Independent Investment Advice Since 1970

Investing FAQs

Here are some common investing questions from our readers answered by Cabot editors. To submit a question, go the Cabot Forum using the link on the left or send an email to customerservice@cabot.net.

How do I get started as a new investor?

Answered by Elyse Andrews, Editor of Cabot Wealth Advisory:
The best thing to do is educate yourself about investing and find a system that works for you. The more informed you are as an investor, the better off you'll be. Reading investing books is a great way to learn more and we have recommendations for many helpful books on the Investment Books section of this Web site. Cabot's Web site also has many additional educational features that can introduce you to the investing world including Investing Advice, Stock Investing Lessons, Market Timing Indicators, Technical Stock Analysis and much more. These features can help you decide which investing system is right for you. This is something we stress a lot—finding a system and sticking to it is the key to success.

How do I know which exchange a stock is traded on?

Answered by Elyse Andrews, Editor of Cabot Wealth Advisory:
In the United States, modern letter-only ticker symbols were developed by Standard and Poor's to bring a national standard to investing. One- or two-letter symbols trade on the New York Stock Exchange; three-letter symbols may trade on either the NYSE or AMEX; four- and five-letter symbols trade on the Nasdaq, although five-letter ticker symbols are usually a special class of stock. In July 2007, the Securities and Exchange Commission approved a plan to allow companies moving from the NYSE to the Nasdaq to retain their three letter symbols. The change does not apply to companies that have symbols with one or two letters. You can find out the exchange for any stock by going to Yahoo! Finance and entering the name or symbol of the stock. The page that comes up will give you the exchange.

Can you provide information about Indian stocks that trade on Indian exchanges?

Answered by Elyse Andrews, Editor of Cabot Wealth Advisory:
Cabot recently published a Special Issue of Cabot China & Emerging Markets that applied our time-tested growth stock picking system to the Indian market. The stocks featured in the Special Issue trade on the Bombay and National Stock Exchanges and are only available to investors that can buy and sell on the Indian stock exchanges. The stocks chosen for the Special Issue were up more than 25% in the first week. More information about the report can be found be clicking this link: Indian Stock Report.

I have been enjoying my subscription to the Cabot China & Emerging Markets Report. One question I have is about the timing of release of your investment suggestions in the press or in Cabot Wealth Advisory, your free e-newsletter.

Answered by Paul Goodwin, Analyst and Editor of Cabot China & Emerging Markets Report:
Here's the rationale: When I'm called to do an interview, I don't have a list of second-class recommendations that I can deliver to the non-paying public. My watch list is my watch list. When the media asks me for recommendations, I feel that I have to give them the best stuff I have on hand. Occasionally, I may mention a stock that I'm watching for Cabot China & Emerging Markets Report but have not yet recommended ... but I can assure you that I'm not such a media star that it happens often. As for Cabot Wealth Advisory, we are careful to feature favorite stocks at least a month after we named them in the paid newsletter. And, of course, non-subscribers don't get the rationale, the buy/sell signals and the opportunity to ask questions.

You just recommended XYZ stock a couple of weeks ago ... and today you're advising to sell it. How can you change your opinion that quickly; I thought it was a great company!

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
As Paul Goodwin (editor of Cabot China & Emerging Markets Report) has written a few times, you need to have three things for a successful stock—a good story (i.e., good future potential based on a unique product or industry upswing), good numbers (particularly strong sales and earnings growth and big profit margins) and a good chart (telling you deep-pocketed investors are accumulating the shares). Paul calls this the SNaC system—Stories, Numbers and Chart—and it's a useful acronym to remember.

The most fluid of these three pieces is the chart—the story and the numbers don't change overnight, but in rare instances, the chart can (either positively or negatively). Most investors refuse to change their minds that quickly, but our studies show that a rapid change in the price of the stock—especially if it comes on earnings news—usually leads to more movement in the same direction. So if your stock collapses soon after you buy it, your best move is almost always to get out. Yes, it's painful ... but stubbornly sticking with the stock usually causes only more pain over time.

I've been looking at Baidu (or Google, or Apple, or any other past leader) and business remains great. Yet the stock is down significantly. Isn't it a good buy?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
This question is closely related to the one above. The answer is generally no, and the reason is that a stock is not the company. A stock can fall sharply and persistently even if sales and earnings are growing quickly. That's especially true in a bear phase for the overall market.

Like I wrote above, you need not only a good story and good numbers, but a good chart as well. One without the other two is far less reliable. We do think last year's big winners have topped, and while the occasional exciting rally will take place, you'll be better off looking for new leaders.

When will this market stop falling?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
This is a very popular question these days (March 2008). But the title of our Cabot Market Letter three weeks ago was "Forecasting Sells, Interpreting Pays," meaning that, while predictions of the market will sell newspapers, the best investors simply interpret the market's action day by day, week by week, and stay in gear with the trends.

Thus, we don't have any guesses about when the morass will end, although we have seen some signs that a bottoming process is underway. Our biggest prediction is that this bear phase will NOT be like 2000-2003; that was a once in a lifetime event that followed years of huge returns. This past bull move was relatively tame, and we're already four months into the downturn. So the next bull market could begin at any time.

