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Are You a Bad Investor?
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Are You a Bad Investor?
I don’t mean to be offensive with that question, or too blunt. In fact, I’m not talking about you, the person reading this issue, at all. I guess I really mean to ask, “Do you know a bad investor?” Because I naturally assume that anyone who reads my stuff is a very good investor. So, sorry for the confusion.
But everyone who keeps an eye on a stock ticker or has a little trading account with an online broker knows someone who is definitely a bad investor. Here are the warning signs.
First, a bad investor (and I’m talking about growth investing here, which is what I do and what I write about) has dead stocks in their portfolio. Dead stocks are recognizable because they have lost money, often a lot of money, and they’re not doing anything.
I’ve talked to investors who have a couple of names in their portfolios that have been under water for years, including a few that are down by 80% or 90%.
How is it that these stocks are still being held? Well, the owners reason that their value is so small now, that it’s not worth selling them. These people have just mentally written the stocks off as a total loss and are prepared to hold onto them until they recover or until hell freezes over, whichever comes first.
I suspect they are also telling themselves that if they haven’t sold it, it’s not really a loss, which is wrong on so many levels that I don’t know where to start! Suffice it to say that dead stocks tie up money that might otherwise be working for the person who owns them. They create a psychological drag, too, thumbing their noses every time someone looks at them, reinforcing the message that whoever manages this portfolio doesn’t have the gumption to follow the rules and clean out the trash.
Setting and following loss limits on growth stocks is one important (perhaps the most important) difference between bad investors and good investors. If you can’t kick your losers out the door and into the garbage, it’s hard to make money.
I know investors who have stocks in their portfolios that they don’t even recognize. Sometimes these “blank faces” are stocks that were impulse buys or were recommended by a brother-in-law or an online “expert.”
Having a few unrecognizable stocks usually means that someone just isn’t paying attention.
Personally, I make it a rule never to invest in a growth stock unless I can make a coherent case for it in less than a minute. This kind of “elevator pitch” approach forces me to boil the case for a stock down to its most basic elements. Is the big story a new product, a rocketing stock chart, low valuation, big potential market, increasing revenue and earnings numbers, top quality management? You should aim for a combination of as many of these as possible and keep boiling the mix down until you have the “ruling reason” for the buy. That will put the odds of success on your side and will serve you well when the stock corrects or consolidates alarmingly (which it will).
Know yourself and know your stocks.
The final sign of a bad growth investor is a failure to take advantage of positive market conditions. As I’ve written here before, bull markets—which is what we are in right now—are not rare, but they’re not so common that you can afford to waste one. When markets are going up, it’s much, much easier for individual stocks to follow suit. An ocean tide isn’t all that fast, but it’s enormously easier to swim with it than against it.
So why are bad investors not putting their money to work in growth stocks? One of the biggest reasons people don’t invest when stocks are going up is that they are afraid they will go down. And there are always a ton of economics geeks, market prognosticators and axe-grinders around to warn about the upcoming collapse in the markets.
The big open secret that Cabot will happily tell anyone who will listen, is that bull markets are quite easy to recognize. But it still takes a little courage to accept the risk and get some skin in the game.
I hate being obvious about this, but one obvious answer to the question, “How do I stop being a bad investor?” is that Cabot Market Letter has everything you need to up your game. (Well not you, personally, of course. I’m just talking about the bad investor that you’re going to show this article to.)
Tim’s Comment: This quote echoes the wisdom of Mike Cintolo in Thursday's Cabot Wealth Advisory—in which he cautioned readers against aiming too low. In short, the profits from one or two stellar investments that multiply many times over can swamp the profits from a "sensible" diversified portfolio. The latter is easier to get—there are more sensibly diversified funds and ETFs than you can shake a stick at—but the former can be much more profitable, and more fun, too!
Paul’s Comment: Phil Fisher is a legendary growth investor who published a book in 1958 called Common Stocks and Uncommon Profits that is still worth reading. Fisher was a believer in enormous amounts of research, buying only a few stocks that represented the absolute cream of the crop and holding them forever. Warren Buffett has said that his method is “85% Graham [Benjamin Graham, the guru of value investing] and 15% Fisher.” Cabot Market Letter, which buys a maximum of 12 stocks, and Cabot China & Emerging Markets Report, which tops out at 10, are very much in the Fisher style of concentrated portfolios.
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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.
Tim Lutts, the expert analyst of Cabot Stock of the Month (and a demon Scrabble player), continues his series on revolutionary stocks. These are stocks that have the potential to reshape their sectors. Stock discussed: HomeAway (AWAY).
In this issue, Roy Ward, value maven and analyst of Cabot Benjamin Graham Value Investor, reviews the strategy of buying undervalued stocks of great companies and holding them until they reach their full value. His pick is a Canadian convenience store giant with international aspirations. Stock discussed: Alimentation Couche-Tard (ATD).
Mike Cintolo, the brains behind Cabot Market Letter, writes about the current preference for low-risk, incremental strategies for retirement saving, and how to recognize the stocks that can energize your portfolio and become big winners. Stockdiscussed: ServiceNow (NOW).
Have a great weekend,
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report