“Man will never be free until the last king is strangled with the entrails of the last priest”—Denis Diderot (1713-1784)
According to Wikipedia, there are only 15 kings left in the world, so we're making good progress there. Counting queens and other sovereign monarchs, however, there are 29. And priests are still plentiful. In fact, I'd guess that more people, globally, follow the head priest—the Pope—than did when Diderot lived.
Anyone familiar with the turbulent history of Europe during the Renaissance and Reformation periods will probably cut Diderot some slack for his bluntness. The Continent was riven by dynastic and religious wars, with few apparent winners, but plenty of losers, especially the common people who fell victim to constant violence. Mostly, though, I just enjoy the blaze of Diderot’s anger and the sharpness of his wit. Change a couple of names and you could probably get plenty of present-day Americans to subscribe to Diderot’s prescription for freedom.
“Buy when you are scared to death; sell when you are tickled to death.”—Market Maxim (Cabot Market Letter, April 12, 2001) Cited in Stock Trader’s Almanac 2014
The last time people were scared to death was early 2009—that proved an awesome time to buy. And I think this quote is fairly appropriate right now because a lot of people are feeling tickled. Not only has the economic situation improved substantially over the past five years, but investors did especially well in 2013. As a result, I'm feeling relatively cautious about investing today.
First, I’m impressed that one of Cabot Market Letter
’s Market Maxims from 13 years ago has wound up as one of the selections in the Stock Trader’s Almanac
. The Almanac
is full of useful and interesting facts about the stock market and its behavior over the years, and it’s a nice honor to be included. But the actual sentiment is a great restatement of a valuable piece of market wisdom. Someone once said that you should invest when there is blood in the streets, even when it’s your own blood. And there’s no doubt that getting to work on investing immediately after a major market bottom (and getting to work selling after a major top) is a very profitable experience.
“Any fool can buy. It is the wise man who knows how to sell.”—Albert W. Thomas
Over the years, I've seen plenty of investors' portfolios, and I've noticed that people like to hang on to stocks long after they should have been sold. They think, "It will come back." But in fact, these dead stocks clutter a portfolio and they clutter the investor's mind as well. I much prefer a clean portfolio full of stocks that are working. If they're not working, out they go.
I’ve always liked the proverb that says, “Hope is a great breakfast, but a sorry supper.” That means that buying with hope in your heart is fine. But if hope keeps you tied to the Titanic, it’s not a good thing. 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.
“In the course of evolution and a higher civilization, we might be able to get along comfortably without Congress, but without Wall Street, never.”—Henry Clews, 1900
With Congress off on a five-week vacation, this seems appropriate. There is no doubt that the country will manage just fine over those five weeks without it. But close Wall Street for five weeks and chaos would reign; without a free market, progress is impossible. Might we possibly evolve to manage without Congress, as Clews suggests? To me, it's an optimistic thought.
I wish I could think of some cutting contrarian remark to make in favor of Congress, but I just can’t. All I can do is remind people that there have been Congresses in the past, before the radical polarization of our political life, when legislators actually tried to govern, solve problems and improve things (like our national infrastructure and other urgent needs). But this group of ideological knife fighters give the giants of the past a bad name. It’s a pleasure to be working with the relatively straightforward honest sharks of Wall Street.
Five Rules for Success from Warren Buffett’s Wife: 1. Show up. 2. Tell the truth. 3. Pay Attention. 4. Do your best. 5. Don’t be too attached to the outcome.
Some people are process-oriented; others care more about goals. Mrs. Buffett, apparently, was one of the former—and that's fine. But this little list will never achieve notoriety. To do that it needs to be pithier, like Woody Allen's "80% of success is showing up" or the Ten Commandments' "Thou shalt not bear false witness against thy neighbor." Quibbling aside, I do embrace her final item as it pertains to investing. Expert investors know that even when you follow a successful system, you'll still have plenty of losers. The key to success is ensuring that the winners outweigh the losers.
These rules sound so self-evident that it’s easy to underestimate them. But when I think about my many colossal screw-ups over the years (in both investing and my personal life), I can easily point to one of Susan Buffett’s rules that I’ve violated, usually #3. And, as Tim points out, the fifth rule has some real food for thought. It’s always powerful to have the obvious pointed out to us in a simple way over and over. For many of us, it’s the only way we learn anything.
“I have never in my life learned anything from any man who agreed with me.”—Dudley Field Malone
Tim's Comment: Malone uttered these words in 1925, when he was acting as co-counsel for the defense (with Clarence Darrow) in the Scopes "Monkey Trial." No doubt they had effect. Even though the quote is an exaggeration, it does ring true, and reminds us to keep our minds open to the opinions of others.
Paul’s Comment: I agree with Tim about the exaggeration part, but there is definitely a kernel of truth in this witty remark. It reminds me of one of my favorite bumper stickers, which advises: “Don’t Believe Everything You Think.” The core of Malone’s quotation is that by seeking out contrary opinions we usually emerge from the conversation stronger and (often) changed a little for the better.
“Wide diversification is only required when investors do not understand what they are doing.”—Warren Buffett
Tim's Comment: The qualifier is the word "wide." In my book, 50 stocks is way too many for most portfolios; even 30 is too many. For the investor who knows what he's doing, and who's paying attention, I think ten stocks is plenty. The more you diversify, the more your results will tend toward average. Contrarily, the more you focus, the greater your potential to outperform.
