By Michael Cintolo, Editor of Cabot Market Letter and Cabot Top Ten Report
From Cabot Wealth Advisory 3/29/08  Sign up for free Cabot Wealth Advisory e-newsletter

There are ample signs that the market's bear phase is close to (or has already reached) its end point.

I won't rehash all the signs here (double-bottom in the indexes, new lows divergence, Bear Stearns bad news, etc.). Instead, I want to take a few paragraphs to dispel a common belief among most investors—that you must get in as quickly as possible to make big money in a bull market. The earlier, the better!

It's not a surprise most people believe this. After all, in just about any competitive activity, the faster you are on the draw, the better your results. The fastest 40-yard dash time helps a wide receiver get drafted higher, while a quicker swing at the plate makes you a better hitter and a quick release allows a quarterback to avoid sacks. "Speed kills" is now a well-accepted term in the world of sports.

But in the market, remember, patience is a virtue. Most investors believe that the closer they buy near a market bottom, the more money they'll make. If you're investing in an index fund, that's true—you'll make an extra couple of percent if you correctly jump the gun when buying the S&P 500. But considering the risk that you might buy at a false bottom, we don't think the risk is worth the reward.   

In terms of individual stocks, we've actually found that the most powerful leaders of a bull advance usually come off the launching pad a few weeks after the bottom. In fact, many leaders have begun their advances two to four weeks after our buy signals (which themselves usually come a couple of weeks after the bottom). I can tell you from my own experience that my biggest winners the past few years have been purchased at least a week or two after our buy signal.

My analysis also shows that my first one or two purchases following a buy signal have, on balance, lost money in recent years. None were huge losers, but the majority just didn't get going, and if they did, their advances were far from mighty. Right now, despite some encouraging behavior from the overall market, I'm seeing almost zero top-notch growth stocks (or commodity stocks, for that matter) that are breaking out of nice consolidations. That's a good reason to take things slowly.

Now, I know what you read online and hear on TV: You have to get into such-and-such stock NOW...don't miss the boat...if you're not in the market during its best few days of the year, your returns will be average...and so on. That's just Wall Street gibberish, based on opinion or a twisting of numbers, as opposed to knowing how the market really works.

Our studies show that practicing patience will help improve your batting average, and will keep your funds free to invest in what will turn out to be the best stocks. So the moral of the story is: Earlier is not always better in the stock market. Remember that as the market tries to build a sustainable bottom.

Another reason to remain patient has to do with the fact that, in the market, a huge part of your overall success depends on minimizing mistakes—i.e., how you play defense. As written above, most media preach the opportunity cost of being out the market. Missing out on a big winner, it's widely believed, is the worst investing sin.

Now, don't get me wrong. When the market is in full bull mode, I can be as aggressive as they come. Any subscriber to our Cabot Market Letter or Cabot Top Ten Report knows I have no hesitancy about getting into fast-moving stocks in a good market.

But when looking out over a number of years, I know that limiting mistakes is even more important than finding that elusive big winner. The reason is simple: Big winners are relatively rare (some years you find a few, others, you're lucky to grab hold of one), but even the best investors buy plenty of stocks that go nowhere. So there's more opportunity for those losers to eat away at your capital!

(Incidentally, that is one reason why the market is so hard on investors' psyche; unless you're a daytrader, most people are only going to uncover one big winner for every 10, 15 or 20 stocks they buy. Such long odds can be mentally trying.)

As an example, consider an investor, whose yearly returns were as follows: +30%, +25%, +25%, +10% and -20%.  So he had three very good years, one average year, and just one poor year.

Now look at another investor's returns: +25%, +20%, +15%, +5% and 0%. Four of the five years, the first investor had superior returns...but the second investor made more money! It was close, 81% total gain versus 79% for the first fellow. As it turns out, that single -20% year damaged the results, even though it was combined with a bunch of stellar returns.

My point isn't that you should always be super-conservative and be afraid to lose money. My point is that it's not always about beating the market or having your money working for you. Much of the time, the intelligent investors are basically doing nothing, waiting for the right environment to take decisive action.

In his book, "How to Trade in Stocks," Jesse Livermore said there are just a handful of times each year when he would be active-near the intermediate-term turning points in the market. Other than that, he let his account sit idle, making sure he didn't lose money, and preparing for the big swing when the market changed course.

Just something to think about while the current market sloshes this way and that. While you're remaining patient, you should be building a watch list of potential winners.

More Stock Investing advice:

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