Stock Market Video
One Perfect Stock?
This Week's Fortune Cookie
In Case You Missed It
In this week's video, I point out how close the major indexes are to turning negative … but they haven't done it yet. It's a time to sweep out your losers and keep your laggards on a very short leash. This market really could go either way, and there's no sense trying to predict which road it will take. I also look at four automotive stocks and pick a favorite, and four other stocks with big stories that qualify them for inclusion on your watch list. Click below to find out my thoughts on the market, what you should do in the days ahead and the stocks that are on my watch list.
One Perfect Stock?
There are lots of legendary treasures that people have quested after for a long time. There’s the Lost Dutchman Mine, The Oak Island Treasure, The Seven Cities of Gold and more caches of pirate gold than you can wave a metal detector at. And plenty of money has changed hands in deals for treasure maps, ship’s logs, diaries and other clues to their whereabouts.
Cable TV channels have even created a sub-industry in “documentaries” about every dang one of them, along with searches for Bigfoot, the Loch Ness monster and the myriad other legendary bogeymen on earth.
For many investors who beat the bushes looking for big returns in growth stocks, there is a related quest: The Search for the One Perfect Stock.
I know there is a large population of seekers after the One Perfect Stock because I used to get calls from them all the time whenever an epidemic of stock fever would sweep the country. These calls came from investors who thought they had figured out the key that would unlock the door to untold riches.
Their strategy was to ask me (or Mike, an expert in growth stocks), which one stock among those I was currently recommending was the one to buy right now.
Brilliant! Why hadn’t I thought of doing that myself?
The deflating answer is that predicting the success of a stock with that level of confidence just isn’t possible. I don’t just mean that I can’t do it; I mean that nobody can, at least on a consistent basis.
Look at it this way. If you want to make the most money at a horse track, you bet on which horse will win. (I’m leaving out the quinella, trifecta, exacta universe of exotics here.) If you bet on who will place second, you win if your horse wins or places. And if you bet on a horse to place third, you win if the nag finishes win, place or show.
But the less specific your bet, the better your chance of winning. If you want the highest return, you must accept the largest risk. By broadening your bet, you take the bargain of increasing your percentage of success by decreasing your potential payoff.
It’s the same with stocks. If you agree to let your investment rise or fall on the fortunes of a single stock, you lower your odds of picking a winner. In short, it’s a win big/lose big strategy.
It’s a much better bet to put together a portfolio that’s big enough to stand a reasonable chance of netting a winner, but small enough to allow a big winner to exert a large positive effect on your total returns.
For the Cabot Market Letter, the magic maximum is 12 stocks. For the Cabot China & Emerging Markets Report (which I write), I use 10 stocks as a hypothetical maximum.
When you combine this portfolio size with Cabot’s market timing techniques (which increase our exposure when markets are strong and move toward cash when markets are declining) and our sell disciplines, you have a recipe for a portfolio that can really flourish when markets get into high gear.
It’s also a way to avoid having so many positions that you lose track. I like to think of it as a portfolio that you can manage with just one Post-It note.
Sound good? You can find the right Cabot advisory to help you get started right here.
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Here’s this week’s Fortune Cookie. Remember, you can always view all Contrary Opinion buttons by clicking here.
“When you feel like bragging, it's probably time to sell.”—John Neff
Tim’s Comment: John Neff was the legendary manager of Vanguard's Windsor Fund, which earned an impressive compound annual return of 10.6% in the 31 years from 1964 to 1995. As a value investor, Neff excelled at buying low and selling high. And I know how he felt when he said that! He was feeling good! But he was remembering all the previous times that he felt good, only to see his profits melt away because he didn't sell his winners. A corollary to this is that if someone else is bragging about an investment they've done well in, you should think twice about buying it.
Paul’s Comment: Most investors are herd animals, happier when everyone is heading in the same direction. But markets can’t go in the same direction forever, and (just to mix my metaphors) when everyone has jumped on the bandwagon, the inevitable next step is for some people to start getting off. When everyone is celebrating about where the herd is heading, it’s time to start thinking about leaving the herd behind.
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, there are links below to each issue.
In this issue, I look at the market at new highs and sort through the possibilities. Yes, risk is elevated. But if you let that keep you out of a bull market, that’s a lost opportunity you may not get back. Stock discussed: Baidu (BIDU).
Tim Lutts, who beat the pack in recommending Tesla (TSLA) at 29 in Cabot Stock of the Month, looks at a few of the factors that could make its current stock price look like a bargain. Tim also comments on the raging NSA surveillance controversy. Stock discussed: OmniVision (OVTI).
Jacob Mintz, editor of Cabot Options Trader, gives a simple, easy-to-understand explanation of how selling covered calls (on stocks you own) and writing puts (on stocks you wouldn’t mind owning) can create extra income for any equity portfolio.
Have a great weekend,
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory
P.S. Did you know…
The inaugural Cabot Investors Conference will be held August 14-16, in Salem, Massachusetts.
This will be two days of portfolio shifting views and money-making ideas. All of Cabot's editors will be there with tips, tricks and stock recommendations that will fill you up with enough "takeaways" to change your investing life.
The Conference doesn’t end when my fellow speakers and I step off the stage. I expect some of your most profitable moments to happen “off-hours” during one of the many social activities we have planned. You can rub elbows with the Cabot editors and attendees, maybe even making new friendships along the way.
August in Salem will give you a chance to experience New England at its best ... stunning water views, amazing food discoveries, and some of the finest summer weather anywhere. It's the perfect setting for the investment event of the year.
I look forward to meeting you in person this summer. I sincerely hope you join us.