Back to Basics
20 Tips for Better Investing
Precious Metals Stocks
With Hurricane Sandy bearing down on the East Coast this week, it’s back to basics for many families—people are stocking up on things like water and batteries while focusing first on safety. If you’re in the path of Sandy, batten down the hatches and be safe! We got hit last night and this morning, but being north of Boston, the rain and storm surges have been reasonable, and the wind gusts (of up to 50 mph or so) not too damaging.
With basics in mind and with the market shut down for a couple of days because of the storm, now is as good a time as any to review the investing basics ... though with 20 rules below, many of these probably aren’t basics to most investors. Nevertheless, I have a list similar to this saved on my computer; whenever I have some free time or am in a bit of a rut, it helps to go back, read through them and make sure I’m not violating some core principles.
I view this as blocking-and-tackling sort of stuff—it doesn’t show up in the box score necessarily, but lots of investors go awry because they, for one reason or another, get off track and don’t adhere to the basics.
Make sure that doesn’t happen to you!
Here are 20 of Cabot's top tips and tools that you can use to become a better investor.
1. Cut losses short (definitely rule #1 for growth stock investing).
2. Search for strong sales and earnings growth (especially triple-digit sales growth).
3. Search for revolutionary products with major benefits. First Solar, Crocs and Green Mountain Coffee Roasters filled the bill and were some of our biggest winners.
4. Heed the message of the overall market--never fight the main trend!
5. Never average down in growth stocks.
6. Be prepared for all contingencies (always have an exit plan ahead of time).
7. Never try to buy at the bottom or sell at the top (if you try, you'll just lose more money).
8. To avoid gut-wrenching volatility, stick with stocks that are liquid (at least 500,000 shares traded per day or more).
9. Only put more money to work after your past purchases are showing you a profit.
10. Be humble—making money in stocks is tough, so don't kill yourself over one or two bad trades. Be thankful when you hit a big winner.
11. Find an investing system that works for you, then follow it. The best way to deal with stress from the market is to have a game plan ahead of time. If you wait until things are blowing up in your face, it's too late—by then, your emotions are out of control and you're likely to do the exact opposite of what's constructive.
12. "Markets are never wrong; opinions are," is a quote from Jesse L. Livermore, one of the most colorful, flamboyant, and respected market speculators of all time. At Cabot, we agree wholeheartedly with his comment and truly embrace this thinking. And you should, too, if you want to become a successful growth investor.
13. When looking for potential purchase candidates, examine both the company's fundamentals and its stock's technical performance. When analyzing the technicals, focus on the stock's momentum and price chart, along with its volume pattern and 50-day moving average.
14. Find a company that has a big idea ... one that leaves few if any limits on its future growth potential. It's these big ideas that create an atmosphere that can push a growth stock to dizzying heights!
15. Warren Buffett once said there were only two rules to follow with your investments: Rule #1: Don't lose money. Rule #2: Don't forget rule #1.
16. Our goal is to get you heavily invested while the market is trending higher. During those times, when investor perceptions are improving, investors are willing to pay more and more for stocks. This is when you can make big money! But, of course, no market moves in one direction forever. So, when the intermediate-term trend of stocks is down, your best move is to play defense. Easing up on new purchases, while building up cash by selling your weakest stocks, is a good idea.
17. Be an optimist. In our more than three decades of publishing investment advisories, we've seen many ups and downs for both the market and our country. But after every tough event our dynamic country and economy have eventually rebounded. So no matter how bleak the situation, always stay optimistic because our country and stock market will give you some dazzling opportunities!
18. Diversify your portfolio. For our Model Portfolio in Cabot Market Letter, 12 stocks provide plenty of diversification for your growth portfolio. Smaller investors can do well with as few as five stocks, but you should never have all your eggs in one basket.
19. Once you've invested in a stock, be patient. Recognize that time is your friend. Frequently stocks don't go up as fast as you might want them to. But if you can develop a persistent and tolerant attitude coupled with plenty of patience, you'll have a great advantage.
20. Buy growth stocks with strong Relative Performance (RP) lines. RP studies are a superb way to identify successful companies and to avoid problem companies. You should buy stocks that are consistently outperforming the market. This is a good indication that they are under accumulation, week after week, month after month, and that the companies are succeeding. The best investing tips come from the performance of the stocks themselves. So ignore hot tips!
Send me your tried and true investing rules and tools by replying to this email.
For my stock pick today, I am going to an area where, admittedly, I rarely go ... precious metals. Why do I shy away from the group? Mainly because the stocks don’t act like growth stocks, or, said another way, the rules and tools we have in place to manage our holdings tend to get us in (or kick us out) at the wrong time in these stocks.
Nevertheless, I am a trend-following investor, and it doesn’t take a genius to see that gold and silver stocks are looking good. But, beyond just the chart, many names in the group also have solid expansion stories; combining rapid production growth with potential elevated and rising precious metals prices should cause earnings to spike and, just as important, attract big, institutional investors.
One of my old favorites, Silver Wheaton (SLW), has come back to life in recent months, and looks poised to head higher. In fact, the stock is in the midst of a beautiful month-long pause ... but more on that in a second. First, I want to get into the fundamentals.
The company is, as my fellow editor Paul Goodwin says, a miner with no dirt under its fingernails. Why? Because instead of operating any mines, the company simply enters into long-term purchase agreements with mine operators to take the silver off their hands. And why would these miners agree to such a deal? Because, for the most part, these miners are focusing on gold production ... but get some silver as residual output. So they’re happy to book some profit on the silver and focus on their core gold operations.
Silver Wheaton was spun off from Goldcorp in 2008, but already had five contracts that would allow it to sell 15 million ounces of silver. Today the company has ballooned its business to 15 long-term agreements that are expected to sell 28 million ounces per year. And management is aiming to boost that figure to 48 million (71%) by 2016! Moreover, because this is basically just a licensing-type firm, its profit margins are ridiculous—a whopping 70% in the second quarter, and that was a slow quarter for the firm!
Of course, much of this comes down to the price of silver; as it’s slid during the past year, Silver Wheaton’s earnings and stock have slowed down. But silver has picked up ever since the Fed’s QE3 announcement in mid-September, and analysts are expecting the company’s bottom line to increase 34% next year to $2.30 ... a figure we think is conservative if silver prices rise from here.
Back to the stock’s action, it hit multi-year lows this summer, but rose 10 weeks in a row from there and, impressively has traded very tightly during the past six weeks (actually two sets of tightness, one for four weeks and one for three, in case you’re charting from home). I think it’s a decent buy around here with a tight stop around 36. Or, if you want to be safe, you can wait for a decisive, big-volume breakout above 41 before buying, and use a stop around 37.
All the best,
Editor of Cabot Market Letter