Finding the Investing System that Works for You

by Michael Cintolo on January 31, 2013
originally from Cabot Wealth Advisory

How Investing is Like Football

What’s the Best Investing System?

Why Institutions are Buying this Stock

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If you’ve read any of my stuff over the years, you know I’m a football fan. A very big football fan. But I’m not one of those tailgating, rabid, paint-your-face fans that the cameras always focus on. No, I actually became interested in the strategy of football at a young age, and took up reading books and watching game film (seriously!) of different offensive schemes.

I still remember my Dad dropping me off at the Boston Public Library one afternoon while he did some errands around the city. I studied an old--some say the original--book on the run-and-shoot offense, a pass-oriented system that gained popularity in 1980s and 1990s before fading into obscurity. Southern Methodist University, under June Jones, has the only major college team I know of that still runs it.

Anyway, I spent a little free time (remember that?) in my younger days thinking about which offensive system was “the best.” Was it that old run-and-shoot? What about the option offense? A spread attack (which is particularly popular nowadays)? A west-coast style attack? How about a single back, two tight system Joe Gibbs made famous with the Washington Redskins?

As with most “What’s the best …” questions, there is no one correct answer. In fact, as I’ve watched hundreds more football games over the years, the obvious answer to the question is, “Whatever system best fits your personnel.” Operating a pass-heavy attack with a bum QB isn’t going to get you anywhere, and neither is a run-heavy attack with a slow running back and a poor offensive line.

In fact, looking at the last handful of Super Bowl Champions, you have the well-balanced New York Giants winning it twice, the wide-open New Orleans Saints and Green Bay Packers winning in 2009 and 2010, respectively, and this year, both the Ravens and 49ers sport run-heavy offensive cores with some downfield passing thrown in.

Going back further in time, you have Hall of Fame coach Don Shula winning two Super Bowls with the Miami Dolphins in the 1970s with a conservative approach. But fast-forward to the 1980s, and Shula was running an aggressive passing attack with stud QB Dan Marino, and they were consistently tough to beat.

Thus, while I’m always eager to see which new offensive systems are popping up on the scene in college and the NFL each year, I now think less about “What’s the best system,” and more about “What system is the best fit for that team?”

And that, believe it or not, brings me to the stock market.

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As I was learning all I could about the market in college (not in classes—usually through books and the Cabot Market Letter), I found myself asking the same question as in my early football days: What’s the best system to make money in stocks?

As with football, there was no shortage of options to “attack” the market. Value investing was (and is) wildly popular thanks to the media’s obsession with Warren Buffett. Some favored mutual funds and asset allocation. Day and swing traders, because of the advent of the Internet, were just gaining in popularity. Growth investors could be in the momentum camp, the GARP camp (growth at a reasonable price) or the buy-and-hold-forever camp. And this is just the tip of the iceberg!

Then there were the tactics for portfolio management. Should I buy more on the way down? When should I sell for a loss? For a profit? How many stocks should I own? And, oh yeah, how do I decide which stocks to buy!?

Just as I watched hundreds of football games over the years, in the stock market I executed hundreds of trades over a few years with my own money, testing various theories and styles … and making plenty of mistakes along the way.

Here’s where the story comes full circle: Just as I learned there was no best offensive system in football, I realized there was no perfect method of investing in stocks. What really mattered was matching the system’s pros and cons with your own personality. Read that again. It sounds a bit “out there,” but I am 100% sure it is true.

I base this not only on my own investing experiences, but also on meeting and corresponding with hundreds of other investors. I’ve seen solid investors with good discipline and great “market minds” lose boatloads of money because they tried to force themselves into a system they weren’t comfortable with--taking on too much risk, or too little, or owning too few stocks, or too many, etc.

Let me give you an example. Say a rather conservative guy was trying an aggressive growth strategy. Well, as long as his stocks were going up, no problem. But the market isn’t a one-way street, and so when the inevitable correction came around, this investor would be horrified at the quick drawdown (drop from an equity peak) he suffered. And then he’d throw all his rules out the window and sell stocks … usually near a market low.

You might read this and say, “It’s obvious why this guy didn’t do well. He didn’t follow his discipline; he panicked at the bottom!” And that’s true. But the fact is you have to have a discipline you truly believe in--one that you can follow without worrying about your financial future when the market gets rough. If you don’t believe in the system, you’ll never follow your rules when the stress level is high.

The more comfortable you feel during periods of adversity, the better the decisions you will make. And that goes hand in hand with better portfolio performance.

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So how would I describe my own investing style? I’m not going to get into the depths of my brain (don’t want to put you to sleep!), but generally speaking, I practice many aggressive-type traits--fully invested with fewer than 10 stocks, make use of margin at times, and so on.

However, I’m also wary of big swings in my account … something that usually comes with aggressive-growth investing. So I tend to focus on mid- to large-sized companies with plenty of trading volume (often more than one million shares per day) and great growth prospects. These are the names institutional investors tend to pile into during a bull market.

Thus, with an emphasis on institutional-quality names, my stock idea for today is a very liquid stock (it trades over $100 million per day) with more than 800 mutual funds onboard. Yet I think there’s plenty of upside, mainly because the company is turning itself around after a couple of up-and-down years.

The stock is Urban Outfitters (URBN), a specialty apparel retailer that’s been consistently putting up great numbers in recent quarters. Here’s what I wrote about the firm in Cabot Top Ten Trader on January 14:

“Selling clothing and accessories to young people in the so-called “lifestyle specialty retail” sector requires a high level of skill in anticipating and leading trends, sourcing competent manufacturing and top-quality marketing and store design. Urban Outfitters makes it look easy.

“The company has positioned its various brands in highly defined customer niches, including its Urban Outfitter stores (213 stores selling everything from clothes and shoes to apartment furnishings to an 18-to-28 demographic), Anthropologie stores (180 stores selling clothes, accessories and furnishings to women aged 28 to 45), Free People stores (about 77 stores aiming women’s apparel, shoes and stuff at women 25 to 30), plus two Terrain garden centers and two BHLDN wedding gown stores. The company also sells through its Free People wholesale operations to 1,400 specialty stores and department stores. All of these outlets are also present online and send catalogs.

“All in all, Urban Outfitters just knows its business, which is reflected in its unbroken string of positive annual revenue growth dating back to 2004. The immediate good news is that the company’s holiday sales through all outlets spiked higher in 2012 (especially online sales), raising expectations for Q4 and annual results, which will be announced in March.”

Specifically, Urban Outfitters said that net sales for November and December rose 15% in total, led by a whopping 38% gain in direct-to-consumer (read: online sales). That news led analysts to hike estimates (this year’s bottom line should rise 22%, following a 36% jump last year), which helped the stock push to new multi-year highs.

It’s not the fastest mover, but with earnings not out until March, I think buying URBN in the low- to mid-40s, with stop around 39, presents up a good risk-reward opportunity. If management continues making the right moves, I expect more institutional investors to pile in going ahead.

Get more information on Cabot Top Ten Trader here.

Until next time,

Mike Cintolo
Editor of Cabot Market Letter and Cabot Top Ten Trader

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Michael Cintolo can be found on Google Plus.