Recently you've profiled a bunch of strong commodity (gold, oil, natural gas, coal, etc.) stocks in Cabot Top Ten Report (March 2008). Yet you've also continued to tell subscribers to hold plenty of cash and only buy small positions. Why not just go heavy into those areas that are working?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
Here's the thing about a downtrend in the overall market: It's going to exert pressure on every stock and every group at some point. Now, that doesn't mean an oil or gold stock won't rise over time—many of the picks in Cabot Top Ten Report have put on solid performances—but it's likely to be a three-steps-forward, two-steps-back kind of advance. And a choppier upmove means the timing of your buys and sells must be precise.

Thus, you certainly could ignore the market and just focus on the leading sectors. But, even though those stocks look great right now, it doesn't mean they won't suffer a sharp sell-off in the days ahead. Said another way, it's hard to have a huge amount of long-term conviction in anything while the overall market is trending lower.

The CEO of XYZ stock, which you just recommended, just sold $2 million of his shares last week. Should I still buy the stock?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
Simply put, insider actions (either buys or sells) have never proven to be a great indicator of future price performance one way or the other. Sure, sometimes a stock tops out after the insiders dump shares, but just about all of the big-winning stocks in history have experienced plenty of insider selling as they rose to scintillating heights.What really matters is what institutional investors think of the stock—which is why we watch the chart.

You've been talking about a possible bottoming process in the market, but with housing sales declining sharply, manufacturing reports looking awful, and inflation measures beginning to tick higher, how can the market move meaningfully higher? (March 2008)

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
All of the problems listed above are economic fundamentals, which are not good leading indicators of market performance. Remember, the market looks ahead three to nine months, so if anything, the market is a leading indicator of the economy, not the other way around. Think of it this way: If investing were as simple as reading the economic indicators and investing based on what they said, we'd all be rich! But that's not going to happen.

The market will definitely bottom when the news is bad, and the outlook seems poor. We don't know many people predicting great things back in March 2003, when our indicators gave us buy signals just as the bull market kicked off (the Cabot Market Letter's Model Portfolio was up 50% that year). So it's important to filter out the bad news and pay attention to the market itself.

I've been using charts more, but am curious about your opinion about the various stock-based indicators like MACD, RSI, Stochastics, and so on.

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
Very good question. To be honest, I like to keep it simple--my charts just look at a stock's price history, volume history, a couple of moving averages (especially the 50-day moving average) and the stock's relative performance (compared to the market). All those "indicators" you mentioned are basically short-term overbought-oversold measures, which don't carry much weight with me.

That's not to say they're totally useless, but if you're looking for intermediate- to longer-term profits, you want to know whether a stock is under accumulation or not. And MACD, RSI and the like don't help you determine that.

List your top rules (or tools) for growth stock investing.

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
My top tools for growth investing are:
1. Cut losses short (definitely rule #1 for growth stock investing)
2. Search for strong sales and earnings growth (especially triple-digit sales growth)
3. Search for revolutionary products with major benefits (First Solar and Crocs filled the bill in '07 and were our two biggest winners)
4. Heed the message of the overall market
5. Never average down
6. Be prepared for all contingencies (always have an exit plan ahead of time, just in case)
7. Never try to buy at the bottom or sell at the top (if you try to do it, you'll just lose more money)
8. Stick with stocks that are liquid to avoid gut-wrenching volatility (usually at least 600,000 shares traded per day or more)
9. Only put more money to work after your past purchase or two is showing you a profit, and
10. Be humble—making money in stocks is tough, so don't kill yourself over one or two bad trades, and be thankful when you hit a big winner.

Should I use trailing stops?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
A trailing stop is simply an order you place with your broker to sell your stock if it falls a certain percent off its high, or if it falls through a given price level. In general, I do believe stops are a good tool for the average investor. They will, first and foremost, allow the investor to cut losses short if his stock heads south after purchase. And they do help lock in profits should your stock, after a good advance, begin to break its uptrend.

But as with all tools, the success of using trailing stops is based on the smarts of the user—in this case, the investor. Randomly placing trailing stops on a winning stock isn't a good idea; you can too easily get stopped out on normal fluctuations.

I think the key to successful selling isn't having a blanket "sell anytime my stock drops 20% from its peak" strategy; the key is studying and understanding charts. If you're going to use a stop, put it somewhere that's technically relevant—having it just below the 50-day moving average, for instance, is a sound strategy. Or, if you're shorter-term, you might place it below the stock's lowest price of the past few weeks.

Thus, I think stops are a good idea, especially if you can't watch the market and your stocks all day. But it's like anything else—if you put effort into learning the best methods to trail your stops, your results will improve.

What books do you recommend on investing, especially charts?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
We're always perusing the bookstore, looking for new and interesting investing books. Here is a handful of my favorites.

How to Trade in Stocks, by Jesse L. Livermore. It's a great account from Livermore himself on some of his key principles of trading. One of the big lessons I learned: Being patient not just with winning stocks, but also practicing patience when waiting for the next big move. (I might need to relearn this, given my words in the first section!)

