Stock Market Video
Before You Buy that Growth Stock …
This Week’s Fortune Cookie
In Case You Missed It
I’m a growth investor, which is to say that I like to invest in individual stocks that have the potential for rapid price appreciation. I buy stocks in uptrends, sometimes after they have made big advances.
That’s also true for the stocks I recommend in Cabot China & Emerging Markets Report, which follows what I would call an aggressive growth strategy.
When I make a new recommendation, the question I’m asked most often is “Why didn’t you buy it before it made such a big move?”
It’s a fair question. After all, from the point of view of the person asking, I may have just missed out on a big move. If the stock has already gained 20%, 30% or more, I’ve just left that amount of gain on the table. For them, it’s like shopping for a shirt and finding out that they could have bought it 30% cheaper yesterday, but now have to pay full price. That’s emotionally discouraging.
Fortunately, I have a couple of answers.
First, when I first came to Cabot and was learning the ins and outs of the growth strategy, one of the proverbs that I heard repeatedly was, “The most bullish thing a stock can do is go up.”
And if you think about it, it’s self-evident. Bull runs in stocks are the same as bull runs in markets; both are evidence of changing attitudes by a large number of people. And that’s something that can’t really be predicted.
As I learned, successful growth investing is a matter of perceiving trends, not anticipating them. As a growth investor, you surf on a wave that’s already gathering momentum.
Second, I learned that buying on volume is evidence that institutional investors are accumulating shares, and that’s critical to successful growth investing. After all, large institutions own more than two-thirds of all equities. (The latest number I could find is that institutional ownership increased to 67% by the end of 2010.)
So, when I look at a chart, I’m looking not just for a rising price; I also want to see that trading volume is increasing as the stock’s price soars.
[Note: There are exceptions to this rule, of course. I love to see a stock that’s trading sideways on steady volume, indicating that institutions are buying consistently on small dips. That kind of accumulation often precedes a breakout to the upside. But I still won’t buy until I see that breakout.]
As a rule, then, a rising stock is a growth investor’s friend. Even after a long run, upward momentum is the best single predictor of future advances.
So when I’m searching for a stock to buy, my favorite screen is designed to find stocks that are advancing strongly on good volume. When I find them, I start looking for the factors that are fueling the advance. Sometimes it’s an earnings beat and sometimes it’s news of a new contract, product or economic trend.
But an advancing chart is the first signal that a stock’s strength is being noticed by investors. Don’t worry too much about what you’ve missed. Momentum is a positive indicator with staying power.
Buying a stock in a strong uptrend is only half the battle, of course. The price of successful growth investing is having sell disciplines to match your buying guidelines. Volatility cuts both ways.
Fortunately, Cabot also taught me the selling rules that have been developed here in the more than 40 years since we began. I’ll talk more about that in a future issue.
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In this week’s Stock Market Video, Mike Cintolo discusses the highly unusual (and also unusually bullish) V-bottom in the market, and why he's now leaning bullish and putting some money to work. He also discusses how to find lower-risk entry points in this challenging straight-down, straight-up environment, by using volume clues and recent tight ranges to identify buy points for some of the rally’s emerging leaders. Click below to watch the video.
Tim’s Comment: And when I go into a restaurant, I don't want to learn how to cook, I want to be fed. But my wife does think about how to cook the meal. And I actually want the drill, because I know I'm going to want more holes in the future. So getting too specific here doesn't help, because we're all different. Levitt's point, anyway, is simple; speak to what the customer truly wants. If I'm at Home Depot, I want the quarter-inch drill.
Paul’s Comment: I’m with Tim in wanting to own the drill, but I’m also with Levitt because it’s not really the drill I want, it’s the power to drill all the quarter-inch holes I want. Those who subscribe to Cabot’s advisories don’t necessarily want to learn how to make their own stock choices; maybe they just want the recommendations and will chuck the rest in the can. But I think an educated investor is a better investor. Someone who understands the whys and wherefores of buying and selling is more likely to actually buy and sell correctly, which reduces risk and raises returns.
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, Tim Lutts, the man behind Cabot Stock of the Month, answers questions from readers, including the advisability of shorting stocks, handling new buys that quickly turn sour and many others. Stock discussed: Alibaba (BABA).
After a quick rant about American politics, I make four observations about the V-shaped correction and recovery U.S. markets have just been through. I also consider whether it’s time to pull the trigger on Alibaba. Stock discussed: Alibaba (BABA).
Growth guru Mike Cintolo takes on the challenges of earnings season in this issue. Mike looks at how to tell when a stock’s big reaction to earnings marks it as a buyable leader and when it doesn’t. Stock discussed: Visa (V).
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory