Keeping Watch Over Your Stocks By Night

We all know that there are things we shouldn't do, but that we do anyway.  We call them bad habits.  Personally, I put talking on my cell phone while driving, and overindulging in triple ginger cookies from Trader Joe's high on my list.  But it never occurred to me that checking the performance of my stocks too often might be one of these bad habits.    

It used to be that only brokers with access to a stock ticker could get anything close to real-time quotes.  This lasted through the 1950s and '60s, when dinosaurs still walked the earth and most individual investors had to buy a copy of the Wall Street Journal to find out how their stocks had traded on the previous day.

When computers began to get connected to what would become the World Wide Web, there was a ready-made population of highly-motivated investors who were eager to follow the gyrations of their stocks.  When markets get active, either frisky (to the upside) or cranky (to the downside), I suspect that all financial sites probably register a big increase in visits from nervous investors whose moods change as their holdings soar or dive.

Checking your stocks often probably doesn't do any harm, but it does reveal something about you as an investor.  Some people enjoy it, in the same way that some people follow America's Cup yacht racers or Tour de France bicyclists on a real-time tracker.  But for lots of people, the intraday ups and downs of their stocks are an emotional roller coaster that can cause real distress.

I think that the emotional toll taken by intraday price fluctuations is one reason some people choose to become buy-and-hold investors.  If you tell yourself that your investment horizon is five years, you can insulate yourself from the bruising that markets can give.

As a growth investor, my investment horizon is considerably shorter.  The portfolio I manage (for the Cabot China & Emerging Markets Report) can turn over as much as 300% a year, so I need to take daily moves very seriously.  And if you have a portfolio with lots of jumpy, speculative stocks, you may need to keep tabs on intraday movements.  But in general, there are only a couple of situations in which it makes sense for you to be following the stocks in your portfolio in real time.

The first is when your stock's company is reporting earnings.  Reactions to earnings disappointments are so severe these days that a delay of an hour or so can make a significant difference in whether your investment finishes in the black or in the red.  It's often prudent, especially in stocks in which you have very little profit cushion, to put a stop on the stock a few points lower than its pre-announcement level.  Look for a price that's below the stock's normal daily fluctuations and place the stop a point or two lower.  This will sometimes whipsaw you out of some stocks that react badly and then recover quickly, but more importantly, it will get you out of some stocks that collapse and never recover.  

The second spot that's appropriate for intraday stock watching is when you're trying to buy into a stock.  If you have access to real-time prices, buying a stock at the bottom of its normal trading range can be the difference between a quick gain and an initial loss, and if you can catch one on a significant pullback, it can be quite profitable.   

You might also want to use your stock-following behavior as a kind of psychological test to decide whether you're cut out for the life of an aggressive growth investor.  If you find that a drop of a few percentage points in the price of your stock is genuinely distressing for you, then you might think about moving toward the value style or a more buy-and-hold growth style.   

I know people who weigh themselves every morning and then feel either good or bad about themselves all day based on the result.  And I'm sure that stocks have the same effect on some people.  So ask yourself how hovering around your stocks is working for you and adjust your behavior accordingly. 

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My stock idea today is an old friend in a booming South American market.  It's Banco Itau (ITU), a leading Brazilian bank that corrects sharply from time to time, but just keeps on advancing in the long run.  The bank has a strong position in Brazil, with a loan portfolio that's about equally balanced between industrial and individual loans.  Institutional investors have been increasing steadily as the Brazilian boom continues and the stock just keeps on trucking.  

ITU was trading at 3.5 back in 2004 as the Brazilian economy was just beginning to recover from its fiscal crisis and the stern measures that brought it back to life.  The stock is now trading around 26 with a forward P/E ratio of 13 and a small dividend.  This isn't likely to be a rocket launcher of a stock, but if you can catch it on one of its frequent dips to its 50-day moving average, it can be quite rewarding  

I hope you're enjoying your holiday season.  I'm working from home, and the view out of my back window shows patches of grass through the snow that gave us an unusual white Christmas.  The cat wants to get on my lap, and I think I'll grab just one more cookie and give in to her.  

 I look forward to writing to you (and hearing from you) in the New Year.

Paul Goodwin
For Cabot Wealth Advisory

Editors Note:   Paul Goodwin is the editor of Cabot China & Emerging Markets Report. Rated #1 Top Performing Newsletter over the last 12 Months by The Hulbert Financial Digest.

With the New Year approaching, I've been checking the results for the stocks of the developed nations against those of the emerging world, and the differences are pretty dramatic.  Peru is the top-performing nation, year-to-date, according to Morgan Stanley Capital International (MSCI) with a whopping 95% gain in local currency terms.  Finland is the leader among the developed nations with a gain of 35% and Germany tops the major industrial nations with a 21% pop.  Those are all good returns, of course, and the loop-the-loops of the Chinese market (+69% YTD) have made it too volatile for many investors.   

But the Cabot China & Emerging Markets Report has been able to ride out the tsunamis and earthquakes of the year to stay in first place among all the investment newsletters that the Hulbert Financial Digest follows.  So if your assessment of how often you check the prices of your stocks indicates that you have the temperament for some exciting action, you might want to give the Report a try.  Here's a link to get started.

Paul Goodwin can be found on Google Plus.

Stock Picks


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