The Everlasting Cycles of Fear and Greed
The Rise and Fall of the Oil Industry
A Great Stock to Buy Now
In this ever-changing world, there will always be new lessons to learn.
In the past decade, for example, I've learned ...
* How to set up a wireless network.
* How to program my DVR remotely.
* How to use several types of GPS navigation systems.
Happily, there are some lessons that are no longer necessary for most people to learn.
* How to milk a cow.
* How to drive a stickshift.
* How to trim the wick in a kerosene lamp.
But some lessons are almost timeless, and will be learned for generations to come.
* Look both ways before you cross the street.
* Wash your hands.
* Be on time.
In the investing world, there are timeless lessons too, and the sooner you learn them, the better.
* Do not confuse the company with the stock.
* Do not confuse price with value.
* The stock market can remain irrational longer than you can remain solvent.
* Compound interest is the eighth wonder of the world. (See my December 20, 2010), so the sooner you start investing the better.
* And-the main topic of this column-it pays to be contrary, as the market rides the unstoppable waves of the human emotions of fear or greed.
Think back, for example, to the spring of 2009, when the financial news was so terrible that people feared massive bank failures, as well as a huge wave of commercial mortgage defaults that would follow the residential mortgage crisis. Fear was rampant then ... and it was an excellent time to buy stocks.
Contrarily, early 2000-when the world's computers had survived the millennial changeover and stocks were shooting through the roof as pundits touted the wonders of the New Economy-was an excellent time to sell stocks.
In hindsight, we can see how each of these periods was characterized by extreme mass emotion, and we can recognize what effect those emotions had on stocks.
But can we do it in real time? The answer-to some extent-is yes. And here's a chart that can help.
Published in 2003 by Sy Harding in Street Smart Report, a first-class market-timing service, this chart provides a handy roadmap of the sentiments of the average investor as markets evolve.
I've kept a copy at hand since I first saw it, and I refer to it occasionally, asking myself where we might be now in the sentiment cycle. So take a look. Where are we now? We're certainly past stage 5 in the bull market. Maybe we're at 7.
In any case, the major top won't come until sentiment hits 10. And that could be months away ... or years away. Which means there are likely to be substantial and numerous corrections on the way there.
But things are certainly heating up, as evidenced by the Facebook/Goldman Sachs deal this month, as well as today's news that a cupcake company-Crumbs Bake Shop-will have an IPO soon. And as emotions improve, along with economic news, it will pay to keep this chart in mind ... so that when the next big bear market does begin, you can resist the cheery groupthink and take action to preserve your profits.
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And now some ancient history.
Millions of years ago, billons of tiny plants and animals died and settled on the bottoms of ancient oceans, creating a thick layer of organic material. Sediment later covered this material, putting heat and pressure on it and transforming it into oil and gas.
And there it stayed, for a very long time ... until January 10 (today), 1910, when a drilling derrick at Spindletop Hill near Beaumont, Texas, produced an enormous gusher of crude oil, signaling the start of the American oil industry.
Within a year, there were more than 285 active wells at Spindletop and an estimated 500 oil and land companies operating in the area, including some that are major players today: Humble (now Exxon), the Texas Company (Texaco) and Magnolia Petroleum Company (Mobil).
(Imagine if you had been a buy-and-hold investor in one of them!)
And petroleum powered the world over the next century, enabling a vast multitude of machines to serve our needs and wants.
But the petroleum age is beginning to fade. The earth's oil reserves are slowly becoming more difficult and expensive to exploit, and we know the environmental costs of their use.
At the same time, alternative energy sources, from nuclear power to renewable solar and wind power are becoming increasingly practical. Young companies are springing up in all these industries, and I'm enjoying watching them grow rapidly, while speculating on what might happen if I hold some of them for the very long term. Might some of them become the next Exxon, Texaco and Mobil?
Which brings me to this issue's recommendation.
It's Polypore (PPO), a stock I last mentioned here in August.
Located in Charlotte, North Carolina, the company makes high-tech polymer-based membranes for two markets.
The first, accounting for about one-fourth of the company's business, is the medical market, where the membranes are instrumental in hemodialysis, blood oxygenation, ultrapure water filtration, degasification and other specialty applications. This business brought in $38.4 million in the third quarter of 2010, and it's growing slowly.
The second market, accounting for about three-fourths of revenues-$133.3 million in the third quarter-and the majority of the growth, is the energy storage business.
Part one of this involves supplying membranes for traditional lead-acid batteries, where the biggest growth is now in China.
But the fastest-growing and most exciting part of the business involves supplying membranes for the lithium batteries used in electronics, including Apple's iPad, and numerous new automobiles-both pure-electric and hybrid-that have lithium batteries.
That business grew 46% in the third quarter, to $34.1 million, and continued rapid growth is expected.
I recommended the stock here in August, when it was trading at 28, and it's done very well since. It's now trading at 44.
But I didn't find the stock. That honor goes to Brendan Coffey, editor of Cabot Green Investor, who recommended it in June, when it was trading at 22.
If you bought it back then, congratulations. I hope you still own it. And if you didn't buy it, you might consider buying some now. The stock has been building a base on top of 40 for more than a month, and its 50-day moving average is now at 38, promising support as the stock prepares for a breakout to new highs.
Or ... you could get the latest advice from Brendan Coffey, who's still recommending Polypore along with other stocks that benefit from the world's embrace of earth-friendly stocks.
Last year, Brendan's portfolio of roughly 10 Green stocks gained 26%, trouncing all other Green portfolios as well as the broad markets.
For more, click here.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
The Everlasting Cycles of Fear and Greed