A Low-Volatility ETF
Here’s letter #1:
“Hello Mr. Lutts,
I am a 15-year-old kid who has almost saved up the necessary $500 to open an account with Scottrade—with my parent's support of course. I have long had an interest in stocks as do my parents—who are active subscribers of your paid advisories. I personally am an avid subscriber/reader of all your free newsletters.
I want to get started in stocks early in order to try and make headway and maybe have a little bit extra money saved up for the future when it could be useful. I was just emailing you because I was curious as to what recommendations you would have for someone young like me who was just getting involved in investing.
Cameron P. San Jose, California”
“Thanks for writing. The best investment advice I can give you is to start early, and I'm happy to hear that you're almost there.
The second best advice I can give is to read a lot. Jesse Livermore, Benjamin Graham, Peter Lynch, the Market Wizards series, works on crowd psychology. You should never stop learning, because you can never truly master the investing business.
Third, keep records of your trades, noting not only what you did but why. Every quarter thereafter, analyze the results of your actions and try to learn your weaknesses. We all have them.
Fourth, start slow. Today, sentiment is rather high and the market is increasingly due for a correction. That doesn't mean one will come, but it does mean the odds are getting worse.
Lastly, never fall in love with a stock. Always practice sensible diversification.
But even after I answered Cameron, I couldn’t stop thinking about him—in short, because he has so much opportunity, and yet he knows so little.
So in addition to the above, I want to add one more piece of information for Cameron, and any other young people making their first investments.
If Cameron grows his $500 by 10% next year, and 10% every year thereafter, in 50 years, he’ll have nearly $59,000. In 2063 dollars, there’s no knowing what that will buy.
But if Cameron simply contributes an additional $500 to his account every year, after 50 years, he’ll have more than $640,000—more than 10 times what he’d have otherwise—and that’s not chicken feed.
In sum, while starting early is the best thing you can do, the second best is to make additional contributions every year. And if you can earn more than 10% a year, you’ll do even better!
Here’s letter #2.
“My year in review: I was 19 years old when I joined the Cabot Wealth Advisory in January 2013. I earned my money detailing cars since I was 13. I feel so lucky and fortunate to have the Cabot investing group’s knowledge, background and work experience, guiding me through the tangled, complex and intricate maze of the financial world. Wow, what a fun year and run it has been! I started off with a small amount of money to invest. I began with the help of Cabot Stock of the Month. Six months flew and I found myself with a bucket of fresh cash to invest. I then knew I needed the expertise of J. R. Ward of the Cabot Benjamin Graham Value Investor. A few more months passed, and I purchased Cabot Top Ten Trader, (which is extremely useful) and my newest purchase, Cabot Market Letter. I look forward to a long and prosperous relationship with the Cabot investing advisories. Thank you so much!
Edward M., San Diego, California
Edward didn’t ask a question, so I didn’t answer him, but I do have some comments to make.
Edward started at a very good time! And he’s done a very good job of learning how to turn profits into larger profits, thus taking advantage of the miracle of compound growth.
Cameron, starting now (or soon), is unlikely to have such a great first year, regardless of how good a learner he is. But he’s got an earlier start, and that’s wonderful.
My one piece of advice to Edward (I assume he’s 20 now) is this: the practices that proved so profitable this year are unlikely to prove so profitable next year. That’s just the way the market works. This year, the market taught you that buying dips was smart, and that buying even more on breakouts was smart. It taught you that buying value was smart, and buying momentum was good.
But it didn’t teach you much about selling.
Interestingly (and it’s a good thing Edward didn’t know this), the previous years were better at teaching you to sell quickly and take small profits. And people who learned those lessons well probably didn’t do as well as Edward this year!
The market, you see, is always trying to fool you. Just after you’ve become confident you know how it works, it changes character! It does this partly because of crowd psychology and partly because of economic cycles, but the reasons don’t matter. What matters is how you cope with its changing character.
If you’re a value investor, like Roy Ward, you ignore the market’s daily fluctuations and concentrate on valuations. Roy was heavily invested early in 2013 when stocks were cheap but he has become increasingly more conservatively positioned as the markets have climbed higher. He’s beaten the indexes year-to-date and now he’s well positioned for the market’s next correction, and raking in good dividends, too.
But if you’re a growth investor like Mike Cintolo, valuations don’t matter! You buy strength and you sell weakness. You don’t own stocks as long as value investors, but in bull markets, the profits pile up fast.
And if you’re like Edward, and thousands of other Cabot readers who can successfully do both, more power to you!
Last week in this space, I wrote about Cabot Top Ten Trader stock Gogo (GOGO), the leading provider of Internet service on commercial airline flights. It’s a classic hot stock with great growth potential, and I’ll be keeping a close eye on it in the weeks ahead, seeing how it deals with the market’s year-end crosscurrents. (More about that topic next week).
At the other end of the spectrum, I’m also intrigued by a recommendation of Roy Ward in his latest issue of Cabot Benjamin Graham Value Investor. It’s the iShares MSCI USA Minimum Volatility Index ETF (USMV), and it sounds like a good safe place to put money without giving up potential for growth.
Here’s what Roy wrote about it.
“USMV seeks investment results that correspond to the price and yield performance of the MSCI USA Minimum Volatility Index. The ETF invests at least 90% of its assets in securities of the Index or in depositary receipts representing securities in the Index.
“USMV shares sell very near to their net asset value. The price to earnings ratio (P/E) of the stocks contained in the ETF is 25.4, and the price to book value ratio (P/BV) is 5.76. Both ratios are a little high, but the beta, which measures volatility, is a low 0.94. Management fees total 0.15%.
“USMV is very well diversified with risk spread out over 140 holdings. The largest position consumes only 1.57% of the total portfolio. The 10 largest holdings in order of size are ADP, Merck, Wal-Mart, Paychex, Exxon Mobil, UPS, Johnson & Johnson, AT&T, McDonald’s and Verizon. The five largest sectors are HealthCare, Consumer Staples, Information Technology, Financials and Consumer Discretionary.
“A recent report by Morningstar concluded: “in nearly every market studied, low-volatility stocks have outperformed high-volatility stocks.” USMV is a great addition to everyone’s portfolio. I expect USMV shares to reach my Min Sell Price of 47.00 within two years.”
Now, you could just jump in and buy USMV here. But I don’t recommend it. Remember, to be a successful value investor, you not only need to sell when things are expensive (in the case of USMV, that’s 47.00), you’ve also got to buy only when things are cheap. Roy has calculated that level for USMV, and told his readers the Maximum Buy Price for USMV, and if you’d like to join them, clicking here is the first step.
Yours in pursuit of wisdom and wealth,
Chief Analyst of Cabot Stock of the Month
Publisher, Cabot Wealth Advisory
P.S. Don't forget to reserve your copy of Cabot’s 10 Favorite Low-Priced Stocks for 2014. Each year we publish a special report that gives you an opportunity to profit from a select group of low-priced stocks with immense short-term profit potential. We don't recommend these low-priced stocks in our regular advisories for a variety of reasons; most often it's a lack of momentum and low liquidity. But we do make their names available to investors who want to take advantage of a special investing technique that traditionally brings big profits to savvy investors every January.