Highlights From Our Investing Advice
In Case You Missed It
I recently brought you an issue of Cabot Wealth Advisory that reviewed some of our most important investing lessons from the year written by three of our editors. Today, I'm going to bring you something from the rest, Timothy Lutts, Cabot publisher and editor of Cabot Stock of the Month, Paul Goodwin, editor of Cabot China & Emerging Markets Report and Michael Cintolo, editor of Cabot Top Ten Report and Cabot Market Letter. I hope this helps you tackle your next investing challenge.
Here's Paul Goodwin explaining how he chooses stocks for Cabot China & Emerging Markets Report using his SNaC system on February 11:
"SNaC stands for Story, Numbers and Chart, and it's the method I use to pick stocks for the Cabot China & Emerging Markets Report. There's nothing complicated about it, but it can be very powerful. Just because it's simple, that doesn't mean it's easy to do. Here are the basic principles.
"Story includes the basic market proposition of a company, including its products, its target consumers, its potential for huge sales growth, its barriers to entry, its competition, its intellectual property, its management and all the other stuff that you can put into words. When someone buttonholes you at a party and tells you about a penny stock they've found that just can't miss ... what you will probably hear is the power of a stock's story at work.
"Story is an attractive way to look at stocks because we're all trained to react to stories. We like books and movies about people who have great ideas and struggle (against apathy, short-sightedness and malevolence) to gain acceptance (and make a pot-load of money). And we're attracted to the same things in stocks.
"But there are lots of stocks with great stories that don't do a thing. I also want good numbers, which are a record of a company's success. I look for stocks that have been growing revenues and earnings for a number of quarters, ideally with earnings (profits) rising faster than revenues (sales). I like to see the rate of growth for both categories rising. It's also nice to have an increasing number of institutional investors and an after-tax profit margin that's high and rising. And finally, I want a stock that's liquid - trading at 400,000 shares a day or more--so Cabot subscribers can trade without being worried that the stock will get deep-sixed by one money manager who wants out.
"Numbers can be comforting because they give you a sense that more and more consumers and businesses are buying a company's products, and that management knows how to grow profits.
"Charts are where the rubber meets the road in growth stock investing. Some highly technical investors don't even care what a company's product is or how much money it's been making. They think they can tell everything they need just from a stock's chart. I'm not that confident, but I know that a stock with a rising price and good volume support must be doing something right. When I screen my emerging markets investment universe for candidates to recommend, I'm really looking for stocks whose price is rising. And that's what's on a chart.
"Charts also tell you about a stock's momentum - whether its rate of appreciation is rising or falling, whether it's shaping itself into any of the classic patterns of consolidation, reversal or base-building. I've sold stocks that were going up steeply because the chart told me it was a climax top. And I've bought stocks that had advanced sharply and then corrected into a tight pattern that indicated steady accumulation.
"Of the three components of the SNaC strategy, I guess I like the charts the best. But I can see the value in all three, and I think that all three parts--Story, Numbers and Chart--can help to shift the odds in favor of a stock's success. The best stocks have great stories, strong numbers and technically attractive charts. In an enterprise that requires you to use every advantage at your disposal to get the odds on your side, it just makes sense to go for the complete package."
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The Superior Investment Over Time
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One of my very favorite pieces this year was written by Mike Cintolo on September 16 when many thought the world was coming to and end. But Mike quelled investors' fears with this article:
"History in the making! Granted, it's not the kind of history we'd all like to see, but the fact remains that the upheaval in the financial world during the past few days--in stocks, bonds, currencies, and, oh yeah, in the real world as well--is going in the history books. We'll be reading about this stuff for years to come.
"As always, we want to keep you in gear with our latest thoughts, so I decided to jot down a few quick notes about what I see--call it a stream of consciousness.
"1. It's during these tumultuous times that investors seem to throw out all the stuff they've learned in recent months. I've already answered emails from subscribers who want to buy, buy, buy, and those who are actually shorting into this disaster. In other words, the news and volatility makes people want to be involved.
"But oftentimes the opposite approach is best. Right now, I'm sitting in cash, avoiding the market's mayhem, and, importantly, keeping a level head so that IF the market happens to form a bottom, I'll be able to recognize it.