Paul’s Comment: For me, the big qualifier in Tim’s comment is “and who’s paying attention.” A growth investor who is willing to do the work of stock selection and then remains active in managing his portfolio can take on much more risk. If you’re not prepared to spend a little time every day keeping track of your results—picking good stocks, cutting losers short and letting winners run—you should probably stick to mutual funds.
“Without deviation from the norm, progress is not possible.”—Frank Zappa
Tim's Comment: I attended the wedding of one of my nephews last Saturday and when I learned the couple was heading to Montana for their honeymoon, I recited my favorite Frank Zappa lyric: "Moving to Montana soon. Gonna be a Dental Floss tycoon." He didn't know it. Doesn't matter. What does matter is that progress requires deviation/change and change is often uncomfortable for people. But if you want better results from your investments, you need to change something!
Paul’s Comment: Frank Zappa was one of the musical heroes of my youth, although he often made me as uncomfortable as he did others. Frank was resolute in his rejection of convention and his pursuit of his modernist musical goals. But in the end, his music was performed by symphony orchestras and he was an economic advisor to the new government in Czechoslovakia. Frank deviated from the norm a lot, which would have made him a great growth investor (if he had given a monkey’s elbow about such stuff).
“A criminal is a person with predatory instincts who has not sufficient capital to form a corporation.”—Howard Scott
Tim's Comment: Not knowing Howard Scott, I deduce that he had a dim view of capitalism, and research proves that somewhat correct; Scott advocated for societal change through the short-lived Technocracy movement. Still, the point about lack of capital resonates. Without capital, not only can't you form a corporation, you can't become an investor. Thus acquisition and preservation of capital is paramount.
Paul’s Comment: I would classify this remark as more of a wisecrack than a pearl of philosophical wisdom, but Scott (an engineer who advocated for technocracy) wrote it in 1933, which explains a lot. In the depths of the Depression, heads of corporations were regarded by many as rapacious profiteers, not as heroic super-entrepreneurs as we see them now. Perspective makes a big difference.
“Start where you are. Use what you have. Do what you can.”—Arthur Ashe
Tim's Comment: As a mediocre tennis player long ago (I was on the second doubles team in high school), I respect Arthur Ashe and all he was able to achieve, both on and off the court. But this quote struck me as just a bit too simplistic. I'd like to see a little more about aiming higher. So I looked it up and sure enough, the full original quote says, "To achieve greatness, start where you are. Use what you have. Do what you can." Much better.
Paul’s Comment: Tim’s probably right about the greatness thing, but I’m always thinking about the people who will never achieve anything because they are discouraged or intimidated by others who seem to have more talent and resources. There are also those hobbled by envy or laziness, but the principle is still the same: no matter where you are or what you are or what you’re trying to accomplish, the determination to get off your backside and start is still the critical factor.
“If it’s obvious, than it’s obviously wrong.”—Joe Granville
Mike's Comment: You want to know the #1 reason most investors struggle in the stock market? It's because the market is a contrary animal; the things that most believe will do well don't, and the things most are unaware of often work. That's why we try to find relatively unknown or less-well-followed stocks; the obvious, well-known names rarely make big moves, and when they do, it's when few expect it!
Paul’s Comment: By the time a stock has become well known, everyone has already bought it. That’s why we watch closely for stock chart action that can indicate institutional accumulation before the stock shows up on the cover of Barron’s.
“80 percent of success is showing up.”—Woody Allen
Tim's Comment: As an employer, I'm astounded by the number of people who apply for a job and then fail to show up. And I'm grateful to my father who—even before I heard Woody Allen's great quote—taught me the value of both showing up and doing good work. As to the connection to investing, it's not complicated. If you put in the time on a regular basis, and work at it diligently, you'll succeed as an investor.
Paul’s Comment: I've always admired the economy of this little gem. It goes along with similar sentiments from the sports world ("You miss 100% of the shots you don't take"—Wayne Gretzky). The application to investing is obvious, since you make absolutely nothing on the investments you don't make. With markets strengthening to the point that the market timing indicators for both Cabot Market Letter and Cabot China & Emerging Markets Report are either positive or teetering on the edge of positive, it's time to limber up your online brokerage account and get ready to do some buying.
“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it”—Henry Ford
Tim's Comment: Similarly, it's worth remembering that a bull market climbs a wall of worry. Which means that as this market correction evolves, and investor sentiment becomes more and more negative, we get increasingly closer to the bottom, and the start of the next bull move!
Paul’s Comment: The only ways to get real enjoyment out of a bear market are short positions, put options and bearish ETFs. For those of us who follow the growth stock discipline, the best we can hope for is that our cash position is heavy enough to insulate us from the chill. But old Henry is right, every bull market that has ever been was born with the wind of a bear market on its face. And the lift the market gets after the bears are finally booted out is reward enough for following your sell rules for a while.
“I'm not better than the next trader, just quicker at admitting my mistakes and moving on to the next opportunity.”—George Soros
Tim's Comment: The most common mistake of beginning investors is holding onto losers in the mistaken belief that the market is somehow wrong. But the market is never wrong, and the sooner the investor learns that success comes from listening to the market and admitting you're wrong—like George Soros—the more quickly he learns to put his mistakes behind him and move onto new opportunities.
Paul’s Comment: I have great sympathy for those who buy a stock and watch while it bumps downstairs day after day. I know that, for many beginning investors, buying is such a big step that they have to really believe in the stock just to get their nerve up and hit the “BUY” button. It’s hard to back off from that kind of emotional and intellectual commitment. But it’s something you have to learn if you’re going to follow the growth investing style.
