The Value of Planning Ahead
Romance, Transition and Reality
Today's lead article is short and sweet.
You should be bullish today because the market has gone up for nearly three months, because breadth has improved and there are none of the typical signs of weakness that precede important downturns.
You should be bullish today because the worst of the European crisis has passed, and thus money is slowly coming out of safe havens (like negative-yielding German bonds) and flowing toward more growth-oriented investments.
You should be bullish today because the demand for new sources of energy and for more efficient consumption of energy is being answered--and will continue to be answered--by fracking, by offshore drilling, by wind-turbines, by hybrid and electric cars and more.
You should be bullish today because the world--and America in particular--is awash in fast-growing young companies that are revolutionizing the retail, entertainment, communications, transportation, technology, utility and health care industries and providing numerous attractive investments in the process.
Finally, you should be bullish today because most people are not! After nearly three months of powerful upward action, my friends and acquaintances (and your friends and acquaintances) who are not in the investment business are still not interested in talking about investments ... and Contrary Opinion tells us that's a great sign that the uptrend has further to run.
So be bullish!
--- (The following article on planning ahead was written by Mike Cintolo and published in Cabot Wealth Advisory just over a year ago; we're running it again--with minor changes--today because we think it's timely.)
Here at Cabot, we make it a point to be available to subscribers, mostly via email but sometimes over the phone. Providing the service takes time, but we think it differentiates us from most investment advisors that send you a newsletter and then turn the other way.
Not only does our being available boost customer satisfaction, it also gives us an insight into how most subscribers are feeling at any given time. Carlton Lutts, Cabot's founder, used to call this the Telephone Indicator (this was way before email). When the market rallied for a few weeks but the phones were silent, he knew most people had yet to get excited ... meaning the market likely had further to run. Most of the time, it worked.
Anyway, I'm not going to write about market timing today beyond saying this: I think most people are generally fearful of the market now, which is a good thing considering the market's strength; it means as they become less fearful, their buying will send the market higher.
What I want to focus on instead is something that happens whenever the market has a few bad days: we get inundated with emails and phone calls, 80% of which ask me something like "What do I do with XYZ stock now that it's down 5 points?" It's like clockwork; a bad couple of days and I have a couple dozen emails all asking generally the same thing.
Such questions aren't necessarily "bad"; you should care about your stocks and what they're doing. And I'm happy to answer these questions whenever they come in.
But if you're someone who often wonders "What should I do?!?," my conclusion is that you're not doing enough planning ahead of time--before the market or your stocks go against you.
It's really just simple human nature. When things are going your way (in this case, when your stocks are heading north), there's no urge to think about negative outcomes; we all like to bask in the glow of the profits we're accumulating. But the great investor does think about what could go wrong ... and more importantly, what s/he will do if something bad happens.
Having such contingency plans is important for a few reasons--the most important is that you'll be following a plan that was made when the market was quiet and your emotions were on an even keel. Contrast that to most investors, who wait for things to hit the fan ... and then react (or, more likely, overreact) based on how they're feeling at that second.
The bottom line is that, after nearly three months of a strong market rally, we're going to run into a serious correction someday. But success doesn't come from predicting when the market will pull back, how much it will eventually fall, etc.--those are unknowable things. Instead, you should start thinking now about how you'll handle the inevitable down period--what you'll sell or buy, where you'll sell or buy, and how much you'll sell or buy.
Your plan doesn't have to be exact to the penny, but it should give you a roadmap to follow whenever the storm clouds gather. Doing this will improve your results-I can guarantee it!---
Moving on to a recommended investment, I'll start by saying I could recommend 100 stocks today. That's how strong this market is. Among well-known names alone, I could recommend Whole Foods Market (WFM), Ulta Salon (ULTA), Caterpillar (CAT), Home Depot (HD), FedEx (FDX), Lululemon (LULU) and Michael Kors (KORS).
All are growing, all are strong, and all have been recommended in Cabot advisories.
But instead I want to talk a bit about Tesla (TSLA), the electric car company.
The high points, quickly, are these:
Tesla was founded and is led by Elon Musk, the genius who invented PayPal. There were co-founders but Elon is the man at the helm today.
The company is headquartered in Silicon Valley, and run like an Internet company, not an old-fashioned car company.
Its strategy of developing, building and selling high-priced cars first and then letting technology trickle down to lower-margin mass-market cars is working brilliantly; in fact, fourth quarter earnings were released last week and they were very good. Furthermore, Musk promises a profit for 2013!
And the company's engineering is so good that Mercedes-Benz has contracted for Tesla to develop a new, all-electric powertrain, and Toyota has contracted to buy production powertrains in the second quarter of 2012. This is a great endorsement of Tesla's cost structure; there are no pensions, and the work force is young, non-union and healthy.
But here's what I like best about the company, and why I think it's a long-term winner.
The company has made no mistakes!
Its cars perform superbly ... while Chevy Volt, for example, has battery fires.
Management has achieved every target it has set, while Fisker laid off people because it failed to meet a government loan deadline.
To me, this speaks of top-quality management, and in the end, management is what you're investing in. So far, Tesla's management looks golden.
And the stock looks good, too.
It came public in June 2010 at 17, and is now trading at 35, just 4% off its all-time high.
Now, some people will say the stock is too expensive. After all, 2011 revenues were $204 million and the market is now valuing the company at $3.7 billion ... 18 times revenue.
By comparison, you can buy General Motors for 28% of sales, and Ford for 35% of sales.
But I think valuation is irrelevant at this point.
What is relevant, contrarily, is the concept of Romance, Transition and Reality, a concept pioneered by my father, Carlton Lutts, who was both a romantic and an engineer.
He wrote, "A stock, like love, thrives on romance and dies on statistics."
Which means stocks that catch the public's imagination can soar to extremes way before such soaring is justified by the numbers. It's all about perception, and it happens with every new technology and in every bull market.
I've seen it in networking stocks; the original king was Cisco.
I've seen in data storage stocks; remember Iomega?
I've seen it in solar power stocks; First Solar shone brightly.
I've seen it in footwear; Crocs ran ahead of all the rest.
I've seen it in medical technology; remember Intuitive Surgical?
I've seen it in online brokers; investors in Schwab raked in the money.
I've seen it in communication stocks; remember Qwest and XM Satellite Radio?
And I've seen it in Internet stocks ... America Online and Yahoo and Amazon.com, to name a few.
So here we are, at the dawn of a revolutionary new era in the automobile business, and the easiest thing for people to do is look at GM and Ford, stocks they are comfortable with, and discuss valuation.
Meanwhile, the real opportunity is in the unknown, in Tesla, where the "unforeseeable and incalculable" mean great riches are possible a short way down the road. The choice is up to you.
For the record, Cabot Stock of the Month which I edit, recommended buying TSLA in late December at 29 ... and it's still rated buy. So you could buy it here, but the smarter course is to take a low-risk subscription to Cabot Stock of the Month here so you can keep up to date with my latest thinking.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory