tim Lutts writes in this issue about the value of a little rebellion now and again and the danger of someone filling the power vacuum. Tim also gives the ninth of his "hold forever" stocks: Stratatys Corporation (SSYS).

Have a great weekend,

Paul Goodwin

Editor of Cabot China & Emerging Markets Report

And Cabot Wealth Advisory

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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