How I Made $2,000,000 in the Stock Market, by Nicholas Darvas. This will take you through a progression from total novice to super-successful investor. It's a great read to reinforce some of the market's basic principles.

Technical Analysis and Stock Market Profits, by Richard Schabacker. If you're just beginning in the world of chart reading, this is a good guide. We don't subscribe to all of the patterns he talks about, but it's still a great place to start.

The Intelligent Investor, by Benjamin Graham. It's not my cup of tea, as I'm a growth stock guy. But most value-oriented investors believe this is one of the best books ever written.

Market Wizards, The New Market Wizards and Stock Market Wizards, all by Jack Schwager. They contain great interviews with a few dozen of the best investors in the world. You are guaranteed to learn some things, about the market and yourself.

For more recommended books, go to the Investment Books section of the Cabot Web site.

Why are earnings so important?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
Companies are in business to make money. Thus, earnings are the ultimate score card. Companies that can grow their earnings rapidly and do it repeatedly see their stock prices rise to reflect their success. Conversely, companies that stumble on their growth path see the price of their stock fall. Investors are always looking ahead to what they believe the company's earnings will be in the future. Thus investors' perceptions of the company's prospects can be as important as the reality in the short term. But in the long run, earnings and earnings per share are most important.

What is a price/earnings ratio?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
If you divide a company's stock price by its earnings per share, you'll come up with a price/earnings ratio, or PE. This simple number reflects how well-thought-of the stock is by investors. A single-digit PE is considered to be low, while a number over 20 is considered to be high. If stocks were commodities, like bananas, a low price/earnings ratio would represent a bargain, a good value. But stocks are not commodities. A high PE simply confirms that investors believe a company will experience fast earnings growth in the future.

Are investors always rational?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
No! While the long-term course of a stock's price will ultimately reflect earnings, its short-term course is highly dependent on investors' perceptions. . . and their emotions. Investors, generally, can be motivated by fear or greed. When they are fearful, they can sell a stock so that its price falls to unreasonably low levels. And when investors are greedy, they can bid a stock's price up to unreasonable heights. The challenge for the individual investor is to avoid getting caught up in the emotions of the crowd.

What is short selling?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
Short selling is the practice of borrowing shares of a stock so you can sell it (short), planning to buy it back later at a lower price …returning the shares and keeping the difference in price as your profit. In brief, you're betting that the price will fall. At Cabot, we do not recommend the practice, for a couple of good reasons. First is the long-term trend of the market, which has been generally upward over the decades, even centuries. When you invest (long) in a stock, you're investing in synch with the long-term trend. But when you go short, you're betting that the stock you're shorting will move contrary to that long-term, upward market trend. And you're betting that you're clever enough to time both your entry and exit points to catch this move. It's tricky. Equally important is the fact that the potential profits of a short-seller are limited. If the stock's price falls to zero, the best you can do is double your money. Contrast that with the potential of a fast-growing company that could triple your money, or more, in a year or two. Conversely, on the long side the worst you can do is lose all the money you invested in that stock, while if you're short, your potential losses are unlimited!

What is investing on margin?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:Someday your broker may ask if you'd like to invest on margin. In effect the broker is offering to lend you money so that you can invest it and profit from it. The broker is a guaranteed winner, because you pay him interest on the money you borrow and he gets the commissions when you trade with that money. But your profits will be harder to come by. You've got to pay that interest and those commissions . . . and your risk is increased. If you're doubled up on margin, for example, a simple stock drop of 10% will hand you a loss of 20%! And a 20% drop will give you a 40% loss plus a headache. In general, we don't recommend investing on margin.

What is market timing?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
We are strong believers in long-term market timing, mainly so we can sell stocks and preserve cash when the broad market enters into a major decline. This is not an exact science, but it can be tremendously rewarding to avoid losing money. And we've had great success with market timing over the years, so we feel confident in recommending that all investors practice it. On average, Cabot Market Letter gives two major market timing signals per year. If it's a sell signal, we work to reduce risk by selling our poorest performing stocks and putting close limits on the others. The object is to reduce the risk of loss and to raise cash for the next buy signal, when bargains abound. When that buy signal comes, we invest aggressively in the best-performing stocks we can find. Interestingly, that's the time most investors are scared to death.

Is it risky to invest when public sentiment is negative?

Answered by Michael Cintolo, Cabot Vice President of Investments and Editor of Cabot Market Letter and Cabot Top Ten Report:
To the contrary, that's the best time of all! The public, in general, tends to react to what has already happened and assumes that the past will continue. Investors have no way of seeing the end of a trend until it's well behind them. But we know that all trends end when the last holdout joins the crowd …when the last buyer buys or the last seller sells. The trend ends when sentiment reaches an extreme level. Then, because all the fuel for that trend is exhausted, the trend reverses. In general, the better you are at gauging the mood of the crowd, the more confident you will feel about buying when all about you have sold in panic…and moving to the sidelines when all about you are buying feverishly.

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