Hall of Fame manager Earl Weaver of the Baltimore Orioles used to say, “You win games with good pitching and three-run home runs.” And we think that’s a pretty good analogy for the way you win at growth investing, too.
Growth Investing and Baseball: Three Similarities
In growth investing, good pitching means keeping the other side from scoring runs. That’s another way of saying that you keep losses small. In all of our advisories, we advise you to control losses in two ways. First, we use our market timing indicators — the medium-term Cabot Tides, the longer-term Cabot trends and the Two-Second Indicator — to keep us on the right side of the major market trends. When the indicators are positive, you should be heavily invested in strong growth stocks. But when the indicators are all negative, you should keep your stocks on a very short leash, selling any that break down before they hand you a big loss.
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Second, we advise you to have explicit sell disciplines in place on all your stocks. When you buy a stock, you should make a note of the price at which you will sell it. Using a maximum loss from your original investment price is a good start, but you may be more cautious than that. You may want to use trailing stops or declines from a stock’s peak price. But whatever you do, you shouldn’t be undecided. It’s the days that you spend watching a stock decline and hoping that it will come back up that can kill your portfolio’s performance. So be cold-blooded and be decisive and keep the discipline in sell discipline.
The three-run homer part of Weaver’s philosophy is just as easy to understand. While some baseball teams use stolen bases, sacrifice bunts and singles to manufacture runs, that wasn’t Weaver’s way. He wanted to get some men on base and then let one of his power hitters bring them home in bunches.
And we’re like that, too. We want to buy some good stocks and then go for the big winners! Some investors are satisfied with small returns, just as some baseball teams are satisfied with a few runs. But we have found that there is no substitute for a growth stock that goes up like a rocket and then keeps on going.
Past Home Runs
Some of our long-term subscribers to the Cabot Growth Investor will remember Amazon.com (+1,290%), American Power Conversion (+1,021%) and Qualcomm (+560%). Those were stocks that put people’s children through college! This year, subscribers who followed our recommendations on Tesla (1,122%), first recommended in Cabot Stock of the Week, Facebook (+352%), first recommended in Cabot Growth Investor, and TAL Education (+247%), first recommended in Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor), reaped the benefit of the stock market equivalent of the three-run home run.
In theory, it’s easy to “cut your losers short and let your winners run.” But in practice, it’s not easy to do. Psychologically, it’s especially hard to let go of your losers. You have to give up a little hope and admit that your judgment isn’t always perfect. We always say there’s a reason why we talk of buying opportunities but sell disciplines. Right now, while the markets are going through a rough patch that may (or may not) signal the end to the recent bull market, is the perfect opportunity for you to bring in better pitching (those thorny sell disciplines) while we all wait for our next trip to the plate that will give us the opportunity to swing for the fences.
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