Stock Market Video90% of Everything Is Crap
This Week's Fortune Cookie
In Case You Missed It
In this week’s Stock Market Video, Mike Cintolo discusses the market's re-test of its August lows this week, which has brought a couple of rays of light. Today, Mike remains in a defensive stance, but his message this week is to be prepared—if the market gets going, it could produce an intermediate-term buy signal that would be a sign to put a little money back to work. Mike relays some of his favorite stocks should the bulls return, as well as major index levels to watch.
90% of Everything Is CrapEvery young person is responsible for finding a way to misspend his (or her) youth. That’s just the way it is. The methods may vary slightly from generation to generation, which gives rise to lots of inter-generational friction, but whether you frittered away those carefree days by playing baseball on vacant lots or watching television, or even doing your homework and having a paper route, the end result was probably the same.
Much of my youth was misspent in reading, which is generally considered a good thing. But I was reading science fiction, which took a little of the shine off of it.
I knew while I was reading all those books from the library with the little atom-and-rocket-ship symbol on the spine that many of them weren’t very good. But I liked the stories and the “what if?” element that allowed them to be told.
Years later, I still read an occasional science fiction book, but not many. And the ones I do read have to come with pretty high recommendations from my friends or book critics.
But years ago, I found a science fiction writer who took on the low quality of sci-fi in the 1940s, 1950s and 1960s directly. And his explanation was a powerful one that made a huge impression on me.
The writer’s name was Theodore Sturgeon, and he used to go to a lot of conventions and writers’ events where he answered questions, both in panels and in conversations in the lobby.
He got tired of defending science fiction against charges of low quality, so he created Sturgeon’s Law* to explain. The Law says, “Ninety percent of everything is crap.” And when you think about it, you’ll have to admit that there aren’t that many genuinely excellent entries in any category.
Note: Sturgeon wasn’t the first to think of this idea, of course. There’s a story about Queen Victoria complaining to Gladstone, her Prime Minister at the time, that there weren’t too many good preachers around. Gladstone replied, “Madam, there are not too many good anything.”
In the stock market, I’d say that Sturgeon is right in the ballpark.
When I screen for a likely stock to buy, I try to set my parameters tight enough to winnow the entire stock market—around 3,700 issues that have the required liquidity—down to between 150 and 250 names. That’s a little less than 10%, but as a growth investor, I’m only looking for one or two.
If a value investor screens for likely candidates, the same tight screens will also yield a stringent 250 stocks, but they will likely be a completely different set of stocks from my growth group.
And an income investor will probably come up with a substantially different group, although there will be much more overlap with the value stocks than with my growth stocks.
I like to think of a screen that can find 250 stocks that fit my needs as the equivalent of a map that will show me the best fishing spots on a large lake. The list raises my odds of finding what I’m looking for. Then comes the hard work of comparing the stories, the numbers and the charts of the group that’s been through the refinery.
One further thing: You can’t expect any screen to tell you the one single stock that’s the best one to buy. Growth investing (the style I follow) isn’t like looking for a needle in a haystack. There’s always more than one to choose from, and making that final choice will occupy a heck of a lot more time than making the original cut did.
"Don't be afraid of missing opportunities. Behind every failure is an opportunity somebody wishes they had missed" -- Lily Tomlin
Mike’s comment: The great thing about the stock market is that, over time, there are countless opportunities to make big money. But investors don't think that way—they don't want to "miss out" on a winner. And of course you know the result: lots of unnecessary losses. We see this especially during market downtrends—people don't want to miss the opportunity of buying at the bottom ... leading to a lot of too-early buys and haircuts to their account values. One key to successful investing is you need to buy right—not buy early.
Paul's Comment: When someone breaks the rules and winds up with a fortune, they always tell other people that breaking the rules is the right thing to do. But we never read books by those who did the same thing and got crushed. There are some tempting bargains in the market right now, but only the value investors should be doing much buying. Growth investors’ real opportunities will come soon enough. Best to be sitting on your hands right now.
---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.
Cabot Wealth Advisory 9/28/15 – Making a List …
Nancy Zambell, editor of Investment Digest and Dividend Digest, writes in this issue about sectors that are poised to perform well when the market gets healthy again. She finds great promise in domestic water infrastructure. Stocks discussed: Chicago Bridge & Iron (CBI), Mueller Water Products (MWA) and Tetra Tech (TTEK).
Cabot Wealth Advisory 9/29/15 – Apple Car Vs. Tesla
In this issue, Cabot Stock of the Month’s Chief Analyst, Tim Lutts, looks at what 50 years of innovation has brought us, and what another 50 years might bring. He also looks at what it might mean if Apple (AAPL) gets into the electric car business.
Cabot Wealth Advisory 10/1/15 – Is This the Buying Opportunity of the Year?
Chloe Lutts Jensen, Chief Analyst of Cabot Dividend Investor, sees some value in income stocks, but doesn’t think the time is quite right for bargain hunting. Stocks discussed: Coca-Cola (KO) and Consolidated Edison (ED).
Chief Analyst Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory