Finding Your System

 

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 various 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 ’80s and ’90s before fading into obscurity. The University of Hawaii has the only major college team I know of that still runs it.)

Anyway, I used to spend 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 eight Super Bowls, you have a couple of explosive offensive teams (St. Louis Rams, Indianapolis Colts), a few conservative offenses (Tampa Bay, Baltimore Ravens, and, to a lesser extent, the Pittsburgh Steelers), and one team that was more of a mixed bag (New England Patriots).

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.

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 a similar question as in my initial 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 this 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 - either 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.

Said another way, 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 ten 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.

I think one such stock is VeriFone Holdings (PAY), which is benefiting from the same mega-trend as MasterCard (MA) - more people are paying with plastic instead of cash, especially in developing countries. Here’s what I wrote about the firm in Cabot Top Ten Report, where it earned a spot due to the stock’s powerful breakout:

“VeriFone is a play on the rising use of credit and debit cards instead of cash, in both the U.S. and emerging markets. The company is the leading provider of point-of-sale and wireless payment systems - when you swipe your card at a gas station or grocery store, you’re likely using a VeriFone system. Every year, a higher percentage of payments are made with plastic instead of cash, and that means higher demand for this firm’s software and products. Emerging markets are a huge opportunity, with many governments promoting credit-based purchases, especially wireless ones (such as taxi cabs taking credit payments, which, incidentally, they do in New York and Philadelphia). An acquisition last year has rounded out the product line, and has helped continue the company’s string of superb earnings results and lofty profit margins. It’s not a barn burner, but we think the stock will outperform the market.”

The stock came public in April of 2005, and immediately put on a good show for many months. But beginning this February, PAY built a long, strong base, wearing out all the “weak” hands in the process. A better-than-expected earnings report (revenues up 57%, earnings up 50%) in early September sparked some high-volume buying, and that was followed by a move to new highs late last month … which came on the heaviest volume the stock’s ever traded!

Clearly, institutions, after quietly accumulating shares for a few months, realize the cat’s out of the bag - they now have to pay up. We believe they will, and that should lead to solid upside for VeriFone’s stock. Encouragingly, the stock held firm during the late-week decline in leading stocks, another sign big investors are supporting the stock on dips.

Until next time,

Mike Cintolo
For Cabot Wealth Advisory

Editors Note: Mike Cintolo is Vice President of Investments for Cabot Heritage Corporation, and is also Editor of Cabot Top Ten Report. The Top Ten Report brings subscribers the very strongest stocks and sectors in the market each week, providing them with the #1 source of new, hot ideas for buying. Best of all, Top Ten plays no favorites; if the big money is flowing somewhere, Top Ten Report will find it, and Mike will provide buy ranges and highlight his favorite stock in each issue. Previous and current winners include Baidu, Titanium Metals, Hansen Natural, Apple, Intuitive Surgical, China Mobile Foster Wheeler, Vasco Data and more. If you want the best money-making opportunities delivered to your email inbox each Monday, I encourage you to give Top Ten a try.

http://www.cabotinvestors.com/ectthcwa12.html


Michael Cintolo can be found on Google Plus.

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