“It's not whether you're right or wrong that's important, but how much money you make when you're right and how much money you lose when you're wrong."—George Soros
Tim's Comment: Too many investors let their egos interfere with their investing, and the result is that they argue with the market instead of listening to it. The fact is, the market is always right, so sometimes you won’t be, and that's okay—you should expect to be wrong sometimes. Expecting this, you should work to minimize your losses when you are wrong, and when you've mastered this principle, it's easier to maximize your gains when you're right!
Paul’s Comment: The ways to go wrong in growth investing are virtually unlimited, but two really stand out. The first one is to sell your winners too fast. Small profits can only become big ones if you have patience. But once you’ve learned to let your winners run, you run up against The Big One, the stone tablet commandment that sends more portfolios to hell than any other: Thou Shalt Cut Thy Losses Short! Remember that if a stock declines by 20%, it has to go up 25% to get back to even. And if it drops 50%, it has to climb 100% to break even again. Sell those losers quickly!
“We are too much accustomed to attribute to a single cause that which is the product of several, and the majority of our controversies come from that.”—Marcus Aurelius
Tim's Comment: Human nature is little-changed since Marcus Aurelius was emperor of Rome, and the increasing emphasis on headlines in this digital age means we continue to be told that any one day's market action was the result of one factor—which is ridiculous. Every day, every investor is weighing a slew of factors—not least their own personal liquidity—and deciding whether to buy, hold or sell. Yet most investors believe the headlines, because most people find it difficult to think independently.
Paul’s Comment: Besides being emperor from 161 to 180, Marcus Aurelius was a stoic, a follower of the philosophy that emphasizes the acceptance of fate, the use of reason and self control. Not bad principles when the bears are in control of the market, and very close to Cabot’s market-timing disciplines. The emperor’s admonition against simplistic explanations for complex phenomena is enormously timely in these unsettled market conditions.
Climate is what you expect. Weather is what you get.
Tim's Comment: Personally, I pay very little attention to weather forecasts. And I don’t watch TV news. I look out the window, check the thermometer, and dress accordingly. That works pretty well. And that’s the way our growth stock investing system works, too, where the key information is conveyed by charts.
Paul’s Comment: Knowing what the weather for any month is on average isn’t a very good guide to whether you will need your coat or umbrella on any particular day. And knowing what the markets do in any month is a poor way to manage a portfolio. Those who advocate “selling in May and going away” are using a blunt instrument to wind a very complicated watch. We have excellent indicators at Cabot to tell exactly what market are doing from day to day, and ignoring them to follow an old adage is like using a calendar to decide what to wear on Monday.
“Your emotions are often a reverse indicator of what you ought to be doing”—John F. Hindelong
Tim's Comment: Five years ago, at the point of maximum fear about the U.S. economy, stocks hit bottom when the last seller had sold. That was an excellent time to buy stocks, but only the bravest, most independent, coolest-headed investors had the courage to actually do it. And way back in 2000, when the person who mowed my lawn and my barber were both dabbling in the stock market and fear was virtually non-existent, was an excellent time to sell stocks. But only the most cold-hearted and steely-eyed had the conviction to do it. Where are we today? Look around and decide for yourself.
Paul’s Comment: As I wrote above, avoiding emotional pain (by not selling your losers) is the mark of an investor who’s donating to someone else’s profits. When markets are rallying strongly, you need to keep a lid on your enthusiasm. And when markets are dredging the bottom of the canal, you need to be thinking like a buyer, not mourning like a loser.
Never test the depth of the water with both feet.
Tim's Comment: This caution is so obvious to experienced investors as to be unnecessary. Experienced investors know that surprises happen all the time, so they take care to invest moderately, and to diversify their investments. But amateurs enter the market with stars in their eyes, dreaming they'll double their money by buying the next Tesla, and sadly, many of them wind up in Edsels (and Fiskers) instead.
Paul’s Comment: Yes, it’s a bit obvious, but it’s still a good lesson despite the obviousness. Sometimes you have to tell people not to check for piranhas by sticking their hands underwater. And in this kind of market, it’s also a reminder that doing the right thing (in the present case, that means cutting your losses short) is still the right thing to do. Bear markets are not the right time for contrary thinking.
“In this age of instant information, investors can experience both fear and greed at the exact same moment.”—Sam Stovall ( Chief Investment Strategist, Standard & Poor's, 2003)
Tim's Comment: Every age remarks on how much faster communication is now than it was previously. To me, this speeding up is a constant and therefore I can ignore it. What I like to rely on most in investing is the other constant, the fact that as humans, we will always swing—en masse—from optimism to pessimism and back again, and thus create large trends that can provide great profit opportunities.
Paul’s Comment: Here at Cabot, we don’t regard fear and greed as abstract notions. We see them as very real states that push stocks up and down. In fact, charts are nothing more than graphic representations of the battle between them. The danger in the market doesn’t come from times (like now) when the two are battling it out and making investors jumpy in the process. The real danger lurks in the extremes, when either one dominates. When fear is unopposed, markets tank. When greed is dominant, bubbles form and caution is thrown to the wind. It’s better to have the uncomfortable balance.
“Life is made up of constant calls to action, and we seldom have time for more than hastily contrived answers.”—Judge Learned Hand
Tim's Comment: Markets don’t always do what you want them to and they sometimes do things that no experts thought were even possible. When crises hit, it’s comforting to have Cabot’s more than four decades of investing experience on your side.
Paul’s Comment: General Dwight Eisenhower, who ran the war in Europe for the Allied Forces, used to say that plans were useless, but that planning was essential. It sounds a little paradoxical, but if you think of how unlikely it is that a plan will work perfectly at every step, it makes sense. Even when a plan goes awry, the planning you have done (which includes what to do when the plan goes south) will keep your mission clear and your strategy on point. In other words, if you’re going to have to come up with “hastily contrived answers,” you’d better be sure you have some planning under your belt.
“Worry is interest paid on trouble before it is due.”—William Inge
Tim's Comment: Furthermore, life typically teaches us that trouble comes from things we are not worrying about. At Cabot, we've found it much less stressful—and far more rewarding—to simply listen to the message of the market and individual stocks and follow the trends.
Paul’s Comment: One of Cabot's strongest principles of growth investing is that there is no percentage in trying to figure out what the market is going to do tomorrow or next week or next year. Our market timing is aimed solely at figuring out what the market's direction is right now and making investing choices accordingly. When you stop worrying about what might happen, it frees you up to get in sync with what is happening.
“I've got all the money I'll ever need if I die by 4 o'clock.”—Henry Youngman
Tim's Comment: Explaining exactly why we laugh when we read this one-liner is difficult. Humor is like that. But there's little doubt one reason is that we identify with the statement. Even if we're comfortable now, we all remember what it was like when we were less comfortable, and we're all investing to make sure those days don't return.
Paul’s Comment: Retirement humor often has a dark undertone, and Youngman’s quip summarizes a fear that many face. It’s one thing to wonder about how inflation, illness or another crisis in the stock markets might affect your monthly income. It’s another thing entirely to joke about good retirement meaning name brand cat food rather than generic. Humor always knows where the deep fears lurk.
“No one tests the depth of a river with both feet.”
Mike's Comment: Because all of us investors are most concerned with the here and now, there's always the urge to form an opinion ... and then back it up with a big bet. After all, the sudden, spectacular success story is what grabs our attention, whether it's a long bomb for a touchdown, a lottery winner or the guy who bet against housing debt back in 2008. But in reality, the best investors take their time when testing new ideas, often starting with a small position and then building over time. They're not fearful of risk, but they manage it carefully.
Paul’s Comment: While I appreciate this Ashanti proverb’s optimism, the problem is that many people do exactly that. People test the thickness of ice by walking on it and check to see if a gun is loaded by pulling the trigger. And, of course, they react to strong market moves by making huge bets on risky stocks. Oh well, I guess some people will only learn caution from broken bones or a flat wallet. And the stock market is always happy to give expensive lessons.
“Few people think more than two or three times a year; I have made an international reputation for myself by thinking once or twice a week.”—George Bernard Shaw
Truly independent thinking is uncomfortable, and most people prefer the rewards of comfort, so they tread the well-worn paths of the masses. But it's independent thinking that builds world-changing companies like Apple, Netflix, Amazon.com and Tesla Motors. And it's independent thinking that has characterized the best investors, from Benjamin Graham to Warren Buffet.
Paul’s Comment: I knew a woman who worked in executive development in a big tech company who swore that top executives were really awake for only about 10 minutes in an average week. The rest of the time, they were gathering information or schmoozing or blathering about things. But for those 10 minutes, which usually involved having to make really big decisions, they were acutely alive and incredibly focused. If you really think about your investing once or twice a week, you're probably well ahead of the game.
“There are three categories of people in industry—the few who make things happen, the many who watch things happen, and the overwhelming majority who have no idea what happened”. — O. A. Battista
Battista was a Canadian chemist who wrote 15 books, and whose interest/expertise extended from chemistry to business, life and religion. He made things happen. And when it comes to investing, the wonderful truth is that you too can make things happen—in your own account. No matter what the size of your portfolio, you have the opportunity every day to make decisions that can truly make things happen.
Paul’s Comment: The application of this quotation to investing is almost too obvious. I like to think that Cabot gives investors of all stripes the information they need to make things happen, including how to weather a bear market without getting pummeled. But I know that there will always be people who don’t get into stocks until the market’s at its top and won’t get out until it’s at its bottom. It’s hard (and expensive) to be in the group that doesn’t know what’s going on.
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”—William Feather
Sometimes they are
both astute, as when a value investor, who bought near (or even before) a stock's bottom, sells (taking a profit) to a momentum investor, who sells some months later at an even higher price for a profit. But sometimes they aren't. The very worst is the guy who buys at the very top and sells at the very bottom. One way to avoid being that guy is to ask what the person on the other side of your trade might be thinking.
Paul’s Comment: William Feather was a 20th century writer who’s now largely unremembered, but he had a huge following at one time. I think he was having a little fun poking fun at the folly of equity investing. But the same observation applies to anyone who sells something, from a used car to a celebrity autograph. And if both buyer and seller get what they want, it’s quite possible that each is astute. But both buyer and seller have to know what they’re doing. Caveat emptor!
“Once you have overcome the challenges of failure, you are faced with the challenges of success.
Challenge #1 in the investing world is not losing money, and some people fail to meet that challenge. But those who succeed get to tackle the challenge of managing their winners. And that can be very satisfying indeed.
Paul’s Comment: When markets are performing strongly, I usually hear from subscribers about which stocks to buy. But right now, I’m getting about as many questions about when to take profits and when to sell. For many investors, having a portfolio full of winners is every bit as stressful as holding a bunch of losers. It’s good to have rules about how to handle winners (the challenges of success), but they’re thin on the ground. Taking partial profits and using trailing stops are the best practices, but not easy to use.
