By "monster," I meant Bank of America (BAC) is poised to be a winner; I meant it in a positive, bullish way. Its purchases of Countrywide and, more importantly, Merrill Lynch, could make it one of the bluest of blue-chips in the financial world once this storm passes.
Just wanted to clear that up, as I know I led some of you to interpret "monster" in a negative way, thinking BAC would be the next problem child.
Either way, I don't advise buying anything financial right here--but in the years ahead, BAC could be a top stock in the financial sector.
As a young investor many years ago, I used to read and watch everything I could that related to the stock market, and even the financial markets in general. I was a huge sponge, eager to sop up information and opinions, no matter how good, bad or biased it might be.
Eventually, however, as I began investing on a more regular basis--i.e., I actually began working and had more money to invest--I took a step back and examined my habits. Here I was, listening to pundits on TV and reading opinions online, listening to people who were clearly very smart and well spoken. But many of them were doing no better than the average investor.
I say that not to throw stones; heck, all of us in the investment business live in glass houses. My point is that even these knowledgeable professionals, who understood and could explain the inner workings of the stock and credit markets ... had trouble making good money in the stock market. And that, after all, was my goal.
No Need to be the Smartest Guy in the Room
All of this brings me to this week's tumultuous events--Lehman's failure, AIG's bailout, Merrill's sort-of bailout, and now the worries about Morgan Stanley, Goldman Sachs and whether the investment banking industry as we know it is about to go up in smoke.
I spent 20 minutes yesterday reading the Wall Street Journal's front-page articles, but I still can't say I understand in full the entire credit swaps/mortgage securitization/collateral backing issues that are affecting the financial world. (Then again, you could argue that the CEOs of these firms didn't have a firm grasp on all they owned ... but I digress.)
Yet, if anything, I believe NOT knowing all the details and ins and outs can be a good thing for you, the investor. How so? In real life, the smartest guys often get the best jobs and have the best careers. Yet in the market, the smartest guys often go belly-up when "once in a lifetime events" (which are happening every five years or so these days) cause their models to go awry.
My point is this: Knowing the nitty-gritty of the financial world is not what it takes to be a great investor. That's just not how the world works. The best investors keep it relatively simple and stick to systems that have been proven for years. Those systems are based on how the market actually works, as opposed to reacting and mulling over the latest crisis.
So don't be too eager to delve too deeply into all the nitty-gritty of the financial world. While it may help you feel smarter, it's not going to help you be a better investor.
--- Advertisement ---
Keep Your Money Safe
The wild fluctuations of the market this year have investors scrambling for what to do with their money. We have a solution: Cabot Benjamin Graham Value Letter. If you want to safely invest your money over the long term, this method is for you. It's how Warren Buffett achieved his billionaire status and how you can protect your investments while still seeing big returns.
Since the 1930s, Benjamin Graham's timeless value investing approach has achieved returns of 20% per year with low risk regardless of the market's ups and downs. Today, Roy applies his system to two models in the Value Letter. Since inception in 1996, Roy's Wise Owl Model has achieved a compound annual return of 16%, and since inception in 2003, Roy's Classic Benjamin Graham Value Model has achieved a compound annual return of 22.4%
Click the link below to start safely investing and earning money the Warren Buffett way.
What to do Now?
Now to address a few pressing questions on investors' minds.
I've received many questions that basically say, "I never sold a few months ago, and now I'm holding a bunch of stocks at big losses. What should I do?"
The fact is that I don't have a great answer for you, but here's what I advise.
First, you should respect the weakness of the market and your stocks by selling something. Just sitting there like a deer in headlights is not a strategy. I'm not saying you should sell everything, but you might sell one-quarter of your holdings, or maybe two or three out of 10 stocks, right here, just to take some pressure off.
Then try to piece out of the rest of your stocks on any bounces. Many of the worst, most beaten-down groups can bounce strongly, but if they do, you shouldn't get greedy. Try to sell out of another chunk after a bounce of a couple of days, and repeat. You want to get out of your broken stocks, and, eventually, get into the new leaders of the next bull market.
New Bull Market?
On that note, I heard this question today, "How do you know there's going to be another bull market?"
