The #1 Rule of Growth Stock Investing

 
Top Investing Rules

Mike's Favorite Stock Right Now

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This month marks a special time for us at Cabot: The 39th anniversary of the first issue of Cabot Market Letter, our flagship newsletter. In honor of this anniversary, I interviewed Cabot's publisher and president Timothy Lutts, and Cabot Market Letter's current steward, Michael Cintolo. You can read the other interviews in our archives: http://www.cabot.net/Issues/CWA/Archives.aspx. Enjoy!

(Please send us your comments on the anniversary of Cabot Market Letter by replying to this email. We'd love to hear from you and you just might see your comment show up here.)


1.) What is your current market outlook?

My current market outlook is generally bullish, although some corrective activity (a 5% to 10%-type market decline) is always a possibility after an advance like we've enjoyed since March.  Still, I think what's more important is the bigger picture, and on that front, I am very bullish.

The reason deals with market history.  Back in March 2000, investor perception was literally as high as it's ever going to be--everyone believed the Internet was changing the world, valuations didn't matter anymore, and for 20 years, the market only suffered brief, sharp bear markets (nothing prolonged in nature).  Every investor thought 10% per year was poppycock--15% to 20% a year was doable.  And many ordinary citizens were leaving jobs to be daytraders.  Crazy!

Fast-forward to March 2009 ... exactly nine years later.  At that point, I believe we witnessed the complete flip-flop in perception.  Investors were not only worried and pessimistic, they feared for the future of our financial system; never before had the market fallen so far, so fast, and never before had so many big firms gone belly-up.  It was pure panic.

In my opinion, that March 2009 period will mark a major, major low for the market--I'm not big on predicting the future, but it wouldn't surprise me if the Dow never again fell to the mid-6,000s like it did in March.  

Thus, while corrections can come and go, after more than 10 years of the market making basically no progress, I believe the worst has passed and we're in a bull market of unknown duration.

2.) What are your top investing rules?

Well, my top investing rules are rules that work for me--everybody has their own style, so some of the things I practice may not produce the best results for others.

With that said, cutting losses short is, by far, the #1 rule of investing in growth stocks.  Doing this will always keep you in the ballgame, and if you cut them short enough, it will always make sure you never fall too deep into any hole.

Another rule I try to preach is to do some offensive selling--i.e., selling on the way up.  When I was learning about the market, I thought that most people liked to sell their winners while holding their losers, a bad idea.  But my experience has been a bit different--investors don't like to sell anything, because doing so means you're giving up hope of higher prices in the future.  And that's psychologically hard for most.

Thus, I like to take a few chips off the table when I have a good profit and things look overheated.  That way, I'm acting, instead of re-acting, like most do by selling after a sharp market correction.  But I will hold most of my shares of a winner, giving me a chance to benefit from the occasional homerun.

Other rules I believe in:  Confine your purchases to the true leading stocks of the day (not low priced, speculative junk), don't invest too much (risky) or too little (what's the point?), try to raise your stops to breakeven as soon as you have a decent profit, and, importantly, keep an eye on your portfolio's total value--you don't want to track it minute by minute, but too many investors fail to take action when things go awry.

3.) What is your favorite investing book?

If you're a student of the market like myself, the hands-down best book out there is "Reminiscences of a Stock Operator," by Edwin Lefevre.  It's really a biography of Jesse Livermore, but it's very conversational, and that book teaches me something new every time I re-read it.  

Also an easy read, is a book I love called "How I Made $2,000,000 in the Stock Market," by Nicholas Darvas.  In it, he goes through his progress from total beginner to millionaire and reveals how he did it.  Many great lessons can be found in this book, too.

4.) What is one of your favorite stocks right now?

One of my favorite ideas remains Green Mountain Coffee Roasters (GMCR), a company with a new, revolutionary product (its Keurig single-cup coffee brewers) that's changing a mammoth industry -- basically anyone that drinks coffee at home or at work.  Obviously, I love the company's growth (sales are expanding at a 60% clip, earnings even faster), but there are two things that make me especially optimistic.

The first is the razor-razor blade potential of this business.  Green Mountain makes little or no profit on selling the brewers, which go for anywhere between $80 and $200, depending on the model.  Instead, the real money is in the K-Cups, the patented single-cup product that works with its brewers.  And, of course, that means recurring, high-margin revenue to the company--once a brewer is sold, it triggers years of K-Cup sales.  Interestingly, while Green Mountain sells its own coffee in K-Cups, it also licenses it out to select coffee companies, each of which pay a six-cent, per-cup royalty to Green Mountain.

The second thing that excites me has to do with our own history.  In the past, nearly all of our really big winning stocks, from Home Depot in the early 1990s, to Summit Technology in the mid 1990s, to Amazon.com and Yahoo! in 1998 and 1999, to XM Satellite Radio in 2003-2004, to Apple and Google in the middle of this decade, to Crocs in 2007, have addressed huge mass markets.  That means they had tens of millions of customers, allowing their rapid growth to continue much longer than most expected.

That said, there are no sure things in the stock market, so if GMCR fails, I'll change my tune.  But I do believe it has the makings of a winner during this bull market, and after consolidating for the past three months, could be ready to resume its advance.

5.) Any final words?

Well, I just want to emphasize to everyone the importance of staying positive when it comes to the stock market.  That doesn't mean staying bullish--being in cash while the market is falling is great--I'm talking about keeping your eyes open for potential big winning stocks.  

Too many investors get too pessimistic about the long-term for one reason or another; I'm still seeing a lot of that these days.  But the fact is that this country and our market has come through all sorts of challenges in the past 100 years, and each crisis seemed like "this time was different."  But it wasn't, and as a student of history, I can tell you that there have been big-winning stocks in every market cycle going back decades.

Thus, simply put, stay positive, think big, and keep your eyes open for new, exciting, revolutionary ideas.  In time, some of these companies will blossom into stock market superstars.

To find out whether Cabot Market Letter (or one of our other publications) is right for you, take this simple quiz: http://www.cabot.net/Subcontent/Which-Publication.aspx

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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 10/19/09 - Dow 10,000 ... What Next?

On Monday, Timothy Lutts wrote about his recent trip to the Contrary Opinion Forum in Vermont. Tim also discussed the Dow hitting the 10,000 level and what that means for investors. Tim finished by writing about a small-cap stock in the femtocell market. Unfortunately, we can't reveal the name because it wouldn't be fair to our paying Cabot Small-Cap Confidential subscribers.

http://www.cabot.net/Issues/CWA/Archives/2009/10/Dow-10000.aspx

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Cabot Wealth Advisory 10/22/09 - Money Flows Where Its Wanted

On Thursday, Paul Goodwin wrote about Wriston's Law, which states "Capital will flow where it is wanted and stay where it is well treated." Paul also discussed the story behind stock symbols. And he finished by writing about a Brazilian retail stock. Featured stock: Companhia Brasileira de Distribuicao (CBD).

http://www.cabot.net/Issues/CWA/Archives/2009/10/Wristons-Law.aspx

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Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor's Note: The stock market recently had its best quarter since 1998--with the Dow and the S&P 500 both surging 15%! There's never been a better time to invest. And to get you started, we're bringing you a special anniversary offer for Cabot Market Letter, which has been helping investors profit since 1970. Order by the end of October and get the rest of the year free! Hurry, there's only one week left to take advantage of this special offer. Click below to get started today.

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Headline News

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