As we mentioned in the previous lesson, the toughest thing for many investors to do is nothing. That’s right, nothing! Once you buy a stock and watch it move up, down and all around for a few weeks, there is an urge to take action. Since you bought the stock, you’ve probably read numerous investment news stories on the market in general and your stock in particular. And even if you are only watching your stock (as we advise), you’ve taken in many days of price, volume and relative performance (RP) action. With so much input, it’s easy to have your thinking swayed, which creates temptation to take action.
Another way to say it is that most investors lack patience. That’s a shame, because almost every successful investor we’ve ever met or read about has an abundance of patience. After all, if you’re correct on a stock, what’s the point of rushing things?
So the focus of this lesson, the second one dedicated to holding great growth stocks, is on practicing patience. Many times, the stocks you purchase don’t do an awful lot for many weeks after your initial purchase. But if you have the guts to stick with those stocks, some can turn out to be huge winders. And in the end, those big winners are what make all the difference.
Making Money the Easy Way—By Doing Nothing!
Here’s a quick tidbit that most investors forget from time to time. The way you make money in the stock market is by holding stocks, not buying or selling them. Sounds obvious, doesn’t it? That’s just the how the stock market works. The value of your portfolio rises when a stock you own rises. So you have to be holding on to a stock if you’re going to take advantage of its appreciation.
The following excerpt is from Reminiscences of a Stock Operator, a fictional biography about the investing life of Jesse Livermore. In it, his character, Larry Livingston, expresses the principle of practicing patience as eloquently as we’ve ever heard:
“And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It was my sitting. Got that? My sitting tight! Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.”
Through our conversations with subscribers over the phone and e-mail, we know that many are slowly becoming more short-term oriented. But we urge you to have patience once you’ve committed money to great growth stocks. Often times, a stock will start moving ahead just after most investors have thrown in the towel. Don’t be one of them!
The message is simple: Practice patience and give your investments a chance to grow into mighty oaks.
What’s Your Goal?
When buying great growth stocks, your goal for every purchase should be to develop a huge winner. By huge, we’re not talking about 30%, 50% or even 100% profits. Instead, you should set your sights much higher—300%, 500%, 1000% profits and higher. All you need is a couple of these big winners every year or two to produce spectacular portfolio returns.
That last point is an important one: All you need is a couple of these big winners every few years to produce spectacular portfolio returns. Knowing this, you shouldn’t agonize over a few small losses, or worry if your last few purchases haven’t turned out the way you had hoped. Instead, by shooting for big profits, you put yourself in a position of power, only needing to find a couple of good stocks to produce great returns. Contrast that with the investor who’s eager to take any profit he can get his hands on. He must find perhaps ten stocks each year that show him good (but not great) profits to garner the same returns you’ll attain by getting only one or two huge winners.
This is why we never use target prices for growth stocks. When you set a price target, you’re automatically limiting the profits you’ll take out of any one stock. And that’s something we will never do!
Finally, remember that if your goal isn’t to develop huge profits, you’ll never attain them. So aim high!
How Practicing Patience Leads to Huge Winners
Clearly, you cannot develop winders without practicing plenty of patience. Developing big winners often takes months or even years. It seems like a daunting task. But our Profit Curve shows us that it’s easier to get 1000%+ profits than you might think.
The main idea behind the Profit Curve is compound growth, sometimes referred to as the eighth wonder of the world. Compound growth is the reason that the Profit Curve is, well, a curve, as opposed to a line. It means that the growth of your profit in any stock increases each time the stock moves higher.
For example, let’s say you buy a stock and watch it double. Great! You now have a 100% profit. Now assume your stock works its way still higher, doubling again. After your second double, your profit expands, not to 200%, but to 300%. A third doubling would yield a 700% profit. And a fourth would give you a whopping 1500% profit.
It’s not impossible to attain these huge profits. Believe it or not, dozens of stocks have grown many-fold in just the past two years. Whether or not that type of growth will happen again is anyone’s guess. But the fact is, the market provides a never-ending stream of opportunities for aggressive growth stock investors like you. You just have to have the guts to stick with your winners.
A Word About Selling
The next two lessons will cover Cabot’s selling criteria. While we won’t get into any details here, one of our selling rules is to cut losses short. So if you have a loss from your initial investment in a stock, your patience should be greatly reduced. That doesn’t mean you shouldn’t tolerate small losses, especially in today’s volatile markets. But it does mean that a growing loss is not good for your portfolio. And the best way to make your portfolio healthy again is to stop the growing loss—by selling it!
Also, after reading through our next two lessons, you’ll understand exactly how patient you should be in terms of time elapsed and price given back. In this lesson, we want to hammer home the idea of giving stocks room to grow. Exactly how much room you should give will be explained in the next two lessons.
Paul Goodwin practices lots of patience in recommending stocks for Cabot China and Emerging Markets Report.
Next:Cutting Losses Short