A Very Good Letter
Four Common Investing Problems
One Great Solar Stock
Last week, one of my Cabot Stock of the Month subscribers, who also subscribes to several other Cabot services, wrote me a brief email asking about a couple of stocks (AMBA and GLW) that had been recommended in Cabot Top Ten Trader earlier this year. After checking the charts, I sent him a brief reply, saying if I owned the stocks I would hold them. And he answered back with this long email that you may enjoy reading, because it describes clearly the challenges so many of our readers face.
“Dear Mr. Lutts,
“I am terribly impressed—and equally grateful—that you saw fit to respond to my email. Were you only at my beck and call 24 hours a day! What would such a service cost?
“Frankly, I did not really expect to get a response at all and thought my comment would be treated simply as one of the hundreds of such comments you must get over time in your kind of business. But on a serious note, the reason people like me spend several thousand dollars a year for advice from companies like Cabot is that we hope against hope that someone can assist us with investing profitably. Increasingly, as I'm sure you know, individuals are increasingly reliant on their own devices for investing in a manner that prepares them for and takes them through retirement. For many, this is a whole new world for which we were not adequately prepared (to put it mildly). Many in my age bracket began our work careers thinking we would have defined benefit pensions to rely on; that day is largely gone. The result is that a bunch of investing novices are expected to be capable of applying investing skills they never acquired.
“Because of the new investing burdens thrust on us, many amateur investors turn to services such as Cabot for help. I currently subscribe to at least four Cabot investing services, and over the past 15 years, I have subscribed to Cabot and to Motley Fool and others, off and on. Presently, I spend quite a bit of money on Cabot publications and have generally been pleased, but not wildly so. Out of a certain desperation, and occasionally in response to your seductive product advertisements, I will more or less aimlessly plunk down $300 (or $2,000 in the case of Supernova) in the hopes that THIS TIME I will have found the service appropriate for my needs. But then, if history is a guide, I will become frustrated at trying to thread my way through all the information overload day after day and then just ignore appeals to re-subscribe.
“I am not quite sure why this is. I would truly like to find one or two (or three) Cabot newsletters that cleanly serve my purposes and to which I could subscribe for the long term. I work full-time (50 hours a week) and have limited time to devote to investing. Often, with the numerous Cabot newsletters I get, I simply find it difficult to know whether I am abiding by the approach advocated by each newsletter and making the most of my investment in financial advice. I not infrequently find myself learning too late that I am hanging on to a stock which I should have sold (or was explicitly advised to sell by one of the newsletters).
“As I re-read my comments above, I am struck by the thought that perhaps I am asking a service like yours to do more for me than can reasonably be expected. I realize, for example, that I have never phoned Cabot to consult with someone about which newsletters might best fit my needs. Perhaps the key is to limit my subscriptions and more or less religiously attend to their advice, rather than combing regularly through four or five different newsletters. Perhaps the only real point I wanted to make is that concrete, timely, actionable advice is extremely valuable to people like me. That's why I wrote to thank you in the first place for the initial advice you circulated about [stock name deleted]. I know I can't expect to get your personal attention on my investing decisions, but the more clear, concise, timely advice you can give, the more I feel like your services are worth the money I invest in them.”
Walnut Creek, California
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As I said, very well put. If you’re in the same boat, raise your hand.
So what shall we do about it, or what can we do about it?
First, we need to try to state the problem clearly; that’s the first step in effective problem-solving.
As I see it, problem one is that Richard, like so many of my readers who made their money in fields outside the investing business, does not have a good foundation on which to build a successful investing system. Whether he’s spent his career writing software or selling cars or building a major restaurant franchise, he can’t expect to take those skills and jump into the investing business without building some kind of new foundation. Doing that takes time, but it does pay off, because it makes you a better investor, and that, in truth, is our ultimate goal. No matter how good the advice of the various Cabot experts, if the reader doesn’t know how to apply that advice in the context of his own situation, he’s unlikely to succeed.
For example, the five greatest mistakes of individual investors—in my opinion—are these:
1.Being greedy at market tops and fearful at market bottoms.
2.Committing too much money to one individual stock that’s “guaranteed” to work.
3.Holding onto growth stocks that have long ago lost positive momentum, either believing that the awesome fundamental story will soon put the stock on the upward track or rationalizing that so much money has been lost that it’s too late to sell.
4.Buying blindly at the recommendation of an advisor, without understanding the rationale behind the recommendation and/or without checking the stock’s current action.
5.Placing brokerage orders overnight, thus guaranteeing an unknown transaction price.
If you’ve already recognized these mistakes and taken action to avoid them, congratulations, you have the start of a decent foundation. But you shouldn’t stop there. All the Cabot analysts work hard to educate their readers, both here in Cabot Wealth Advisory and in the “Basic Guides” specific to each advisory, and continuing in their regular messages to subscribers.
The second problem is time. While people who are retired generally have enough time to work on their investments, people working full time, like Richard, often feel that they don’t have enough time to do it properly.
Well, we can’t make more time, but we can use it more wisely, and that, in a nutshell, is my suggestion if you feel that you’re not devoting enough time to your investments.
And this is related to—
Information overload is the problem, and the solution is obvious; reduce your intake so you consume more of the things that matter and less of the things that don’t. When it comes to investing, what matters is whatever the expert advisor says matters.
For value investors who follow the advice of Roy Ward in Cabot Benjamin Graham Value Investor, it’s the Maximum Buy Price and Minimum Sell Price generated for every stock in his universe. The day-to-day news means nothing, and the day-to-day action of the stock means nothing.
For growth investors who follow the advice of Mike Cintolo in Cabot Market Letter, once a stock is bought, it’s the action of the stock. Again, the day-to-day news means nothing, but the day-to-day action of the stock, especially as it traces out week-to-week and month-month patterns, does matter—a lot.
If you can remember what really matters for the stocks you own, you can learn to filter out what matters less.
In my own case, which some people might call extreme, I spend a fair amount of time thinking about market timing and gauging the sentiment of the investing and non-investing public, because I know how valuable going to cash in market downtrends can be, and because I like being a contrarian. Also, I spend a lot of time thinking about big trends, because that’s what I like to think about, and because I’ve found success investing in big trends like ecommerce (Amazon.com—AMZN), solar power (First Solar—FSLR) and electric cars (Tesla Motors—TSLA).
When it comes to individual stock research, I don’t do much original work anymore. I read pretty much everything that Cabot publishes (that’s eight paid publications in addition to Cabot Wealth Advisory). And I keep tabs on the action of the stocks that fit my big trends focus.
Contrarily, I tune out a lot of the noise that goes on in the market every day. I don’t watch any of the news people and other market experts on TV. And I particularly don’t pay attention to the opinions of experts who are using systems that I’m not using, or worse, not using any system at all.
In short, if your time is limited—and technically, none of us has unlimited time, it pays to focus, and ignore the factors that are unimportant to your investing system,
Which brings me to—
This problem, as Richard mentioned, comes when you’re using multiple investing systems. You get confused about who recommended a stock, or what the sell discipline is for a stock, and before long, you lose confidence in your ability to follow our advice effectively.
The answer to this, in my opinion, is two-fold.
First, keep a record! Write down why you bought a stock, who recommended it, what the sell discipline might be (momentum, price valuation, acquisition, FDA approval, etc.) and anything else you think matters, even your state of mind when buying, or your expectations. A simple spreadsheet can track these things easily.
Second (this is for paying Cabot subscribers), ask us! All Cabot analysts respond to emails from their subscribers, just as I responded to Richard. And if your question is more general, feel free to call customer service to talk to our representatives.
We can’t promise they have all the answers, in part because for some of these questions, there are no simple answers, but I do promise they will help to reduce your confusion and get you on the right track.
Moving on, I have this to say about the market’s current state. Indexes are very strong, the former high-fliers are weak, and a fair amount of “dumb money” has come into the market in recent months, making sentiment levels elevated.
Now, I’ll be the first to acknowledge that trends can and do go to the extremes. Trends tend to go farther than people originally expect.
But the weak action of those former high-fliers tells me that the pros are making those newcomers pay for their tardiness. Hopefully, when they’re done teaching the message, the pros will step in and start buying again. But hope (as Mike Cintolo likes to say) is not a strategy, so my plan, as always, is to keep following the trends, paying particular attention to what’s strong.
Today, that means First Solar (FSLR), which was a big winner for Cabot back in 2007, in the first big solar wave, and is shaping up to lead the industry in the current wave as well.
But FSLR can be a hard stock to hold onto!
It’s already appeared in Mike Cintolo’s Cabot Top Ten Trader three times earlier this year (February through May), trading at 34, 39 and 51. In June it peaked at 56.
And then it took a plunge. Mike recommended selling at 41 in June, and the stock fell all the way to 36 in September before beginning a new uptrend.
Then, just last Friday, it exploded higher on huge volume after releasing a monster earnings report, in the process breaking out above that old high of 46.
To me, it’s not the news that matters, though I do like seeing revenues soaring and earnings trouncing analysts’ estimates.
To me, it’s that big-volume breakout to new highs that matters, because it tells me there’s serious institutional money climbing on board. Plus, as I mentioned before, I have very high expectations for solar power in general as efficiencies improve and costs come down.
So, you could just buy FSLR here, but then, of course, you’d be on your own. My suggestion is that you take a no-risk trial subscription to Cabot Top Ten Trader, where FSLR is almost certain to appear in the near future, and then follow the recommendations carefully, paying particular attention to avoiding problem four above.
Yours in pursuit of wisdom and wealth,
Chief Analyst of Cabot Stock of the Month