“Plus ça change, plus c'est la même chose. (The more things change, the more they stay the same.) ”—Jean-Baptiste Alphonse Karr
Up close, everything about investing is different these days, with technology playing a huge part. But if you step back and look at the patterns of stocks, you see the exact same patterns that existed a century ago—and the reason is simple. Human emotions play a huge part in investment decisions, and always will. Today, sentiment is improving everywhere, thanks to growing productivity and falling unemployment, and thus stocks are rising. But when sentiment peaks, watch out!
Paul’s Comment: Lots of people use this French aphorism as a cynical dismissal of the idea that anything can ever change for the better. But I love it for its wry take on history, just as I flinch when I hear anyone say, “It’s different this time” about anything at all. The fundamental things apply, as time goes by, no matter what. And the more you learn about the history of the stock market, the more you appreciate the market’s ingenuity in finding new ways to produce the same results, over and over.
“Insanity: doing the same thing over and over again and expecting different results.”—Albert Einstein
Tim's Comment: Humans, like all animals, are creatures of habit, and the older we get, the harder it is to break old habits and form new ones. Yet if you want to become a better investor, that is what you must do. My best suggestion is borrowed from Mike Cintolo. Periodically (year-end is a great time) review your trades of the past period. Determine your most common mistakes and then take steps to minimize them in the future.
Paul’s Comment: Albert Einstein was a very smart guy, with a quirky sense of humor. I'm not sure that he really defined insanity this way—it's a big temptation to hook a clever quote to the biggest plausible name, regardless of its correctness—but it has the kind of twinkle that Einstein frequently brought to his public musings. The lesson for investing is obvious, especially as a New Year begins. If you're not getting the results you want, change your methods.
“The enemy advances, we retreat; the enemy camps, we harass; the enemy tires, we attack; the enemy retreats, we pursue.”—Mao Tse-Tung
Tim's Comment: Strategically, this makes great sense. By responding to the enemy's movements—rather than making plans—Mao-Tse-Tung (or any warrior) can minimize damage and maximize progress. And the same holds true in the investing world. If you continually monitor the actions of the broad market and your stocks—rather than holding preconceived notions of what they'll do—you'll minimize your losses and maximize your gains!
Paul’s Comment: Growth investors are fighting a kind of war, and Mao’s famous dictum about guerrilla war is very apt. If you buy when markets are going up, sell when they’re going down, preparing to sell as bulls tire and preparing to buy after a bear phase, you’re likely to be on the road to great results. Getting in line with the major trend of the market is always the best thing to do.
“You make most of your money in a bear market, you just don’t realize it at the time.”—Shelby Cullom Davis
Tim's Comment: As we near the end of a very profitable 2013, it's worth remembering that you haven't really earned those paper profits until you've preserved them through the next bear market. Defensive strategy is the last thing on most investors' minds today, which is exactly why it's such an important topic to meditate on.
Paul’s Comment: When Mr. Davis (a cantankerous, but astute value investor) was making his fortune, it was his buying during pullbacks, recessions and slumps that made the biggest contribution. Today, with stock markets at record highs, there’s not much on the plate for value investors. But just wait—things will turn. And growth investors will find that their sell disciplines are their only true friends when the major indexes are falling.
“I'd be a bum on the street with a tin cup if markets were always efficient.”—Warren Buffett
Tim's Comment: America's most respected investor exaggerates, but there's much truth in his words. It's only because humans are irrational (and markets thus inefficient) that equity prices fluctuate between undervalued and overvalued. It's Warren's ability to recognize value in what other investors are selling that has brought him great success.
Paul’s Comment: If markets were always efficient, equity investing would be about as exciting as watching television with the set unplugged. Not everyone can be as good as Warren Buffett at finding and exploiting the hidden value in companies, but the time and attention you devote to doing your own research can pay off quite handsomely. And the investment advisors who deny that anyone can beat the market on their own should pay more attention to what Warren has accomplished.
“It is wise to remember that too much success in the stock market is in itself an excellent warning.”—Gerald M. Loeb
Tim's Comment: For most investors, success in investing increases the desire to invest, by boosting self-confidence and reducing defensive mechanisms. That is exactly why every market movement goes too far to the upside, and that is exactly why it will always be so.
Paul’s Comment: Getting the right balance between optimism and caution is probably the hardest thing for growth investors. Sometimes, when markets are on a tear and stocks are soaring like skylarks, keeping caution alive seems silly! But it’s not. It’s the same problem as keeping your optimism healthy as markets are hitting the depths. Contrary thinking isn’t an abstract concept in the markets, it’s a survival skill.
“Criticism is something we can avoid easily by saying nothing, doing nothing, and being nothing”—Aristotle.
Tim's Comment: The world is full of good people who live lives beyond reproach, hewing to the dictates of society from grade school to the grave. Most of them do little to advance humanity. It's those who are different who create progress, and to the best of them, criticism is a sign that they are on the right path. In the investing business, likewise, if you follow the herd, your returns will be average, unworthy of note. It's those who dare to act differently who achieve outsize success.
Paul’s Comment: Maybe it’s because I drive mostly around north of Boston, but I see plenty of bumper stickers reminding drivers that, “Well-behaved women rarely make history.” I happen to know the woman who wrote that lovely sentiment, and I can assure you that she is very well behaved. But she also admires the lives of women who weren’t, and she writes memorably about them. As in the stock market, taking no risks in life brings no gains. Striving to be out of the ordinary, whether in stock investing or the way you live your life, can bring plenty of criticism … but also remarkable accomplishments.
