Growth Stocks: The Seven Deadly Sins

 

Growth Stocks: The Seven Deadly Sins
Stock Market Video
This Week's Fortune Cookie

Growth Stocks: The Seven Deadly Sins

You have to hand it to whoever compiled the list of the seven deadly sins. (The idea was formalized around the fourth century AD, which is a long run.) Even people who can’t name all seven know that there are seven of them, and lots of modern ideas would love to have that kind of recognition.

But while Pride, Greed, Lust, Envy, Gluttony, Wrath and Sloth work pretty well as guides for those among us who need advice on how to be good people, they’re not much help in warning growth investors what to avoid. (Well, some are. Sloth, for instance, isn’t ever much help in doing a difficult job. But that’s pretty generic.)

Humbly, I offer to remedy this glaring omission. After much thought and soul-searching, I’ve compiled a list of the Seven Deadly Sins of Growth Investing. I hope it does your investing soul a lot of good.

Here it is. My apologies that I couldn’t match the elegant, single-word terseness of the original.

Sin #1: Holding Losers
This is a big one, maybe the big one. Failing to sell losers is the fastest road to investing hell. Investors who hold and hope while stocks keep declining learn the discouraging truth. A growth stock that you hold while it declines by 50% will have to appreciate by 100% to get back to even.

Sin #2: Ignoring the Stock Market
The general health of the broad market is the major determinant of how well growth stocks perform. Buying while markets are controlled by bears is like swimming upstream in a river. If you take some time to browse through the charts of a bunch of random stocks, you will see the general shape of the market’s major moves in nine out of 10. Yes, a few growth stocks can go up in a down market and up in a down one. But without the support of the broad market, one slip can bring disaster. Market crash? Go to cash. Market flying? Time for buying.

Sin #3: Buying a Single Stock
While it might seem to a novice growth investor that buying just one stock is a low-risk strategy, nothing could be farther from the truth. An ideal growth portfolio needs to be concentrated, of course. That way a rally by one stock can have a significant impact on annual results. But buying just one stock is a coin flip. Both Cabot Growth Investor and Cabot Emerging Markets Investor aim at having 10 growth stocks in their portfolios when they’re fully invested. That seems to be the sweet spot where the balance between concentration and diversification is reached.

Sin #4: Panicking
Markets go up and down. Stocks do too. And you have to know what you will do in either case. Some people panic in a bull market and sell their winners too soon, unable to stand the risk of losing a profit. Others freak out in corrections, not knowing when to sell losers and how to go to cash to protect against more losses. Panic is what happens when you don’t plan. So plan. Write down your maximum loss limits on each stock. Take partial profits in winners occasionally to lower your blood pressure.

Sin #5: Confusing the Stock and the Company
Many people love Apple, so they think they have to own AAPL. It’s the same with Tesla and TSLA and with Facebook and FB. But successful growth investing demands that you pry the company and the stock apart with a pry bar and keep them separated. A company can be thriving yet it’s stock can trend lower for a long, long time. And your love for a company (either because you own its products or because it was a big winner at one time) can cost you.

Sin #6: Bottom Fishing
When a popular company’s stock stubs its toe, chances are that Cabot’s growth analysts (me included) will get a question about whether it’s a good buy at its new price. And it makes sense; if the stock was a good deal at 50, why isn’t it twice as good a deal at 25?

The answer is that a broken stock is like a broken bone; both need time to heal. The broken stock has a legion of disappointed people who bought it at higher prices who are just itching to sell once the price gets back to their break-even point. That’s called overhead resistance, and tends to stop any rally in its tracks.

Veterans say, “Don’t try to catch a falling knife.” I say look for the fresh stock that doesn’t have to fight its way back to its old high. Clear skies and new highs are great for airplanes and growth stocks.

Sin #7: Ignoring the Chart
Probably the most common error of beginning growth investors is to buy a stock because the company’s story is so appealing. Great stories featuring revolutionary products that solve enormous problems are a dime a dozen on over-the-counter and pink-sheet markets, and many can be found on major exchanges. But whether the stock is a pump-and-dump scheme or a genuine business with a good idea, one look at the chart will often save your portfolio. The chart is a simple graphic representation of what the entire investing world thinks of your stock. And while you may get lucky, and be right while everyone else is wrong, it’s generally a good idea to heed the message of a terrible chart.

Conversely, a chart that shows growing enthusiasm for a stock is a major plus. The chart puts you in contact with the wisdom of the crowd. It’s not always right, but it always pays to pay attention.

So what’s the worst sin? There is only one mortal timing sin in buying and selling growth stocks, and that’s selling too late. Winning back lost capital is a hard slog. Among the other sins—buying too early, buying too late and selling too early—the damage to your results is relatively limited.

Cabot’s growth advisories work hard to steer you clear of all investing sins, of course. We know all the rules (and have the scars to prove it). And we’ll be happy to guide you in the righteous path to profits. So learn more about Cabot Emerging Markets Investor right here.

Here's more information about Cabot Growth Investor.

Stock Market Video

In this week’s Stock Market Video, Mike Cintolo talks about his new intermediate-term buy signal, which is telling him to be coming off the sideline for the first time in nearly two-and-a-half months. Mike advises going slow, and discusses the kind of growth stocks he's looking for in this environment. Better yet, he runs through a bunch of stocks on his watch list, and lays out a plan for your portfolio. Click below to watch the video. 

This Week's Fortune Cookie

Here's this week's Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here. 

 

Mike's Comment: Investing in the market requires plenty of judgment and flexibility. But even the investor with the best judgment and the most flexibility is nothing without a firm foundation. I think that's what Twyla was talking about—you have to start with something simple, basic and sturdy before going beyond that. And it's exactly the same in the market; it's best to develop, understand and stick with a methodology, and only after that should you branch out. 

Paul’s Comment: Nobody really starts from scratch in anything, whether it’s choreography, science of stock investing. First you learn the rules. Then you break the rules. Then, if you’re really brilliant, you make up new rules. But you pretty much have to start with the box.

Sincerely,

Paul Goodwin
Chief Analyst of Cabot Emerging Markets Investor
and Editor of Cabot Wealth Advisory


Paul Goodwin can be found on Google Plus.

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