Find Your System and Stick to It

I'm beginning to feel like one of those superheroes (or villains, depending on your perspective) that lead a double life. By day, I'm all about the market, stocks, new companies, volume trends, economic numbers and educating investors. By night, I transform into the guy that's all about taking care of the astounding number of tasks, both big and little, for my upcoming wedding. Of course, my bride to be is doing much of the work, but like a good fiancée, I do what I can.

On this past Wednesday night, for instance, we decided to meet at the Macy's in downtown Boston to buy suits for the wedding. (We live in Back Bay, right in the city, so it's a brief subway or cab ride away.) I'm not a huge tuxedo guy--why is dressing like a penguin fashionable?--and I wanted to get all the groomsmen crisp-looking suits and ties for the big day.

So we strolled in there, picked out a suit and bought a few of them, right? No, no ... if things were that easy, it wouldn't be wedding-related. It's got to be more difficult! And, to nobody's disappointment, it was.

Trials of Wedding Planning

First we find out that we needed everyone's waist size, not just their jacket size, because the suit was sold separately from the pants. So my fiancée and I had to make a dash to call and/or send text messages to all of the groomsmen. One of them--my best man--hadn't yet gotten me his jacket size, either, so I gave him a call, and he said to hold on the line while he found the answer. At which point my phone's battery died!

So I had to work double time on my fiancée's phone, but even so, we couldn't get in touch with one of the groomsmen. Thus, since the store was open until 9 (it was about 7 at this point, one hour after we first got there), we decided to go grab dinner around the corner, try to get in touch with the missing groomsman, and return before 9.

At dinner, we had a beer and a great appetizer ... and then we both ordered the "artichoke ravioli" with some sort of sherry sauce. What was delivered was cheese ravioli covered in cream sauce with a few pieces of artichokes on the side. Fantastic. We returned to Macy's a few minutes later with an empty stomach and $75 more on our credit card. And we still hadn't gotten in touch with our missing groomsman.

Well, by this point, we just winged it, and ended up purchasing three jackets, six pairs of pants, and having the salesman order the three jacket sizes they didn't have in stock. All's well that ends well, especially when my fiancée's Macy's card allowed us to save 20% on everything. By the time we had lugged all the apparel back to our apartment, I poured myself a tall glass of red wine, drank it down and hit the sack.

It was time to "transform" back into the stock market guy again.


Now, I realize the above rant probably comes across as a mixture of whining and negativity, with possibly a dash of humor tossed in. That was my intent! I admit that, while everything I wrote was 100% true, I did embellish things a bit. But I had reason to--I wanted you to "feel" the stress of the situation.

Of course, this sort of stressful exercise isn't unique to weddings--anyone can have a bad day or night, when one thing leads to another, which leads to another, and it seems that anything that can go wrong, will. No matter how you might try to avoid days like that, the fact is, they're going to happen. The key is what you do in response.

It's the same with investing, especially nowadays, when the volatility has become extreme. One day, the market is sinking to new lows. The next it stages its biggest up day in five years. And two days after that, the market gaps down more than 1% on more bad news and credit fears ... before reversing to close higher on the day!

But even during "normal" times, the stress can get to you. You might be fully invested or on margin when the bulls are running, and a one- or two-day shakeout drops your total account by 5% or more. And that doesn't even touch on earnings season, when one of your holdings can magically jump or plunge 15% or more based on its quarterly report and conference call.

Have a Game Plan

As with wedding planning, I'm convinced that the best way to deal with this stress is to have a game plan ahead of time. If you wait until things are blowing up in your face, it's too late--by then, your emotions will get out of control and you're likely to do the exact opposite of what's constructive. (The equivalent of this in the wedding example would be yelling at your fiancée ... which is only counterproductive.)

That's why now is the time to formulate a system that works for you. You're more than welcome to start with the general philosophy from one of our newsletters and then tailor it (like a suit!) to your own personality. Some rules, like cutting losses short when buying growth stocks, are absolute. Others, like how to sell (scale out of a position? All at once? Set a profit target?) can be adjusted to your own trading and investing goals.

