This Week's Stock Market Video
Read, Play, Leave
In Case You Missed It
In this week's Stock Market Video, I spent a lot of time talking about how cautious you need to be in these sloppy, dangerous market conditions. Leading growth stocks continue to get hit and you need to be very aware of your loss limits and be moving toward a heavier cash position. I give some examples of stocks that are getting the benefit of the rotation toward cyclicals, too. But curtailing your buying and keeping your losses small is still the best thing you can do for your portfolio right now. Click below to watch the video.
Read, Play, Leave
The recent spasms of selling in growth stocks have many investors heading for the safety of cash. And that's okay. The Cabot growth advisories (Cabot Market Letter and Cabot China & Emerging Markets Report) have done exactly that, with cash positions over 50%.
Having lots of cash protects not just your portfolio results, it also gives you the emotional equanimity to watch the market's wild fluctuations without undue distress. Thinking about the distress felt by new investors who flock to the market during uptrends and are shocked-shocked!-by its stormy moods, got me to thinking about how to stay calm when things get tough.
And that, because my mind works that way, led me to contemplate the search for meaning depicted in the movie Eat, Pray, Love. (Yes, I know it was a book first, but reading stories about spiritual pilgrimages makes me break out in hives.)
I didn't see the movie either. But for a couple of weeks last year you couldn't escape images of Julia Roberts' teeth as her character travelled the globe in search of something.
I have therefore resolved to come up with my own version of Eat, Pray, Love for the benefit of those who may be feeling oppressed by the market's recent punishing behavior.
Here it is: Read, Play, Leave.
Step One: Read.
Reading is the same as researching, which is the main activity of the responsible growth investor. The more you know, the better your chances are when you finally get around to buying. It's not just companies that you're researching; you also need to know something about economics, investor psychology, global politics and the trends that push the market around. Reading (I'll include watching here, although I believe spending too much time tuned in to the talking heads on financial cable shows will cause brain damage over time) is educational. It makes you smart.
But being smart is only a tool, and the ultimate goal is to learn enough about stocks to actually buy something.
Step Two: Play.
Playing is just putting money to work in the market by buying something. Whether it's a stock or an option or an ETF, the goal is always the same. You want your money to grow. In order to do that, you have to be ready to take on the risk that it might shrink instead. That's the hard truth behind investing. You can lose money.
But the more your reading has taught you about stock selection, market timing, portfolio management and stop-losses, the better your chances are.
And when it works, it's not just profitable, it's very satisfying. You're doing something that lots of investment advisors say you shouldn't be doing and many institutional investors tell you can't be done. Satisfying indeed. But your reading will also have taught you that growth investors need to have a highly developed sense of self-preservation, and that means knowing when to get the heck out of Dodge.
Bear markets are destructive in many, many ways. They destroy value in your portfolio. They reduce the odds that any of your growth stock picks will succeed. They make you doubt that you have learned anything useful in your entire research effort. Bears kill your confidence. And that leads to ...
Step Three: Leave.
Knowing how to play the markets as a growth investor means knowing when to stop playing. And when the bears are in town, it's definitely time to stop playing.
A bear market should have you tightening your loss limits, throwing your losers out of your portfolio like last week's trash and reducing your buying to small bets on only the highest quality growth stocks with the most healthiest of charts.
Leaving is your ultimate lifeline. Cash in your portfolio defies the efforts of bears to disrupt your equilibrium, destroy your confidence and deflate your portfolio. Leaving isn't admitting defeat, it's claiming victory. It's the mature investor's ultimate weapon.
So there you have it. That's my version of Eat, Pray Love for the growth investor. I hope Read, Play, Leave will help you get through this pothole-rich environment with a calm head and a healthy portfolio.
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Tim's Comment: Personally, I pay very little attention to weather forecasts. And I don't watch TV news. I look out the window, check the thermometer, and dress accordingly. That works pretty well. And that's the way our growth stock investing system works, too, where the key information is conveyed by charts.
Paul's Comment: Knowing what the weather for any month is on average isn't a very good guide to whether you will need your coat or umbrella on any particular day. And knowing what the markets do in any month is a poor way to manage a portfolio. Those who advocate "selling in May and going away" are using a blunt instrument to wind a very complicated watch. We have excellent indicators at Cabot to tell us exactly what markets are doing from day to day, and ignoring them to follow an old adage is like using a calendar to decide what to wear on Monday.
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, Chief Analyst of Cabot Stock of the Month, writes in this issue about how Tesla's no-dealerships model might disrupt (and improve) the current state of auto sales in the U.S. and give consumers a better deal. Stock discussed: AutoNation (AN).
Mike Cintolo, our growth guru, uses this issue to answer some of the urgent questions we've been fielding about the recent market meltdown, including how to handle losses, what to hold and what to buy. Stock discussed: GT Advanced Technologies (GTAT).
Have a great weekend,Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
and Editor of Cabot Wealth Advisory