Three Vital Questions for Growth Investors

Stock Market Video

Three Vital Questions for Growth Investors

This Week’s Fortune Cookie

In Case You Missed It

In this week’s Stock Market Video, Mike Cintolo says that while the market has pulled back recently, evidence from both the major indexes and leading stocks is still positive—so he remains bullish. In fact, despite the down market, growth stocks have actually held up very well, and should the overall uptrend resume, there are plenty of stocks setting up secondary buy points. Click below to watch the video.

Three Vital Questions for Growth Investors

Advice columns can be interesting reading, especially if the person giving the advice has the courage to be bold. Miss Conduct, the The Boston Globe’s advice giver, can dish out advice like a roller derby queen dishes out elbows. I love it when she starts a comment on a question she’s received with: “First, you’re wrong.”

It’s not always easy to know when you’re wrong in a changing world. Emily Post never had to deal with dinner guests who couldn’t leave their smartphones alone. But there is one place where it’s clear: the stock market.

There are many things to love about the stock market, and one of them is its willingness to tell you how you’re doing. The market doesn’t say, “It’s not you, it’s me.” And it doesn’t say, “Sit down, I’m afraid I have some bad news.”

You just look at the number at the bottom of your online account page and know that that’s how you’re doing. If your portfolio is up, you’re on the right track. If it’s down, you need to go back to the drawing board.

That’s easy to say, but if the market is telling you that you’re barking up the wrong tree, what are you supposed to do?

As you might have guessed, I have the answer to that. And the answer is in the form of three questions.

(Note: these questions are only appropriate for growth investors. If you hold stocks based on expectations of long-term appreciation from an undervalued price (value investing), you can pretty much ignore what the market is doing. And if you’re holding stocks for dividend yield (income investing), you’re off the hook too. And small-cap investors who follow the recommendations in Cabot Small-Cap Confidential can also go back to working their crossword puzzles. But if you’re investing in stocks for price appreciation alone, read on!)

Question One: Are you holding big losers in your portfolio? 

The number one source for most portfolio losses is sticking with stocks that are in negative territory and heading deeper. It’s like keeping a rotten apple in the crisper along with the fresh ones. Losses are toxic, and a losing stock can easily swallow up the gains from multiple winners.

If you answered yes to this question, you need to be reading a Cabot growth letter, like Cabot Market Letter, where you will learn how to set loss limits and the statistics about how much a stock has to go up to make up for a big loss. It’s astonishing. Sample: If you hold a stock through a 30% decline, that stock will have to appreciate 43% from that low to get back to even money. And the bigger the loss, the bigger that recovery percentage becomes.

Question Two: Are you heavily invested in growth stocks in a bear market?

The single greatest deciding factor on the performance of growth stocks is the direction of the broad market. If the momentum of the market is down, your stocks are swimming against the current. Some stocks can do that, but if the bears are running the market, you should be increasingly alert for signs of weakness, more willing to take partial profits and more circumspect about doing more buying. 

If you answered yes to this question, you need a clear indicator of the health of the markets and some rules to help you make decisions. Cabot China & Emerging Markets Report (which I write) uses a simple indicator to reveal the market’s direction and tells you how to react accordingly.

Question Three: Do you know why you bought the stock in the first place?

If your portfolio has been put together using recommendations from talking heads on cable networks, from online news stories about hot new products or (worst of all) from tips by relatives and co-workers, you need to take a long look at your strategy. Going to Las Vegas and dropping big bucks will at least get you comped for as much alcohol as you can tolerate. But losing money in the market won’t make you feel like a high roller.

If you answered yes to this question, a series of lessons on stock selection would do you a world of good, and Cabot Top Ten Trader will give you 10 examples every week of stocks that are leading the pack among growth stocks. Top Ten will tell you why the stock’s strong, how the company’s fundamentals stack up, what price to buy the stock and where to set your defensive stops. If you want to wise up your stock selection, you can’t do any better.

The bottom line is that you should always pay attention to what the market is telling you with the rising and falling numbers of your portfolio’s value. And if the ink is red, Cabot has the knowledge you need to turn it black again.

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

Tim’s Comment: Timing is everything, whether it’s in comedy, baseball or investing.

Paul’s Comment: Shakespeare had a lovely sense of irony, and putting advice about seizing opportunity in the mouth of Brutus, a man who seeks advancement by killing his emperor, is rich. But Brutus (or Shakespeare) was right that a missed opportunity (or for growth investors, a missed bull market) can be a huge loss. Knowing how to recognize the bull when it arrives is vital, as is putting money to work in the market when the bull is in charge.

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 3/9/15 – Negative Interest Rates

Tim Lutts, Chief Analyst of Cabot Stock of the Month, writes about the paradox of negative interest rates and how the low-interest phenomenon has made stocks the best option for those seeking investment gains. Stock discussed: Lumber Liquidators (LL), but Tim doesn’t have anything nice to say about it.

Cabot Wealth Advisory 3/10/15 – A Restaurant Stock with Momentum

In this issue, I boil down what I’ve learned about Cabot’s growth investing philosophy in 10 years into a few simple rules. These rules will help you if the market is telling you that you’re on the wrong track. Stock discussed: Cracker Barrel (CBRL).

Cabot Wealth Advisory 3/12/15 – Two Liquid Leading Stocks

Growth guru Mike Cintolo writes about the importance of having a plan and following it. He also gives a couple of liquid biotech leaders and a solar pick. Stocks discussed: Biogen Idec (BIIB), Celgene (CELG) and Guggenheim Solar ETF (TAN).

Have a great weekend,

Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

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