Another thing to work on is your portfolio management plan, a topic that's near and dear to my heart. (My favorite saying on the subject: How you manage your portfolio can make the different between being up 20% in a good year and being up 120%; it's that important.) Questions to consider include how much money (as a percent of your overall portfolio) do you want to commit to each new buy? How much do you want to risk (again, as a percent of your total account) on each trade? When, if ever, do you want to go on margin?

I'm sure that if you lined up 100 random investors and got their year-to-date results, and then ordered them from best to worst, the top 10 have likely stuck to a sound market timing and stock selection system (which likely would have had them heavily in cash for much of the year), while the worst 10 had no system at all, letting their emotions of panic and greed take them in and out of stocks at the worst times.

So, with the market still in a downtrend, don't ignore your portfolio. If you haven't already, get working on your system so that you can do what we all dream of doing--making (and keeping!) truly big money during the next bull market, partly by handling the market's daily dose of stress that it's so adept at delivering.

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Optimistic That Market Bottom is Near

As for the market itself, I have to admit: I'm optimistic we're close to a bottom, if not the bottom, to this bear phase. The reasons to at least be looking for improvement are numerous. First, the market looks to be successfully testing its late-January low. Surely, should the indexes decisively penetrate those lows (about 1,270 on the S&P 500 and 11,600 on the Dow), it would throw cold water on much of this argument. But right now, the indexes are holding up, despite the wild movements this past week.

Second, the broad market is in much better shape than it was in late-January; the number of stocks hitting new lows is about one-third as many as during the January low. And I'm beginning to see a few growth-oriented stocks round out some solid basing patterns - Urban Outfitters (URBN) is one, MasterCard (MA) is another and WMS Industries (WMS) is a third.

Third, sentiment is ridiculously, outrageously pessimistic. Odd-lot options players (a great contrary indicator) are loading up on puts, total put-call ratios are skyrocketing and there are more bearish newsletters than bullish ones for the first time since 2002. All those are dumb money measures. On the other hand, smart money players like insiders (they're buying heavily) and S&P 100 options players (they're buying calls and selling puts) are leaning heavily bullish. And, of course, the headlines (led by Bear Stearns ) remain horrible, which is a good contrary indicator.

Fourth, this Tuesday's gigantic rally was the largest in the S&P 500 (percentage-wise) in more than five years, an occurrence that usually portends future gains looking out anywhere from one to 12 months.

Finally, this bear phase just hit its five month birthday on Tuesday (when measured with the Dow), which is shorter than the average bear market (usually six to nine months), but long enough to wash out most hopeful investors and set the stage for a new advance. The bear markets of 1990 and 1998, for instance, lasted just three months each. However ... being optimistic is one thing, and being bullish is another; I've yet to buy anything for the Cabot Market Letter's Model Portfolio, which remains more than half in cash. I'm waiting for our trend-following indicators to give the green light, because I've learned over the years that investing isn't all about being the first in during a bull market, nor the first out in a bear market.

As I've written before, the biggest winners often come off their launching pads between two and six weeks after a bottom. So those who rush into a bunch of stocks are not only guessing whether the market has bottomed-- they're also guessing which stocks are going to be the real, institutional-quality leaders of the next advance. The odds of doing both successfully aren't great.

Thus, my parting advice to you today: Break yourself out of any bear market doldrums you might be suffering. And while I don't advise any action right here, you should hone your watch list and your system in preparation for the next bull market. For the first time since we topped out in mid-October, I'm thinking that the market has a legitimate chance of putting on a sustained advance.

All the best,

Michael Cintolo

Editor's Note: Michael Cintolo is Cabot's Vice President of Investments and editor of the Cabot Market Letter. While everyone has a sales pitch to get you hooked on their product, the Cabot Market Letter's sales pitch is all about performance--Hulbert (the keeper of the keys for newsletter performance) has the publication ranked #5 in the country over the past year, up 32% versus a loss of 2% for the market. And during the past five years, it's up 19.5% annually versus 13.2% for the market. Mike does it by sticking to sound, time-tested market timing and stock selection rules that help him recommend the market's leading stocks during the strongest bull markets. If you want to better your own performance, I highly suggest you give the Cabot Market Letter a try.

Michael Cintolo can be found on Google Plus.

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