"2. While it seems like today's the end of the world, it's not. We're in the midst of a bear market, and obviously, the financial system is being tested. While there are going to be plenty of losers, our economy is actually hanging in there relatively well--I'm not saying things are good by any stretch, but I'm almost surprised that the Dow and S&P 500 aren't down more given all the woes. Many sectors, such as retail and medical, are actually growing nicely.
"3. Yesterday, as the Dow and S&P 500 broke below their mid-July lows, there were 792 stocks on the NYSE that reached new 52-week lows. That's far fewer than the 1,304 seen in mid-July ... a positive divergence, something usually seen at major lows. Of course, this morning opened ugly as well, so we'll see if this divergence holds after today.
"4. Echoing that point, I can say that, as opposed to mid-July, when I couldn't find a single stock that I really wanted to buy, today I'm closely following a list of 10 good-looking stocks that are, even after Monday's disaster, holding very well. And these aren't "defensive" names like Colgate or Phillip Morris; they're real growth companies that are showing big increases in sales and earnings right now. I find that encouraging.
"5. I believe the effect of this financial mess is emphasizing the bear trend in commodities--slower economic growth/higher uncertainty/less liquidity means less money will flow into commodities. Looking at oil, natural gas, gasoline and gold, they're off 37%, 48%, 31% and 21%, respectively, just since early July. Those seem like abnormal drops to me, not normal corrections. While sharp rallies will come, a meaningful top might have finally been put in. Translation: Don't buy commodity stocks (even gold) as a "hedge" against this uncertainty.
"6. Another area I remain worried about: Nasdaq 100-type stocks, especially the big winners of the last advance. Apple (AAPL) looks like it's completing a very long, very sloppy topping pattern, First Solar (FSLR) is in the same boat, and stocks like Baidu (BIDU), Dell (DELL), Cisco (CSCO) and most chip stocks are looking terrible. I don't see this group leading if a new bull market gets underway in the weeks ahead.
"7. Always remember that defense is a necessary part of the investment ballgame, especially with growth stocks. As of last night, I see that Calamos Growth Fund is down 25%, CGM Focus is down 18%, Fidelity Growth & Income is down 29%, and many hedge funds are down 20%+ ... with some already folding up shop. A 20% drop in your portfolio requires a 25% advance just to get back to where you were; a 30% drop requires a whopping 43% advance to get back.
"As one subscriber said, "it's all about advancing, and protecting." Too many people forget the second part of that. Cabot Market Letter, which I edit, has been 65%+ in cash since early July, and has been 90% cash during the last couple of weeks. You CAN time the market and avoid situations like these!
"8. As for the real world ... I'm glad to see the government draw a line in the sand with Lehman, allowing it to fail. And, yes, I know someone who works there, and one of my best friends works at Merrill Lynch, and I feel awful that the average employee is getting whacked like this. Still, bailing out everybody was just prolonging the agony, and besides, the Federal Reserve is there to be lender of last resort. I'm not so sure Lehman was suffering from just liquidity issues--they had a ridiculous amount of terrible debt, so they were likely going the way of the dodo bird eventually.
"As for AIG's potential bankruptcy, yes, I do think it could have a bigger impact than Lehman. But I also think that, even if AIG files Chapter 11, the heads of the remaining investment banks and the Fed aren't going to create a situation where AIG liquidates its balance sheet in a hurry, crushing the markets.
"Lastly on this topic, I think Bank of America (BAC) is going to be a monster when this storm passes. And I will also say that the best-acting financial stocks, like Hudson City (HCBK), Northern Trust (NTRS) and Wells Fargo (WFC), should thrive whenever this mess ends. Keep them on your watch list.
"9. As someone who's very early in the process of looking for his first house, I would love to be able to take advantage of these plunging mortgage rates. So if you're tied up in a higher-rate mortgage, this market turmoil, which has caused a rush to safety, could be presenting you an opportunity to refinance.
"10. To re-answer a question I've heard many times: Could this bear market just keep going and going for months? Yes, it could--anything is possible in the stock market. But the market is an odds game, and when you're 11 months into a bear market, and fear is elevated, and nearly a quarter of all stocks are hitting new yearly lows, the odds favor this bear market being in the seventh, eighth or even ninth inning here.
"It's not a prediction, but I'll just say that the time to become truly bearish was weeks and months ago (when our indicators turned bearish), not today. That doesn't mean the market's going to turn around here, but when worry and panic are in the air, the smart professionals keep their eye on the ball, look for those stocks holding up best, and remember that a new bull market WILL eventually come, and those that are prepared will make the most money. In the meantime, I'm patiently waiting in cash."
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And last but not certainly not least, here's Tim Lutts writing on March 3 about three steps to successful investing:
"Back in 1931, Humphrey Neill, who later became famous as the Vermont Ruminator, but was then vice president of Wetsel Market Bureau, Inc., wrote a book called "Tape Reading and Market Tactics--The Three Steps to Successful Stock Trading." It was published by B.C. Forbes Publishing.
"In 1970, it was reissued by Jim Fraser of Vermont, and last year it was reissued again, by Marketplace Books. You can get it on the Internet for about $10.
"The copy I pulled off my shelf last week is from the original edition, second printing in March 1931. It was first owned by Lester Vernon Parmelee, who signed his name both on the flyleaf and inside the back cover, and affixed his bookplate, complete with the Parmelee motto, Beatus Qui Patitur, or "Blessed is he who endures," inside the front cover.
"A little research reveals that the Parmelees settled Guilford, Connecticut, in 1639 (and some endure there today), but that Lester was born in Los Angeles in 1896 and died in 1966. He never married.
"My father bought the book used in 1951, apparently for $5.00 (the price penciled on the inside cover) and affixed his own bookplate, and though he retired from Cabot four years ago, his valued books remain here in the office, enriching those of us who are still willing to learn their secrets.
"So what are the Mr. Neill's three steps to successful stock trading?
"The first step is familiarizing yourself with the methods of the institutions that move the market.
"The second step is learning how to interpret the actions of both these groups and the investing public.
"The third step (and hardest of all) is achieving mastery of yourself; of the "temperament, emotions, and the other variables that go to make up human nature."
"We write about all three of these issues frequently, but we don't spend much time on the first; we simply accept that institutions have the power to move the market.
"We do spend a lot of time interpreting their actions, reading charts to determine whether stocks are under accumulation or distribution or just simply ignored.
"And we spend even more time on the third issue, working to teach you, the individual investor, that the greatest obstacles to success lie in those variables that make up your own human nature.
"The biggest obstacle of all, of course (if I've written it once, I've written it a thousand times) is the inability to cut losses short.
"Humphrey Neil said it way back in 1931; "The one thing which retards success in trading, more than any other, is the unwillingness of many of us to accept losses, cheerfully and quickly, when we realize that we have misjudged the action of the market."
I hope you enjoyed this review of the last year. Remember, you can read all of our past issues on the Cabot Web site at any time. As always, feel free to send us any questions, comments or suggestions via email or on our blog, http://www.iconoclast-investor.com.
In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, we have links below to each issue.
Cabot Wealth Advisory 12/22/08 - A Leader for 2009
On Monday, Michael Cintolo reprinted readers' letters that brought up alternative points to his partial solution to our Social Security problem. Mike also wrote about the market looking better and why it's important not to buy past leaders during the next bull market. Mike also discussed a stock he thinks is poised to be a future leader. Featured Stock: Myriad Genetics (MYGN).
Cabot Wealth Advisory 12/25/08 - A Dangerous Toy Story
On Thursday, Brendan Coffey wrote about the dangerous chemicals found in many of the toys kids received for Christmas this year. Brendan also wrote about the effects these chemicals have on people and how one group is testing people to see which chemicals are in their blood. Brendan discussed the future of Green stocks within the framework of the new administration's infrastructure and Green spending plans.
I hope you are having a wonderful holiday season, complete with a safe and happy New Year. I'll be back with you in 2009!
Until next time,
Editor of Cabot Wealth Advisory
Editor's Note: This has been a tough year for investors, but it's time to start looking ahead. Dick Davis Digest is doing just that with its two special January issues that bring investors the top stock picks for 2009 from the best minds on Wall Street. These stocks, handpicked by an investment expert from the recommendations of other top investment experts, are just what you need to get your portfolio back on track in the New Year. A subscription to Dick Davis Digest gives you all the tools you need to invest wisely in the coming year. And if you sign up before December 31, you'll get both of the special issues we publish in January containing the top stock picks of 2009 from the best minds on Wall Street.