GM Recalls All Vehicles Made Since 1994
Ten Stocks to Buy & Hold Forever
Just joking about GM—sort of. Seems like every week they recall more cars, so eventually, that’s a headline I wouldn’t be surprised to read!
Anyway, today we start with a few responses to my last column, where I took off from the news that Facebook once manipulated readers’ feeds to see if it affected their mood (it did). I asked how you felt about the unrelenting flow of bad news in your media stream, and how you dealt with it.
Your answers included these:
“1. I tend to focus more on the local, but keep an eye on the national political picture.”
2. I mostly ignore the “bleeding” headlines.
3. At the international level, I focus on the economic scene, screening out the persistent barrage of items on Israel and its enemies.
Conclusion: Headlines are screened and mostly ignored. Items of importance are long term, which are rarely headlines.
So the “if it bleeds, it leads” mentality is mostly ignored.”—Jerry R., Racine. Wisconsin
“Regarding the news, we live in a time when we have a divided political nation, including many who want a free lunch forever, class income warfare, doses and doses of new regulations and a government that exudes stasis. I’m positive that out of this miasma we’ll collectively work for the greater good. As an aside, we immigrated to America and had nothing. Today I have 10 1/2 grandkids and a good life and great wife. I’m grateful to this nation!”
“Out of necessity I read the WSJ and the Tulsa World (owned by a Berkshire Hathaway company) each day. Knowing, as I read that both papers are politically conservative, biased on their editorial pages, and due to this readers must question their reporting bias as well.
The WSJ used to be much more politically balanced and less biased in its non-editorial business pages, but the change in ownership a few years ago has clearly tainted the paper.
As a reader, I occasionally respond to the most biased of the opinion pieces, and about once every 6 months write the Tulsa World begging for reporting objectivity and asking they factually question some of the national columnists they choose to publish. The willingness of national columnists to purposefully distort political positions and deliberately distort factual information (polite phrase for ‘lie’) seems to growing especially among conservative writers.
I start each day knowing that there is conservative bias in the financial press that distorts attempts to find ‘everyday reality’ of the public. Once this reporting bias is overcome, it is rather bright day.”—Jerry B., Fairfax, Oklahoma
“This last January I moved to Chile. As a result the amount of news I hear on a daily basis has been greatly reduced. When I return to the U.S. next year I believe I will continue to ignore the majority of news.
Why do I plan on this you ask? Because quite frankly I don’t feel I’ve really missed anything important. Most news simply doesn’t matter yet we get all spun up and excited about things that have no effect on our lives.
The other benefit I’ve noticed is that I am actually practicing Cabot’s advice by tuning out the noise and letting the market tell me what to do. As a result my portfolio has outperformed the S&P 500 by 3% so far this year. I completely ignore pundits and only pay attention to how my stocks are performing.
And yes, I sleep well at night.”—Kent N., Phoenix, Arizona
“I don’t watch the news. I don’t read the news. I do get Breaking News Flashes from the major media outlets on my iPhone. I do skim the headlines in IBD once a week. I focus on my own little world. When the major indices start falling apart I get curious as to what’s happening. When my neighbor says a hurricane is coming, I take in the lawn furniture and pick up some gas for the generator…
I was able to retire at 30 years old (hit the real estate market at the right time) … but I still “work-think” harder than ever …
I was lucky to have learned the Pareto Principle in law school.”—Michael S.,
Manhasset, New York
That last letter, happily, set me off researching the Pareto Principle, something I’d learned about once and then forgotten—actually, I hadn’t forgotten the principle; I’d just forgotten the name.
So here’s a little refresher, which actually has great application in the field of investing!
Vilfredo Federico Damaso Pareto was born of an exiled noble Genoese family in 1848 in Paris, a centre of the popular revolutions of that year. His father was an Italian civil engineer and Ligurian marquis and his mother was French. They were so enthusiastic about the 1848 German revolution that they named their son Fritz Wilfried—which became Vilfredo Federico when they moved back to Italy in 1858. In 1869, Vilfredo earned a doctor’s degree in engineering from what is now the Polytechnic University of Turin.
He started his career as a classical liberal (not to be confused with today’s social liberals) attacking any form of government intervention in the free market, and in 1893, he was named chair of Political Economy at the University of Lausanne in Switzerland, a position he held the rest of his life.
