My Favorite Investing Books
A Favorite Growth Story
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Today I want to start off by giving you 10 nuggets to put in your investing toolkit. These tips won’t be new to longtime readers, but I think it’s always helpful to review classic investing advice from time to time, especially as we approach year-end. And for new readers, these lessons will help set you on the path to investing success.
1. Most big-winning stocks advance for 12-24 months, from their breakout to their top: In other words, if you've owned something for more than a year and it's been pretty much straight up, the stock's likely in the latter stages of its advance. True, some great stocks (take Apple, for instance), can go up longer, but even then, the stock tends to have a very nasty (50%+) correction, something that's hard to sit through.
2. Most big winners in new bull markets are new stocks: By new, I mean most stocks have come public during the past few years and did NOT enjoy spectacular run-ups during the prior bull market. We saw much of the same this year with little-known names making big gains. A corollary of this is that only one or two out of 10 leaders of the last bull market end up leading the next bull market. It's possible, but unlikely.
3. The best stocks begin their runs when they break out to new 52-week highs: When a stock is moving up off its lows it's tempting to jump on board. However, these stocks move quickly and hit resistance quickly. So to make money on these names you either have to buy early (not recommended) or have impeccable timing (difficult). Contrarily, the biggest winners have chewed through all potential sellers, and begin their moves from their breakout into new-high territory.
4. The biggest winners will break out to new highs within a few weeks of a market low: If you're buying a bunch of beaten-down stocks after a major market low, you'll probably do OK ... but you won't own any true leaders, and your performance will eventually lag.
5. The 50-day moving average will contain most of a great stock's intermediate-term advance: Usually, once a winner gets going, it will find support a couple of times at the 50-day moving average. If your stock breaks decisively below its 50-day line, it's probably time to sell at least some of your shares.
6. If an entire group is strong for many weeks, and then most stocks in the group suffer their biggest drops in many weeks, then a top is likely in: A classic example was commodity stocks in early July 2008. This action could give you an early-warning sign, instead of waiting for the trailing 50-day line.
7. A big move (more than 10%) the day after an earnings release usually leads to more movement in that direction. Nobody likes to sell after their stock has just been crushed 20% on an earnings announcement, but that's often the best thing to do. Same goes on the upside--a large move higher on earnings is often buyable (if the market is healthy, of course). The bigger the move, the more meaningful it is.
8. "Strong then Tight = Flight": This is a great rule of thumb. If you see a stock consolidate for a week or weeks, then break powerfully to new highs (Strong), and then trade in a tight range, say, within 10% for couple of weeks afterward (Tight), it's usually a sign that big investors are still accumulating shares, and the next big move will be up (Flight). This is one of my favorite set-ups.
9. A stock split (or stock split announcement) will often mark a meaningful top for a stock: Most investors, for some reason, have been trained to think of stock splits as good. But if your holding has been advancing for many weeks (at least a couple of months), and then spikes on stock-split news, you're usually better off selling at least some of your shares.
10. Good stocks can go bad in a hurry in bad markets: Last but not least, you should always keep in mind what the market is doing. Is it trending lower? If so, no matter how good the set-up, you're more likely to lose money. If it's trending higher, it'll be like running with the wind at your back. Using the 50-day moving average on the major indexes is a simple-but-good way to know whether the trend is up or down.
Now, these rules aren't perfect, but if you print these out and refer to them, I guarantee they'll improve your performance going forward.
It's that time of year again ... time to figure out what to get everyone on your holiday shopping list. I think one of the best gifts, both for getting and giving, is investment books. Here are some of my favorites:
"Reminiscences of a Stock Operator": My favorite book, which I've read many times, was written by Edwin Lefèvre. It's the fictional biography of Jesse Livermore and many of his escapades, both good and bad. Not a step-by-step book on how to get rich, but if you fancy yourself a student of the stock market, you must read this book.
"How to Trade in Stocks": This was actually written by Jesse Livermore, though it's been republished and expanded a bit. Again, it's not a step-by-step instruction manual, but it is more specific in some of the tactics Livermore used.
"The Successful Investor": This one, by William O'Neil, is more of an instruction manual, which makes it longer to read (and hence, not be the best for a beach trip). But if you read it, you'll find many of the same principles Cabot's growth publications adhere to.
"Hedge Hogging": This one I read on my honeymoon; and I was planning on reading it over a few days ... but it only lasted three. It instantly became one of my favorites. It's basically about Barton Biggs' (the author) attempt to start a hedge fund, and all the work that goes into it. However, it's really a compilation of short stories and experiences he's had in the investment world. I loved this book!
"Confessions of a Street Addict": Author Jim Cramer has a few recent books that I've perused ... and am not that impressed with. This book, however, was his first, written years before he became a TV personality. It's basically about his life as a hedge fund manager; there is a three-chapter section about his dealings during the 1998 financial crisis (Russian ruble, Long Term Capital Management, etc.) and bear market that might be the best three chapters I've ever read.
"The Perfect Speculator": This book is a follow-up to author Brad Koteshwar's first book (called "The Perfect Stock," which was actually about TASER). It basically involves Koteshwar's interactions with a fellow named Boyd Hunt--honestly, I'm not sure if this is a real person--and Hunt's lessons of how he got rich in the stock market. I wouldn't say it's the easiest read out there, but it has many great tools to add to your arsenal.
"Market Wizards": I've mentioned these books before--there are three of them (the first one was written in the late 1980s, the most recent around 2000 with an update in 2002) and each features a bunch of great interviews with successful investors. Jack Schwager is the author of all three; the last book in the series (called "Stock Market Wizards") focuses exclusively on stock investors.
I'm hoping to add more names to my "favorites" list in the months ahead; you can be sure I'll be tapping Cabot's bank account looking for new titles. When I find some good ones, I'll let you know!
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My stock idea for today is one of my favorite growth stories ... but the stock itself hasn't done much in months. So why write about it here? Because it's showing signs of wanting to get going ... and once it does, I believe it's going to embark on a major run.
The company is American Superconductor (AMSC), a firm that tried for years to make a name for itself in high-performance superconducting wires. And, in fact, that business should do well over time, as the U.S. and other countries build out so-called smart grids.
However, the big money is not coming from superconducting wires anytime soon. American Superconductor has really transformed itself into a leader in the wind power market ... although, interestingly, it doesn't produce any turbines of its own.
What American Superconductor does is design all sorts of wind turbines, and then license the designs to firms that want to get into the production business. These licensees use American Superconductor to set up shop, and then via contract, they are obligated to purchase wind electrical systems (basically the brains of the wind mill). So as its customers grow, so does American Superconductor!
By far its biggest client thus far has been Sinovel of China, which wasn't in the wind business just a few years ago but is now one of the five largest in the world! Almost single-handedly, Sinovel has pushed American Superconductor's growth into high gear. But this isn't a one-trick pony--the company has inked more than a dozen licensees, including a few that should ramp into volume production of wind turbines in 2010.
Because of all that, American Superconductor is firing on all cylinders. Revenues have exploded 60%, 83% and 85% the past three quarters, while earnings have surged from losses to three cents, 12 cents and 19 cents per share during the same time. Better yet, management recently stated that they expect earnings of 60 cents a share for the current fiscal year (ending next March), and for fiscal 2010, earnings of "at least" $1.15 per share. We think even those figures could be very conservative as new licensees ramp up.
The stock, as mentioned above, has been building a launching pad for a while, since late July. But since Thanksgiving, AMSC has tightened up and come under some serious accumulation. This week the stock tested its old peak.
While this stock has teased me before (it's tried to break out a couple of times in recent months before failing), I believe it's worth buying a small position--maybe half of what you normally buy--around here with the idea of averaging up in price should AMSC continue higher.
All the best,
For Cabot Wealth Advisory
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