“A market is the combined behavior of thousands of people responding to information, misinformation and whim.”—Kenneth Chang
Tim's Comment: I've written the same message countless times myself—because knowledge of why stocks move is critical to profiting from those movements—but I've never used the word whim while doing so. I shall try to in the future.
Paul’s Comment: I’m always a little appalled when analysts talk about the market as if it were a rational place. If it is, it’s only because the various irrationalities of the people who trade there might possibly cancel each other out. Everything goes into the market, including fear, greed, stupidity, brilliance, insight and error. As a science writer for the New York Times, Kenneth Chang understands the implications of that mix.
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”—Peter Lynch
Tim's Comment: Lynch was famous for not timing the market—for staying fully invested at all times—and with good reason. His Fidelity Magellan fund was too large, once he got famous, to be able to do anything but stay fully invested. And he's right about the average investor. Following their emotions, they typically do exactly the wrong thing. Happily, Cabot's unemotional system does allow individual investors to time the market successfully, and in the process, beat the fully invested professionals!
Paul’s Comment: It takes courage, and a certain amount of discipline, to take what’s happening in the market at face value and ignore the teams of economists and market gurus who try to anticipate the future. The future will get here soon enough, and being able to tell a bull market from a bear is all the information you need to set your sails for the current conditions.
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute” —William Feather
Tim's Comment: Quibbling slightly, sometimes at least one of them is scared, frustrated, so nervous he can't sleep, or simply responding to his broker's margin call. However, in the “normal” condition when both think they are astute, the market will in time prove one more astute than the other—and this is not a problem. It's not a contest. Your goal in investing should be to find and practice a system that fits your risk tolerance and meets your investing goals. That's all.
Paul’s Comment: I’m sure Mr. Feather, a Cleveland publisher who wrote The Business of Life and was known for his pithy aphorisms, thought he was mocking the delusions of stock investors when he wrote this. But it’s only the literal truth. And given the different aspirations and tactics of growth, value and income investors, the standards of astuteness are quite broad enough for both buyer and seller to be absolutely right!
“Now is always the most difficult time to invest.” —Anonymous
Tim's Comment: And hindsight is 20/20. However, if you can use hindsight (precedent analysis) to apply the lessons of the past to the conditions of the present, you can be a successful investor. In fact, that's how all Cabot’s analysts do it.
Paul’s Comment: When I talk to investors, I often hear a real note of anguish in their voices that they didn’t buy something last week that’s rocketing higher this week. If I ever find out how to buy a stock 10 days ago, I’ll let you know. In the meantime, the best we can do is listen to what the market tells us to do and do it … now.
“Take calculated risks. That is quite different from being rash.” — General George Patton
Tim's Comment: General Patton was one of the greatest U.S. generals that ever lived; he led from the front, and was far fonder of offense than defense. Yet he was not rash. And that is exactly how the greatest growth investors act as well, aggressively, but not rashly. Ironically, General Patton died from injuries suffered in an accident when the car in which he was a passenger was hit by a 2½ ton GMC U.S. Army truck. Some risks you just can't control.
Paul’s Comment: Everything has risk, even some things that people used to view as hedges against risk, like T-bills, bond funds and a sock full of Krugerrands under the mattress. Anyone who has ever put six quarters into a vending machine knows about risk. But Patton knew war inside out, and he knew that the biggest risk lay in tentative action, luke warm execution and fuzzy goals. He would have made a heck of a growth investor.
Behold, the fool saith: “Put not all thine eggs in the one basket”—which is but a manner of saying, “Scatter your money and your attention.” But the wise man saith, “Put all your eggs in one basket and WATCH THAT BASKET.” — Mark Twain, Puddin’head Wilson
Mike’s Comment: Well, Twain couldn’t have written it better if he’d been a growth stock investor himself. I wouldn’t go so far as to say “fools” are the only ones who spread out their purchases, but the question is really whether you want to be average (which you can do by owning index funds and a couple dozen names), or whether you want to strive for awesome performance ... which normally comes via owning a few top-notch, revolutionary leaders, and knowing them inside out.
Paul’s Comment: There’s a real sense of power to be gained from actually managing your own investments, but nobody ever said it would be easy. The easy choice is to let someone else do it. “Watching that basket” requires time and attention. Fortunately, the potential rewards, both monetary and personal, are substantial.
“Some problems are so complex that it takes high intelligence just to be undecided about them.” — Lawrence J. Peter
Mike’s Comment: While most people think of stock investors as highly confident, even cocky, all of us in the office strive to remind ourselves that we don’t know as much as we think we do. In my experience, it’s the amateurs that have the strongest, hard-and-fast opinion about where XYZ stock is heading, or what the market is going to do next month. The old timers tend to say, “There’s a chance of this turning out pretty good” and are often right and early.
Paul’s Comment: I guess this is just another variation on the theme of “Don’t Get Cocky.” You need a certain amount of certainty just to make any investment at all. But an excess of certainty (which translates to a lack of rational caution) can really mess you up. It’s all about balance.
If you believe everything you read, better not read.—Japanese proverb
Tim’s Comment: A pleasant twist on our "Don't believe everything you read," which is flat in comparison. Better than not reading, of course, is to read with an enlightened mind, and the ability to filter, digest, synthesize and sometimes reject ideas. So how does it relate to investing? Since the market delights in misleading amateurs, skepticism is a tremendous asset.
Paul’s Comment: Every once in a while, I see a bumper sticker that says, “Don’t believe everything you think.” The first time I saw it, the change in the last word actually made me laugh out loud. Now, I just nod my head, because the stock markets teach me constantly that I need to be more skeptical, think more independently and question my own assumptions more. It’s a good lesson to learn … again and again.
Buy the rumor; sell the news.
Tim’s Comment: If successful investing were a matter of simply reacting logically to public information, the market would be rational. But the market is irrational, because people are always investing based on their perception of what will happen in the future. Said another way, stock prices discount the perceived future. Knowing this, you can see that it's better to buy a stock at onset of the rumor of good news and sell when the rumor becomes fact (because then investors are looking to the future again).
Paul’s Comment: Right now, stocks are being moved around by speculation about military action in Syria and when the Fed might start weaning the economy. Markets are really just one big human-powered computer for setting the odds on what might happen and anticipating what the results will be. But money is made by taking risks, which is why this market maxim suggests investing in what might happen, then taking profits when it actually happens. The losers will be the ones who tried to avoid risk by waiting until there was no uncertainty left.
“War is God's way of teaching Americans geography.”—Ambrose Bierce”
Tim’s Comment: Well, I guess we all know where Syria is now, at least temporarily. This quote has nothing to do with investing, but it might lead one to ask, "Does knowledge of geography make one a better investor?" Some might argue that such knowledge is superfluous, and the time spent learning it might be better spent poring over balance sheets or searching out strong charts. But I (and no doubt Paul Goodwin as well) would argue that all knowledge can help, if it is used intelligently.
Paul’s Comment: Yes, I absolutely agree with Tim on this one—knowledge of world events and geography gives you a perspective and an edge. In investing, knowledge is power.
“Capitalism and communism stand at opposite poles. Their essential difference is this: The communist, seeing the rich man and his fine home, says: 'No man should have so much.' The capitalist, seeing the same thing, says: 'All men should have so much.'”
Tim’s Comment: It's true in theory, but reality is messier. In recent years, Communist China has embraced a controlled form of capitalism that has helped boost the standard of living there immensely (with the side effect of horrible smog), while Capitalist U.S. has taken unprecedented steps to stimulate the economy by bailing out debt-burdened entities large and small and worked hard to improve our inefficient health care system by making health care more available to all. Where these trends lead will be interesting, but speculation brings little reward; it's more rewarding to work at finding good stocks.
Paul’s Comment: This is a fine sentiment, if a little dewy-eyed about the high moral principles of capitalists. In my experience a capitalist is more likely to say “I want it for myself” than worry about the living conditions of his fellow men. But it’s certainly true that communists were all about equality in theory but selfishness in practice. Capitalism builds lots of fine homes, and offers them to whoever can come up with the money. The trick is to figure out where the money is to be made and either start the business or buy the stock.
“We can complain because rosebushes have thorns or rejoice because thorn
bushes have roses.”—Abraham Lincoln
Tim’s Comment: If this had been a quote by Rodney Dangerfield or Don Rickles, perhaps the complaining would take center stage. But because it's by Lincoln, almost universally rated America's best president, we know that rejoicing about the roses, finding the good among the bad, is the prescription. In investing, that can be done in two ways, market timing and stock selection. I recommend both.
Paul’s Comment: Market volatility can be a terrible thing, wiping out millions and billions of dollars in the twinkling of an eye. But that same
volatility is responsible for the enormous gains that can come to growth investors in just as short a time. So, as Lincoln seems to be counseling, I choose to focus on the possibility that a dangerous place like the stock market can produce gains, not the possibility that a market full of opportunities can clean me out. Being aware of both risk and reward allows me to appreciate the possibilities.
“It's not whether you're right or wrong that's important, but how much money you make when you're right and how much money you lose when you're wrong.”—George Soros
Tim’s Comment: Personally, I don't like using the words right and wrong in discussing investments. If you're following a successful system, you're doing the right thing, even though it sometimes results in losses. Most pros lose money about 40% of the time. But by minimizing your losses, while maximizing your profits, great success can be achieved.
Paul’s Comment: I, on the other hand, use “right” and “wrong” all the time when talking about stocks. Yes, the bottom line is the only thing that’s important in the long run. But I know that part of the reason I enjoy growth investing is the genuine satisfaction I get from having one of my holdings—most recently Baidu (BIDU)—make a big gain. I’m not as good at taking the personal element out of investing as Tim is. I live a rich emotional life with my portfolio.
“I don't want a lot of good investments; I want a few outstanding ones.”—Philip A. Fisher
Tim’s Comment: This quote echoes the wisdom of Mike Cintolo in Thursday's Cabot Wealth Advisory—in which he cautioned readers against aiming too low. In short, the profits from one or two stellar investments that multiply many times over can swamp the profits from a "sensible" diversified portfolio. The latter is easier to get—there are more sensibly diversified funds and ETFs than you can shake a stick at—but the former can be much more profitable, and more fun, too!
Paul’s Comment: Phil Fisher is a legendary growth investor who published a book in 1958 called Common Stocks and Uncommon Profits that is still worth reading. Fisher was a believer in enormous amounts of research, buying only a few stocks that represented the absolute cream of the crop and holding them forever. Warren Buffett has said that his method is “85% Graham [Benjamin Graham, the guru of value investing] and 15% Fisher.” Cabot Market Letter, which buys a maximum of 12 stocks, and Cabot China & Emerging Markets Report, which tops out at 10, are very much in the Fisher style of concentrated portfolios.
“The only function of economic forecasting is to make astrology look respectable.”—John Kenneth Galbraith
Tim’s Comment: Galbraith was not only an economist, he was also an excellent communicator, with a good sense of humor. With this quip, he compares economic forecasting unfavorably with astrology (which is currently discredited by roughly three-fourths of Americans). He is, of course, too modest. Economics has great value in explaining what has happened in the past, and most of us persist in believing it is of some help in anticipating the future.
Paul’s Comment: Believe it or not, we actually receive an astrological investment newsletter here at Cabot (part of our exchange program) and it’s very interesting. But I wouldn’t invest a thin dime on its advice. So that means it has exactly as much influence on my investing as long-term economic forecasting, which is zero. Cabot’s technique of following what markets are actually doing (and ignoring predictions) is based on facts, not forecasts. So neither form of prognostication has any respectability for me. But Galbraith, love him or hate him, could really turn a phrase.
“Don't believe everything you think.”
Tim’s Comment: Bertrand Russell once wrote, "The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt." In investing, I've learned that overconfidence can kill; it's much better to be unsure, and to continually revise your opinion in response to the market's actions.
Paul’s Comment: This wry advice to question everything has gotten a lot of mileage since some anonymous wag put a little spin on "Don't believe everything you read." It's been the title of a book by Thomas E. Kida (subtitle: The 6 Basic Mistakes We Make in Thinking) and the title of a song by Lee Brice (sample lyric: "that mind's a funny thing/don't believe everything you think, girl/you need to get on outta your head and get on into your heart." But whether it's sublime or ridiculous, this reminder to take a critical inventory of your assumptions can do you a lot of good in growth investing. The market is happy to do the teaching if you have an open mind (and Cabot can help, too.)
“I'd be a bum on the streets with a tin cup if the markets were always efficient.”—Warren Buffett
Tim’s Comment: Warren exaggerates, of course. With a mind like his, he'd still be a great success; it just might not be as an investor. My guess is he'd be in insurance. In any event, Warren recognizes that because markets are created by mortals, who are influenced by hopes and dreams, fears and uncertainties, they are by nature frequently inefficient, and it’s these inefficiencies that offer opportunities.
Paul’s Comment: Warren Buffett and his crew at Berkshire Hathaway are diligent about researching the companies they’re interested in, giving those companies the corporate equivalent of the physical the life insurance company gives you before you’re sold a big life insurance policy. By the time they’re done, Buffett and his team have a firm hold on how much the company is actually worth, and is likely to be worth, and how much it might be worth if they took it over ran it themselves. The market probably doesn’t know all of this, which just shows how inefficient the market’s estimates really are. Inefficiency is a great thing to exploit.
“Don't look for the needle. Buy the haystack.”—John Bogle
Tim’s Comment: Bogle's advice was great in the bull market of the 1990s, especially for the average investor, who tends to enter the bull market too late, buy the popular stock, and then hold too long as it goes down. But for the past decade's market, and perhaps the next as well, buy-and-hold has been beaten by market timing combined with astute stock selection, and in the long run, it will always be so.
Paul’s Comment: John Bogle, the founder of The Vanguard Group and the Grand Guru of index investing, tells people to put their money into low-cost index funds and just leave it there. He argues against actively managed funds (high fees) buying individual stocks (too much risk). I admire Bogle a lot; he’s very smart and he’s probably right about keeping costs down. But I can’t agree that “buying the haystack” and just sitting there is the cure for investment woes. And anyone who got swatted by the 21st century’s two bursting bubbles would probably agree. Cabot has a lot to say to investors who want to be less passive in building their retirement portfolios, and finding a few golden needles can make a huge difference to your portfolio.
“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”—William Arthur Ward, college administrator, writer (1921-1994)
Tim’s Comment: Pessimists have no fun; they don't enjoy life. I'm an optimist, so by definition, I'm always expecting the wind to improve. But I do recognize the value of trimming sails, and the wisdom of being a realist, and I wholeheartedly recommend changing in response to those winds—for those who have the ability to change.
Paul’s Comment: Calling someone a "trimmer" (meaning someone who trims his sails in response to the wind) is sometimes intended as an insult, implying that the person changes his principles in response to challenging circumstances. No doubt having an ironclad set of principles is an admirable thing. But not in the stock market. Staying invested in a bear market makes as much sense as staying outside during a downpour because you refuse to let the weather boss you around. Make sure that your principles include one that counsels getting out of the market's way when the sirens sound.
“When you feel like bragging, it's probably time to sell.”—John Neff
Tim’s Comment: John Neff was the legendary manager of Vanguard's Windsor Fund, which earned an impressive compound annual return of 10.6% in the 31 years from 1964 to 1995. As a value investor, Neff excelled at buying low and selling high. And I know how he felt when he said that! He was feeling good! But he was remembering all the previous times that he felt good, only to see his profits melt away because he didn't sell his winners. A corollary to this is that if someone else is bragging about an investment they've done well in, you should think twice about buying it.
Paul’s Comment: Most investors are herd animals, happier when everyone is heading in the same direction. But markets can’t go in the same direction forever, and (just to mix my metaphors) when everyone has jumped on the bandwagon, the inevitable next step is for some people to start getting off. When everyone is celebrating about where the herd is heading, it’s time to start thinking about leaving the herd behind.