By Paul Goodwin, Chief Analyst,
Cabot China & Emerging Markets Report
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I spent several years at Putnam Investments, and during that time, several institutional maxims about investing were repeated over and over, to the point that they just seemed true ... period. And since they were always buttressed with impressive statistics, they did, indeed, seem true.
One of my favorites was, "It's Time, Not Timing." This was to caution investors who might be tempted to cash out during bearish periods and then invest again when the bulls reasserted themselves.
The support for this rule often took the form of statistics illustrating how missing just a few great market days every year would leave your returns flatter than an Interstate possum. A study by the Schwab Center, for instance, analyzed returns for the decade from 1997 to 2006, pointing out that during that period the S&P 500 gained an annualized 8.4%. But if you had been out of the market for the market's best 40 days, your returns would have slipped to a loss of 6.4%.
Moral: Don't try to time the market!
Cabot's response: Hogwash!
The Cabot Growth Investor has been timing the market for over 40 years, and it is darned good at it. Even the Hulbert Financial Digest has noticed, giving the advisory an attaboy for its success in getting out of bear markets and back into bull runs.
There are reasons for the divergence in the opinions of Cabot and the market commentators, and they don't require that one or the other has to be wrong. It's a good illustration of the power of the individual to grab victory from the jaws of defeat. Here's how it works.
The anti-timing crowd, let's call them Team Patience, gives you only two options: either be 100% invested or 100% out. But growth investors don't invest in markets or indexes, they invest in individual stocks. This means that they don't just have an on/off switch, they have some real control. The Cabot Market Letter, whose Model Portfolio is considered fully invested when it contains 12 stocks, can dial its market exposure up or down based on the state of its market timing indicators, the Cabot Tides, the Cabot Trend Lines and the Two-Second Indicator.
A growth investor's cash position isn't a top-down decision, so Cabot Growth Investor's chief analyst doesn't look at the markets and decide on a cash percentage. Rather, the editor uses the market-timing indicators as a guide to the market's central tendency, either bullish or bearish, and then evaluates each stock's chart with that tendency in mind. What might be accepted as a significant correction during a bull market could be taken as a warning signal during a bear phase.
There are hundreds of rules about investing in the stock market. Unfortunately, some of them don't agree with one another and almost all of them have exceptions and conditions. Cabot's market timing techniques are purposely simple. They're not a magic formula, but they signal you when it's time to get out of a down market and let you know when it's time to get back in. They're a large part of the reason Cabot growth letters consistently beat the broad market and occasionally beat the heck out of it.
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