The Market Wants to Take Your Money
You Need a System
One Stock That’s on the Move
Stock market old-timers will often tell newcomers that “The market wants to take your money,” which, on the face of it, isn’t all that credible. After all, lots of people make lots of money on Wall Street, and you have as good a chance as anyone, right?
Well, not really. There’s something to the warning, and the quicker you learn about it, the quicker you can start printing your yearly results in black ink, rather than red.
The education of a stock investor isn’t exactly the stuff that Hollywood movies are made from. (No, that’s not what the movie Wall Street was about!) There’s not a lot of excitement in digging into business models, studying chart patterns and tracking revenues and earnings.
Investing does have its moments, of course. I’m thinking specifically about how some of the action in the Nasdaq exchange in March and April looked like Matt Damon driving a Mini-Cooper down those stone steps in Paris in The Bourne Identity.
And there are always a few exhilarating days every year when markets take off, giving you the same thrill that you got when the Millennium Falcon first went into hyperspace in Star Wars: Episode IV.
But I digress. The point is that learning to invest in stocks isn’t a barrel of laughs.
On the other hand, it’s a tough world out there, with lots of people working more than one job and scrambling just to stay even with their mortgage and the bills … and not even managing that. It’s hard to get ahead, and Wall Street always offers a chance to get ahead.
Feeling like you can’t get any financial traction sends some people to convenience stores in search of lottery tickets or to gambling casinos, where the odds are astronomical (in the first case) and inexorable (in the second). In those cases, at least, people know the odds are against them.
Unfortunately, desperation also sends some people to the stock market … with the same results. People who go into stock investing in desperation often bring with them the same mindset (and the same lack of preparation) that accompanied them to the lottery window or the blackjack table. What they find out is that (as the title of this section notes) The Market Wants to Take Your Money.
Some people treat this truism as a general warning about equity investing. They don’t believe that the market is actively, forcefully and intentionally trying to take their money away. They’re wrong, and here are three reasons why.
– Institutions want to take your money away. Large institutional investors control a wide majority of the equity capitalization in U.S. and global markets, and they count on individuals being both over-enthusiastic and over-discouraged. The individuals who push stocks up the last 10% or so to their tops are setting the table for institutions to sell and begin the stock’s decline. And the last individuals who finally capitulate and sell a stock down to its low are tying a bow on the gift package for institutions, who will then quietly begin to buy up the discounted bargains.
– The bandwagon wants to take your money away. It’s hard to commit to putting a chunk of cash into a stock. As a result, a lot of investors wait to invest … and then they wait some more, trying to be sure that the stock they’re buying is the real deal. Eventually, as the stock rises, more and more people are reassured by the stock’s performance into actually pulling the trigger. It’s fun to grab a piece of one of these stocks that’s going through the roof, and some people actually make some money this way. But the last few people who jump on the bandwagon are doomed to go over the cliff with it. It’s the law.
– Good stories want to take your money away. Every great stock has a great story. Stories are how entrepreneurs win funding for their startups and how rising companies get the capital to expand. The trouble is that a lot of absolute mutts have stories that make them sound like the next Apple and Google and Microsoft all rolled into one. The guy who starts telling you about his favorite stock at a party will probably give you 95 cents worth of story with just a nickel’s worth of information about the company’s revenues and earnings and the performance of its stock.
There are other things in the market that want to take your money, but you get the picture. So what can you do about it?
As any of our long-time readers know, the answer is: have a system.
If you like the idea of buying stocks at a discount and then holding on for years while they appreciate to fair value (the Warren Buffett way), then you are a value investor and you should follow that system. You’ll make money.
If you’re more comfortable with the idea of buying dividend-paying large-cap stocks that are closely tied to the progress of the U.S. or global economy, then you’re a blue-chip income investor, and that’s exactly what you should do. You’ll make money.
If you cherish the thrill of finding hot, young stocks that are climbing like rockets and riding them to huge gains – and you can tolerate – and minimize – the losses that inevitably accompany this strategy – then you’re a growth investor, and you should stick to your guns. You’ll make money.
Whatever system you use, a strict sell discipline needs to be an integral part of it. If you ever forget that the market actively wants to take your money, the value of your portfolio will be glad to remind you.
The market is a tough teacher; it tests first and teaches afterward. And its lessons can be expensive.
I don’t want to appear self-serving, but as a growth investor who learned my investing chops from working at Cabot, I know that our rules for growth investors are sound. And subscribers to Cabot China & Emerging Markets Report and Cabot Market Letter get the benefit of many years of patient testing of different investment models. We only recommend what works.
And it’s a heck of a lot cheaper to learn from us than to get schooled by the market. After all, The Market Wants to Take Your Money.
My stock pick for the day is an old friend of Cabot China & Emerging Markets Report. We’ve had it in the portfolio since July 2013, and our position has jumped from 110 when we bought to 183 in today’s market.
But I’m recommending it again here because, after six months of trading sideways, mostly between support at 150 and resistance at 180, BIDU is on the move again. It hit an April low below 145, but began a new rally in the middle of May that has led it close to all-time highs. I wrote the stock up recently in Cabot Top Ten Trader as one of the 10 strongest stocks of the previous week. Here’s what I had to say.
“Why the Strength: Baidu is probably the best-known Chinese stock in the U.S., partly because of its snappy nickname, “The Google of China,” and partly because it has enjoyed some huge price appreciation in the past. Baidu is a provider of Chinese-language search services and the company legitimately vanquished Google in head-to-head competition in China. But Baidu makes money the same way Google does, by selling ad-words and general advertising access to users. Baidu has been challenged in recent years by the upstart Qihoo 360, a small company that grabbed a significant market share in mobile search services by leveraging its popular mobile browser. It took Baidu a while to respond, but the company has used its large cash reserves to develop its own mobile anti-virus products (to counter Qihoo 360’s foundation) and by acquiring 91 Wireless, a popular Chinese app store, in July 2013 for $1.9 billion. Baidu has been hit by the general unpopularity of Chinese stocks, but it has also emerged as a core holding for anyone interested in emerging markets investing. The company’s most-recent quarterly report showed a 59% increase in revenue (an acceleration from prior quarters) and a 25% jump in earnings, the biggest bump in EPS in over a year. Baidu looks to be back on track.
“Technical Analysis: BIDU went into a correction in July 2011 and fell from 166 to the 80s in early 2013. But July 2013 brought a strong rebound that kicked to stock to above 180 in January 2014. Since that peak, BIDU spent a couple of months trading in a range with support in the 140-150 area before investors moved in again. BIDU is now back in the high 170s and is enjoying the improved climate for Chinese stocks in the U.S. BIDU looks like a good buy on any weakness, with a stop at 160.”
To learn more about BIDU and other emerging markets stocks that are poised to break out, take a risk-free trial subscription to Cabot China & Emerging Markets Report. In it, you’ll learn all about the high-potential growth stocks I’m following all over the world. Find out why now is the best time to invest in emerging markets.
Chief Analyst, Cabot China & Emerging Markets Report
Editor, Cabot Wealth Advisory
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More