My answer: There is always another bull market. That's the great thing about capitalism--there are still millions of people out there employed, working, growing existing businesses and starting new businesses. Believe it or not, many sectors are doing just fine these days, and we expect many more to do well once the current malaise passes.
Yes, it will pass, just as the Orange County, California, crisis passed in 1994, and the Russian ruble/Long-Term Capital Management crisis passed in 1998, and the tight money crisis passed in 1982, and so on. The country and economy will get through this in good shape, and when a new bull market begins, there are going to be plenty of leading stocks to buy.
Why Didn't You Sell?
Lastly, I received one question just this morning that asked, "Why didn't you just sell everything when the market turned negative [according our indicators] in mid- to late-June?"
My answer is simple, but it has broad implications. Over the long term, selling everything when the market breaks down isn't the worst idea, but if you do, you're going to sell out of many big winners early on in their advances. We would have sold all our First Solar (FSLR), Crocs (CROX), XM Satellite Radio (XMSR), you name it, just a few months into what turned out to be yearlong upmoves. And thus, our results would have suffered.
Of course, this time it would have been great to sell everything in June (heck ... maybe even sell short, too!). But that gets to my larger point--don't assume the future is going to be just like the immediate past. Too many investors look at the most recent experience, and believe the next five events (in this example, the next five sell signals) will be similar. That is not how the market works.
Instead, realize that you want a system that works for you over the long run ... not something that hits it out of the park in 2008, but misses the mark entirely in 2009. I've had the Cabot Market Letter's Model Portfolio at least two-thirds in cash since early July, which is quite defensive in my book. Obviously, it would have been better to be 100% cash, but, if I did that, does that mean I would become 100% invested on every buy signal? That would produce a ton of choppiness and losses, which I'm not eager to embrace.
Bottom line, remember to take a step back when evaluating your methods, and ask yourself, "How are they going to do, not just today, but in bull, bear and sideways markets during the next five years?"
My stock idea is, very simply, the #1 stock on my watch list right now. The company sports most of the characteristics of past leaders--fast sales and earnings growth, healthy profit margins, a unique position in a mass market, and a huge opportunity for growth going forward.
It's Concur Technologies (CNQR), a relatively small ($193 million in revenue) company whose software allows companies to save 50% to 80% on travel-related costs. The idea is simple--it's computerizing and automating many of the aspects of booking, tracking and reporting travel expenses. No more paper-based expense reports!
And the service is offered "on-demand," which simply means that Concur hosts everything on its own servers, so all customers have to do is log-in online, and get to work. The overall attraction (cost savings plus ease of use) is so great that renewal rates have been in the 97%+ range for the past six years.
The company's been doing great for a while--sales and earnings are rising at a 60% to 100% clip--but business should get even better next year. Why? Because American Express, once a competitor, has thrown in the towel, bought 13% of Concur's shares, and is beginning to exclusively push Concur's software to all its clients.
Considering that Concur has just 7,000 or so clients, versus a potential market of more than 600,000 in the U.S. (according to management), you can see how big this business could get. The market has also been compared to the early stages of the outsourced payroll market-think Paychex, and ADP, both of which enjoyed years of growth.
Best of all, the stock is acting like a champ. It broke out to new peaks in August, and is still above those peaks now, despite the horrid market. It's positioning itself to be a leader of the next upturn ... but I still need to see the market itself find a bottom before buying in.
All the best,
For Cabot Wealth Advisory
Editors Note: As editor of Cabot Market Letter---Cabot's flagship product, published since 1970--Michael Cintolo has helped subscribers beat the bull market of 2007, while also avoiding the worst of the bear market during the last 11 months. The result has been a Model Portfolio (which focuses on young, dynamic growth stocks) that has bested the S&P 500 by an amazing 35% ... just since the start of 2007. Looking ahead, Mike believes we're in the later innings of this bear market, and thus, he's readying his shopping list with stocks like Concur Technologies (CNQR), preparing to jump on the leaders of the next big bull move. If you want top performance in both bull and bear markets, and if you want to know the leaders of the next advance before they shoot higher, give Cabot Market Letter a try.