Stock Market VideoChasing Returns? Wrong? Please!
This Week's Fortune Cookie
In Case You Missed It
In this week’s Stock Market Video, Mike Cintolo discusses the intermediate-term buy signal he received last week, and how the market has handled itself well enough since then. That said, Mike believes the rubber will meet the road during the next three weeks or so—he has a growing watch list of growth stock set-ups, and if many of them lift-off, that will be the sign to become more aggressive on the buy side. (If not, Mike intends to "stay close to shore.”) Get his advice—and many of his top stock ideas by clicking on the video below.
Chasing Returns? Wrong? Please
It’s been a long time since I made a living as a college professor, but there are old ingrained habits that just won’t let go of me. And I’m not sure I want them to, now that I think about it.
One habit is critiquing sloppy language, which my wife and I do as a matter of reflex when we’re watching television. It’s hard for anyone (newscasters are a favorite target) to get a misuse of lay or lie past us and anyone who declares that something “begs the question” would probably be surprised to hear us respond, “No, it doesn’t!”) in unison.
But as a former teacher of argumentation, debate and persuasion, I’m also liable to grab a (mental) blue pencil and start marking up specious arguments when I run into them on the Web, and that’s what happened when I read a piece published by a major brokerage about “How Chasing Returns Can Sabotage Your Savings.”
This fascinating cautionary tale tells about two women friends in their 40s—once fierce competitors on the college track team—who are having drinks. Woman A tells Woman B that she has a stock that was up 35% in 2013, but down 10% in 2014.
B, while a little put off by the volatility, is intrigued and a little envious. She wonders why her financial advisor didn’t tell her about this stock? And wonders further if she should get a new advisor or buy more aggressive equities like the one that gave A such a nice return.
My first response is that A shouldn’t be mixing alcohol and investing advice, but that’s a side issue.
My big objection is that the brokerage has set up a straw man, which is a weak argument that’s raised just so it can be knocked down.
In this case, the straw man is the idea of letting envy or competitiveness take charge of your investment decisions. Nobody should ever advise that! It would be like suggesting that someone have a few drinks before driving home to make it easier to get through traffic!
As the article notes, anyone “making impulsive or emotional decisions” would be better off sticking to her investment plan.
But this fairly condescending article gives absolutely no consideration to the possibility that “chasing returns” (the articles snotty way to refer to investing in individual growth stocks) might actually be a part of that plan.
Clearly, it’s in the interests of full-service brokerages to discourage you from making your own investing decisions. They make their money from commissions for trading your account and fees for managing your money. And the more they can count on keeping you in a standard mix of index funds, ETFs, sector funds and bond funds, the better they like it.
But there’s not much room in this kind of mix for you to do anything but keep shoveling money in. And maybe you can throw a little international or emerging markets equity into the mix for excitement!
Once you knock down the straw man, the brokerages want their kind of portfolio management to look like the only reasonable choice.
But as a growth investor who works for a company that has been giving sound advice to equity investors for 45 years (Cabot actually just turned 45 on Columbus Day!), I can assure you that there is a very reasonable alternative. And you don’t have to get envious over drinks to take part.
Right now, headlines about China’s economy are as scary as any Halloween haunted house. Growth has slowed and Chinese equities have been flat for two years and in a downtrend since the middle of June. It’s a rough environment.
But as any equity investor will tell you (even your broker, if you hold his feet to the fire), a volatile situation is an equal balance of risk and reward. And if you can find a way to control the risk, you can take a reasonable crack at getting some of that reward.
Thus, if you have a credible partner to tell you when the Chinese market turns around and advises you about which stocks to buy and how to properly handle them, you have a great opportunity to put the growth portion of your portfolio into overdrive.
Here at Cabot, we don’t call that “chasing returns.” We call it growth investing. And we’re very good at it.
"Beware of the man of one book"—Saint Thomas Aquinas
Tim’s comment: Like the stopped clock that’s right only twice a day, the man of one book is useless in situations outside his narrow area of expertise. In the stock market, the equivalent might be the investor who uses only one rule (like buying stocks whose 50-day moving averages cross above their 200-day moving averages) and ignoring all other sources of information and opinion.
Paul's Comment: Nobody can know everything about the investing world, which means that we are all in varying states of ignorance. The investor who has read one book probably thinks that investing is simple, because just about every investing book I’ve ever read aspires to explain everything. But the market is smarter than all of us combined, and the best investors never stop learning, which means getting to your second book, and your third, etc.
---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 10/12/15 – Surfing Small Caps Provides a Wild—Yet Fulfilling—Ride
Tyler Laundon, Chief Analyst of Cabot Small-Cap Confidential, looks at the similarities between small-cap investing and surfing; both are cyclical, require quick decision-making and require the right conditions. Stock discussed: GoPro (GPRO).
Cabot Stock of the Month’s Chief Analyst, Tim Lutts, talks about the Volkswagen mess and what kind of stocks are appropriate for the kind of market we have now. In addition to high-quality institutional-grade stocks, Tim has a hot oil stock that he will reveal to you if you email him at firstname.lastname@example.org.
Our options expert, Jacob Mintz, who writes Cabot Options Trader, writes in this issue about how you win tennis tournaments over time by hitting your best shots, just like in options trading. He also describes a buy-write option on Ascena Retail (ASNA) that he recently advised to his subscribers.
Chief Analyst Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory