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Happy Fourth of July! I hope you're having a safe, fun-filled holiday.
Instead of writing a regular issue today, I'm bringing you the top four essays from our recent contest, "How I Lost Money in the Bear Market and What I Would Do if I Had Another Chance." Our thanks to all our readers who submitted entries -- I thoroughly enjoyed reading your reflections.
We had planned to select three essays but the entries were so good that we had a tie for third place, so I'll ask you to vote for your favorite among our top four. So read the essays below and then vote for your favorite in the poll at the end. The winner will receive a FREE subscription to a Cabot publication.
Thanks to everyone who participated. I enjoyed reading about your experiences in the bear market and hope that you'll continue to turn to Cabot to help you weather future market storms. Enjoy!
ESSAY #1 I did everything right -- everything! Well, except for one small thing, but I'll come back to that later.
I only chose stocks of companies that had a great product or products. I chose stocks of companies that were playing in large, worldwide markets or in emerging technological or green markets. I chose stocks of companies that were making money, many at an exceptional rate and had a history of doing so. I chose stocks of companies that appeared to have strong management with relevant experience. I bought in rising, bullish markets and in countries with exciting future prospects. I sat back and looked at the way the world seemed to be going and made intuitive plays based on obvious trends. I bought some Cabot recommendations that I liked the sound of. I backed it all up with some solid mutual funds with no loads and good track records. I kept some cash in the impossibly unlikely event that the bull market underwent a protracted pullback or a leveling off. I even had some bonds but kept my investments low because I could make more money in stocks (did I say that I just made ONE error - ha!). I was smug. I was happy. I thought I was the bee's knees. I had made good money for a couple of years and was confident in my ability to recognize a star in the making and also a falling star.
Then the market changed and suddenly it no longer seemed so easy. But I had good, solid companies with great products -- right? I loved those companies! They were my babies, my growing children and like all parents I thought they could do no wrong. Not my babies. Someone else's maybe, but not mine. So I failed to spot the downside, failed to use a systematic system of stop losses, believed my companies would always bounce back (they were GOOD companies!) and I watched them slide into obscurity, even buying a few more shares on the way down because these good companies seemed so cheap. When the dust finally settled many of my stocks had lost 80% or more. The good ones lost 50%.
Next time I'll be stronger. Next time I will NOT fall in love with the companies. Next time I will grit my teeth and sell at a 15% or 20% stop loss even though my heart tells me otherwise. It's hard to throw the cake away when it goes bad and the mold is spreading. The idea of its taste overwhelms our hatred of an upset stomach. But next time I WILL use those stop losses. I may have said the same thing back in 2000. Who can see that far back?
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ESSAY #2 I am 54 years old, have an MBA, and several years of personal investing experience. Despite my age, education, and experience, I managed to throw away a good chunk of my portfolio during the bear market. How? Well, first of all I subscribed to the invest-and-hold mentality believing that time was my investment friend. Well, I was wrong. Second, I believed that professional managers of stock and bond funds had an edge and insight that I didn't, and therefore would steer me clear of any serious downturn in the markets. Again I was wrong. Finally, feeling that the remainder of my portfolio was securely managed in these funds, I used the final portion to invest directly in stocks that I believed were capable of a higher than market return.
One of these investments was in Wachovia. Just as the whole sub prime mortgage debacle was beginning I had read an article in Barron's about Wachovia and the upward potential of this stock. The article specifically addressed the fact that Wachovia had diversified investments and shouldn't be seriously affected by the sub prime mortgage fiasco that was just beginning to show its ugly face. After carefully examining the financials of Wachovia, I decided to jump in with both legs. The stock soon began to slide backward, and as it did I seized the opportunity to buy more. Being a smart and confident investor I did this a couple of more times on the way down. Bad, bad move. By the time it was bought out by Wells Fargo, the stock was worth a small fraction of what I had invested. I think that I finally got a dollar out for every six that I had invested.
Now, what I learned was, first of all, that professional fund managers may, or may not, have my best interest at heart. And, that they cannot protect me from a downturn in the market. Second, that the buy and hold mentality benefits the companies that manage the funds, not me. Third, that despite my best efforts to investigate and analyze a stock, that I need to protect my downside risk by employing trailing stop losses on each stock the moment that I invest in them. Had I done this with Wachovia I may have lost only 10% to 20% on that investment. The really sad thing is that previous to the Wachovia investment I knew that I should have such a selling discipline in place but believed that Wachovia was secure enough not to need to protect the downside. Wrong again.
Finally, through these expensive lessons I learned that I need several disciplines in place to improve my long term investing performance. Managing downside risk is one important discipline that I am hoping will help, but came to realize that I needed much more. I also needed to manage the upside. It was then that I found the Cabot Market Letter and became a subscriber. Following the macro trends of the market, as provided by the newsletter, has helped me to better understand when the timing may or may not be right. Furthermore, insight into specific stocks that hold the potential for better than market growth has helped me to look at and analyze stocks differently. Certainly not every stock has been a home run, but my investment performance on individual stocks is far better than it has been in the past and I can see that, in the longer term, it will only improve. Thanks Cabot.
ESSAY #3 How did I lose 40% of my portfolio from May 08 to March 09? I didn't listen to my gut in August '08, or to my brother, who is a longtime subscriber to the Cabot Newsletters.
My husband and I were too focused on the wedding of our older daughter. She was married in early September 2008. "Simple elegance" our wedding motto kept us from going overboard, a direction largely influenced by my late father's advice: "Don't touch your nest egg" and "Spare" (German for "save your money").
I am grateful that the wedding expenses were paid for before the November crash when we finally realized we had lost 40% of our portfolios. At least we have a son in law and lovely memories to show for that wedding investment, money which didn't just disappear on paper.
After my father passed in 1992, I considered myself a steward to what he bequeathed. If I had another chance to relive last summer, I would not be a passive steward, content that someone else was watching out for my best interest. Instead, I would be a proactive steward, educate myself, and be obedient to time tested advice, like the Cabot services. Come to think of it, I do have another chance, and I took it today. I joined my brother and am now a fellow Cabot subscriber.
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ESSAY #4 I would think that I'd have a sell-discipline by now. Sheesh, I've been investing for over 25 years-but too much time I was lolling, fat and sassy, in bull markets. Oh, I'd been burned in the past, but only mildly, and that due to stock selection. Being well diversified, I didn't fret much over market fluctuations.
Then came 2008, and the bull market turned into a huge and steaming cow pattie!... Argggh!
YES! Let's start anew.
I need a sell discipline...emphasizing the word "discipline." Any rule would do that involved a specific number, that's all I'd need, just a specific number.
Or, even 20.
Any specific percentage that would stop me out of a losing position.
Out. Machine-like in its predictability...exit here, exit now. Period.
If I'd had a sell discipline, I would have sidelined much more money, and would not have joined the whining masses with a 40-plus percent loss.
That's my lesson. Two words: Sell. Discipline. But, like many personal investors, I'd been clinging to fleeting hope rather than simply taking my beating now and being done with it.
I hereby resolve, I shall set a fixed number, at whatever threshold I can stand-perhaps 10 or 12 or 15% would be good. Golly, with that loss-point I would have sold every one of my stocks and mutual funds. What's so wrong with that? I ask myself. Listening to my inner critic...my emotional distress over loss becomes very apparent to me. I've prided myself on being objective-hah, isn't self-deceit a wonder?
1. Set a stop-loss low enough to not fret overmuch about getting whip-sawed with general market fluctuations, but high enough to stop me from losing a lot. Duh.
2. Have a rubric, well-constructed, that will allow me to reset the stop-loss lower...once? Oh, listen to me-still loss-intolerant-how about NEVER!
3. Determine to adhere to this plan and stick with this price...and to adjust the stop-loss point higher if/when prices climb.
4. Keep a diary of my thoughts, feelings, wonders, and my specific intent for each buy and each sell decision I make.
Click on this link to vote for your favorite essay: http://www.surveymonkey.com/s.aspx?sm=oDVORuhE_2bHcYmldD8D16Zg_3d_3d
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, I have links below to each issue.
Cabot Wealth Advisory 6/30/09 - The Next Intel
On Monday, Timothy Lutts wrote that he found an op-ed piece from the New York Times entitled "Invent, Invent, Invent" by columnist Thomas L. Friedman so spot-on about the future of the U.S. economy that he copied it in its entirety. Tim likens his featured stock, Starent Networks (STAR), to Intel in its early years.
Cabot Wealth Advisory 7/2/09 - The Fabulous Fourth
On Thursday, Paul Goodwin wrote about some of his favorite Fourth of July experiences and made some observations about investing on your own and Yosemite Park. Featured stock: Electro-Optical Sciences (MELA), a low priced, speculative stock with a great idea for scanning skin for melanomas.
Until next time,
Editor of Cabot Wealth Advisory
P.S. Don't forget to follow us on Twitter http://twitter.com/IconoInvestor and check out our blog at http://www.iconoclastinvestor.com!