In 1906, he made the famous observation that 20% of the population owned 80% of the property in Italy. This was the beginning of what others came to call the Pareto Principle (also termed the 80–20 rule).
Over time, Pareto came to believe that the 80-20 distribution applied to many other economic realms, as well, and we still refer to it today, believing, in general, that:
80% of your sales come from 20% of your customers
80% of complaints come from 20% of your customers
80% of a company’s sales come from 20% of its products
80% of a company’s sales are made by 20% of its sales staff
80% of health care resources are used by 20% of patients
80% of taxes are paid by 20% of households
80% of computer errors and crashes are caused by 20% of the bugs
80% of accidents are caused by 20% of drivers
And finally, 80% of crimes are committed by 20% of criminals
In the investing world, you could probably say that 20% of stocks account for 80% of trading volume and that 20% of investors account for 80% of trading volume.
More relevant to your own interests, we like to say that 80% of your profits come from 20% of your stocks, and your job is to identify those winners as quickly as possible, so you can ditch the losers and buy more of the winners, boosting your profits even more.
That’s why we’re here!
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Speaking of investing.
It’s time for the final installment of my series: 10 Stocks to Buy and Hold Forever
The goal, remember, is not to identify stocks that can give you a decent long-term return, like Johnson & Johnson (JNJ) and DuPont (DD). You can hold those forever, but they won’t make you rich.
I want to identify the next Amazon.com (AMZN), the next Apple (AAPL), the next Google (GOOG) and the next Keurig Green Mountain (GMCR).
To recap, the key attributes I look for are these:
1. A product or service or business model that is revolutionary.
2. A mass market.
3. A company that’s still small enough to grow rapidly.
4. A company that is not respected—perhaps not even known—by the majority.
5. And last but not least, a stock that’s trending up, indicating that investors’ perceptions of the company are improving. This is important because perceptions are always at least as important as reality.
I selected these 10 stocks back in early May by asking for nominations from all the Cabot analysts. I reviewed all the submissions, paying particular attention to the long-term growth prospects and selected the final 10.
Since then, I’ve highlighted them one stock at a time, trying to present them at opportune entry points. For this last one, which I began to write about last Thursday, I thought I had a great setup. But then the world changed.
Nevertheless, here’s today’s stock, Number 10 in the Series, “Ten Stocks to Buy and Hold Forever.”
If you’ve had any real estate dealings, or done any research on real estate in the past few years, you’ve probably used Zillow. (The name is derived from “Zillions of Pillows”)
The company’s website has become the #1 resource for real estate information for both individuals and professionals.
Consumers use it to find and research properties.
Professionals, mainly real estate brokers, use it to present their offerings.
And it’s the advertising purchased by those professionals that makes up Zillow’s revenue.
Zillow has grown revenues at more than 50% per year in each one of the past four years. Revenues topped $198 million in 2013.
Profits began flowing in 2011, and are growing fast. Analysts are expecting earnings growth of 71% in 2014 and 197% in 2015.
Going forward, I believe the sky’s the limit for Zillow. Being number one is a huge advantage in an industry where the network effect is critical (think Facebook). It means you have a big natural advantage.
And now that advantage is set to be even bigger, because last Thursday word leaked out that Zillow was in negotiations to buy the #2 company in the industry, Trulia (TRLA). This morning, the deal was finalized for a whopping $3.5 billion in stock.
The sad part of this story is that before the news was leaked, Z had pulled back quite quietly and normally to its 50-day moving average at 125. To me, that looked like a great, low risk entry point for the stock.
But when the news got out, Z spiked 16% higher!
And now, two days later and even higher, it’s not nearly as attractive to me, short-term.
Yes, the company’s long-term story remains intact. In fact, it will be even better if Zillow can acquire Trulia.
But I’m not feeling so good about paying 20% more than last week, particularly because now there’s the potential for the stock to fall back as investors digest the large amount of new shares needed to swallow Trulia.
Alternatively, the stock might base right here. There’s decent support at 145, and that might be a decent entry point.
Now, you could wait for a pullback to 125 and try to get in there.
But even better would be to take a no-risk subscription to Cabot Top Ten Trader, which originally recommended the stock back in March, when it was trading at 94.
Cabot Top Ten Trader details the top 10 stocks every Monday. It’s a great resource for active investors, and it can get you in on the ground floor of some of today’s biggest winners, like Zillow. Get more details on Cabot Top Ten Trader here.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory