From Cabot Wealth Advisory 4/2/09
One point that I've touched on in the past but want to expand on today is the issue of patience. Everyone's heard from their parents that patience is a virtue, and that definitely comes into play in the stock market—in sitting out bear markets, in riding your winners, and in choosing the best time to buy stocks ... which I'll write about in detail now.
Before diving into why exactly you should wait for your pitch, let me first paraphrase one of my money manager friends (he's also a Cabot subscriber) who has a great analogy for a good system. He plays tennis, and he told me that, like many players, every now and again his shot will hit the top of the net ... and fall over to the other player's side. Point won.
But, as my friend puts it, can you repeat that shot? Of course not. It was more luck than skill; if you were grading yourself, you'd rather have hit a scorching backhand cross-court that moved away from your opponent.
It's similar in the stock market. Yes, there were some investors who bought growth stocks three weeks ago, and have made good money. They might have bought Citigroup at a buck and Bank of America at 3. But ... can they repeat that trade? Was that the best time to buy the stocks? Can they use that system to get in at the next bottom, and the one after that?
More often than not, the answer is no—in fact, I would guess that most investors who made money since the market's low in early March have also lost a ton of money in the preceding few months, either by remaining heavily invested, or by trying to catch bottoms during the past year. What I'm interested in is a system that can produce consistent, repeatable results over time.
That leads me to the issue of patience, especially when it comes to waiting to buy the RIGHT growth stock at the BEST time. A couple of years ago, I did a study of many of our past big winners, where we bought them, how we sold them ... all the usual post-trade analysis. However, I also compared our purchases and the stocks' action to our market timing signals. What I found changed my thinking in a big way!
Specifically, it turns out that most of our big growth stock winners--and even most of the winners we didn't own, but were following—began their period of greatest price performance two to four weeks AFTER our market timing indicators turned bullish. And remember that our market timing system is based on trend-following, so we usually don't get buy signals until a couple of weeks after the market itself has bottomed.
Translation: Most of the market's biggest winners get going in a real powerful way four to six weeks (a couple of weeks for a buy signal ... plus another two to four weeks after that) after the market has bottomed. Many times, the investor who rushes to be the first to buy after the market bottom will miss out on the real leaders, instead buying what he thinks are the real leaders. I've fallen prey to this myself.
Back in the spring of 2007, we got a new buy signal in early April. One of the strongest stocks at the time was FEI Corp. (FEIC), which had a great story (it was making some very complex life sciences imaging equipment) and good numbers, and I recommended it to subscribers. But the stock stalled out, headed south, and we sold it for a small loss a few weeks later.
Then there was First Solar (FSLR), which I also recommended at the same time as FEIC. While it meandered higher for a few weeks, the stock sank right back down to our buy price four weeks after our initial recommendation. It took off to the upside after that, and went on to be one of the year's biggest winners, rising nearly five-fold for us. But note that the stock didn't make any progress for a full month.
Fast-forward to today, and you have everyone tripping over themselves to beat the rush. Worse, many investors who have yet to get heavily invested feel like they've missed the boat. Not true!
I believe that even if you're 100% in cash right now, you're still in a great position ... assuming you're busy putting together a Watch List for your upcoming buying spree. Since we're about four weeks from the market's bottom, history tells me that most of this market upmove's biggest and most lucrative winners are still on their launching pads ... but could lift off soon (maybe during the upcoming earnings season).
So now is a great time to do some homework and get ready to latch on to the leaders–wait for the best time to buy stocks!
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