To Cabot Small-Cap Confidential
In Case You Missed It
This month marks the two-year anniversary of Cabot Small-Cap Confidential and in honor of that, I'm going to be bringing you a multi-part series with Editor Thomas Garrity. Tom will explain how he got interested in small-cap stocks, where he thinks the market is going and some of his time-tested investing rules. I hope you enjoy it!
Question: What are your thoughts on the two-year anniversary of Cabot Small-Cap Confidential?
Answer: I'm pleased with the performance of the individual stocks in Cabot Small-Cap Confidential, especially since the March stock market bottom. Since that time, the Dow is up 41% and the S&P Small-Cap 600 Index is up 48%, and Cabot Small-Cap Confidential is up a huge 93%, which is especially gratifying. Helping the portfolio to reach such heights are key investments like UQM Technologies.
Our subscribers deserve a big thank you on our two-year anniversary, especially for sticking with us through the bear market. For the most part, our investments will take us beyond brand named stocks to undiscovered entities. Owning shares in unknown, young companies undoubtedly introduced our subscribers to risks, but despite the stock market's volatility, neither I not our subscribers lost sight of the long-term goals of Cabot Small-Cap Confidential. We stuck to our thematic approach to investment research, even when some volatile stocks threatened to undermine our investment objectives. We use a method that makes holding stocks, even in bad market environments, prove not only fortifying, but also profitable given our risk exposure.
Though Cabot Small-Cap Confidential began just a short time ago, capital markets are always changing. I continue to strive to hit on the best stocks, while exercising and prescribing a rigorous investment discipline especially in challenging times. After a challenging two years, this feels like a new beginning for Cabot Small-Cap Confidential and I'll use this opportunity to uncover the best investments for our subscribers.
Question: Tell me how you got into investing, specifically small-caps.
Answer: My curiosity for investments goes back to my grandfather's and my father's influence in my early years. My passion for investment research took on scope and meaning when I was working part time in college. My grandfather planted the seeds for a strong work ethic in me, as he grew up an orphan and through hard work managed to own a seat on the NYSE. My dad played an equal role, imparting his knowledge by reminiscing about his days working as a chartist. So you might say that stocks are at the core of who I am; they're in my genes.
My selective involvement for investing in small-cap stocks originated out of necessity, as college kids are often broke, combined with a desire to capitalize on the efficient market theory. I was looking to find a 10-bagger stock in an effort to refute the theorem that all information relevant to security pricing is known. How could stocks reflect the full extent of information that can be acquired when all the facts aren't in usable form? Needless to say, I had a difference of opinion with the philosophy that stocks fully discount the future. But what's a college kid to do, re-write the finance text? My best strategy was to take advantage of the information gap and the best place to start was in the small-cap arena.
As an investment, small-capitalization stocks represent an entire class that, over the years, has been entirely overlooked, primarily on the basis of information scarcity, in favor of mid- and large-cap stocks. So I reasoned, investing in small-caps would immediately give me a few extra steps out of the starting gate simply because they were being ignored.
Second, I had limited funds to deploy so if I could buy 50 shares of XYZ company at 2.00 versus one share of IBM at 100, I'd have some additional price leverage. Finally, I didn't want to risk a lot of money by investing in the wrong horse, I only wanted to make a lot of money. After all, I'd heard stories from my grandfather about the stock market crash in 1929 and I knew that investing in stocks would be a risky enterprise.
Despite the ambiguity that comes from treading into uncertain waters, my first investment in a small-cap stock worked flawlessly and I was able to make a quick 50% on my invested capital. My initial experience investing in small-caps, more than a quarter of a century ago, has never been forgotten. I was hooked on small-capitalization investing.
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Question: What characteristics are you looking for in the individual stocks you recommend?
Answer: One of my investment hallmarks has always been to give Wall Street's unknown stocks a chance, and I will continue to do that and rely on the metrics that have served me well for decades. I'm forever partial to companies that have monopolistic positions in thriving industries or what I like to call pure plays. A pure play is a company with a product that has created its own category in a large addressable market. Second, it's a company with a highly dedicated research team to develop the product and a sales staff who will bring that product to market.
Question: What advice would you give someone who is ready to get back into the market after sitting on the sidelines during last year's bear market?
Answer: Set up some clearly defined investment rules for stock investing, such as:
* Make certain the company you're considering has enough capital to run its operations for many years and its balance sheet is (for the most part) debt free.
* Time your investment with a company-specific event.
* Get into a stock before institutional investors become aware of it.
* To the best of your ability, ensure that your investment has the highest probability for success. The proof will come from doing research and assessing data. Any company can fail, big or small, you just want to try to avoid being a shareholder when that happens.
* Only put capital to work in a stock that correlates with your investment risk tolerance and timeline.
* Finally, become committed to your investment, which means being comfortable with market volatility, and also having the patience to let it succeed.
Question: Where do you see the market, and small-cap stocks, going in the second half of 2009?
Answer: I might be slightly biased, but I believe that small-caps will follow where larger cap have already taken the market. A big movement in the price of large-cap stocks, like what we've just seen, is typically a prelude to great optimism. Large-cap stocks typically go out of the starting gate first and gain an early lead, however, it's small-cap stocks that truly carry out the full extent of this optimism. As the overall market gains confidence, investors will seek out riskier investments, like small-cap stocks.
The bear market may have soured some investors on large-cap stocks, as many people invested in them for safety, but lost big when the market crashed. This new reality may indicate that investing in large-caps isn't going to bring the biggest winners or be best path to investment goals.
Small-caps have traditionally outperformed large-cap stocks over the long term for as long as the record books have kept track. So while many investors will shy away from small-caps, there's no doubt that these stocks have a better performance record over time.
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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 9/8/09 - Being Nosey Pays Off
On Tuesday, we brought you an article from StreetAuthority's Stock of the Month editor Amy Calistri about a number of potential investment prospects. You can run stock screens and watch CNBC all day long. But sometimes the best way to come up with winning investment ideas is to get out into the world and start asking questions. To show you how it's done, Amy Calistri shared one of her stock sleuthing days with us.
Cabot Wealth Advisory 9/9/09 - No Consensus on Sorry September
On Wednesday, Paul Goodwin wrote about the significance of that day's date: 09/09/09. Paul also discussed the statistic that shows September as being the worst month for the stock market and what it means for investors. Paul finished by writing about a Latin American wireless company that's taking off. Featured stock: American Movil (AMX).
Cabot Wealth Advisory 9/10/09 - America's Astonishing Renewable Energy Potential
On Thursday, Brendan Coffey wrote about BP's oil discovery in the Gulf of Mexico that may hold three billion barrels of oil. Brendan also discussed the numerous alternative energy sources available here in the United States. Brendan finished by writing about a Spanish-based company that manages Green resources. Featured stock: Telvent (TLVT).
Until next time,
Editor of Cabot Wealth Advisory
Editor's Note: In honor of Cabot Small-Cap Confidential's two-year anniversary, we're rolling back the price! Cabot Small-Cap Confidential discovers stocks before institutional investors have pushed them way up, so you maximize profits by getting in early. Subscribers have seen a huge 93% gain since the market bottomed in March ... and that's just the beginning. Don't miss out on this limited time offer.