In Investing, It’s the Recipe That Counts

by Robin Carpenter on October 09, 2012
originally from Cabot Wealth Advisory

How’s Investing Like Ice Cream?

Right Ingredients, Right Mix, Right Cooking

The ETF Investing System Recipe: Analysis and Strategy

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One of my favorite memories from when I was a kid, was when we’d spend a day (two days!) making home-made ice cream. Our Dad would come home some afternoon with a bagful of ingredients and call out “Anyone for ice cream?” Amid cries of “Yay!” and “Me first!” he’d burst our excitement with the reality-check, “Well, it won’t be ready ‘til tomorrow.”

Before there could be ice cream, we (he) would have to execute the recipe. I was too young to remember how it all went, but I remember there were two kinds of cream, lots of sugar, vanilla flavoring, some fruit or berries, and maybe some “secret” ingredient. (My Dad made that part up, perhaps.)

It all had to be measured and blended, simmered carefully so it cooked well but never scalded, cooled on the table and finally put away in the fridge to set overnight.

My Dad wasn’t really a cook from day to day, but he sure knew how to follow his ice cream recipe “just so.”

Next day, we kids would help. The creamy mix would go into the canister churn, with ice packed around in the bucket, and we kids would crank the churn. And crank, and crank, and crank. Then more ice in the bucket, and more cranking. It seemed like forever. We had to not let up, but crank away at a constant pace until the mix “set up” to where we kids couldn’t keep the crank handle turning any longer.

(Today, electric motors do the cranking; motors calibrated with just enough power to “give up” just when the ice cream is thick enough to stop. But this was in the middle of the last century, and kid-power was just enough to have the same effect.)

Finally, the ice cream “won,” and we kids couldn’t keep going. The precious payload would go into the freezer to harden, and after about an hour of waiting, we had our treat. And it was fabulous.

So, what has this to do with your investments? It’s the recipe. It’s all in the recipe.

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If the recipe is right—right ingredients, right mix, right cooking—then the ice cream is right. All the cranking and all the waiting is just the final execution. I don’t know whether my Dad’s ice cream recipe was his own (or maybe his Dad’s), but whosever it was, it had been carefully thought out and tested and tasted many times.

By the time we kids got to do our cranking, success was already baked in. We knew it would work, and we knew what we’d get.

For investors, the recipe is in the analysis and the strategy.

If the analysis is thorough, and the strategy has been tested, the investor knows pretty much what he or she will get. Sure, there’s more variation with investments than with ice cream. But variations average out.

With valid analysis and a well-tested strategy, we know what to expect over time. And the systematic investor knows that when we get to do the “cranking”—the week-in and week-out management and execution—it will end up worth the work and worth the wait.

In the Cabot ETF Investing System, I follow a well-researched strategy that’s been successfully tested for over a decade, through bull market and bear.

The Cabot ETF Investing System has two primary ingredients: The market timing component and the sector selection component.

The timing component saves us from significant market downtrends, and the selection component consistently identifies outperforming sectors in up-trends.

As long as we follow the recipe carefully, we can have confidence how things will turn out over time.

(We also keep testing a bit of variation—like trying blueberries instead of peaches in the ice cream—and when new flavors improve results with consistency, we’ll happily add them in.)

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If your kids haven’t yet hand-cranked their ice cream, it’s not too late. In spite of all the motorized models around, you can still get the real thing.

Here’s an image of a hand-cranked model that’s available online.

ice cream maker

And here’s a link to a recipe that sounds a lot like what my Dad’s must have been:

Your guide to ETF investing,

Robin Carpenter
Editor, Cabot ETF Investing System

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