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There’s No Reward without Risk

It’s easy to sell people on the promise of huge returns, but investors are in danger of underestimating risk.

There’s No Reward without Risk

Hope and Regret or Fear and Greed?

An Indian Stock that’s Blasting Off

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Most writing about the stock market goes on and on about risk and reward. That’s appropriate, because any responsible analyst discussing the market needs to keep bringing up risk. It’s always easy to sell people on the promise of huge returns, but investors, especially novices, are always in danger of getting too enthusiastic and underestimating risk.

Then they lose their shirts. Then they blame either the market or the analyst. But never themselves.

That’s easy to understand, because the market has a simple formula for bringing new blood into the game. Every year, including its very worst years, the market throws a bunch of stocks up the charts to spectacular gains. In 2014, which wasn’t even a very good year, there were 10 stocks—all trading well above the penny stock threshold and liquid enough to qualify as targets for institutional investors—that soared more than 200%. By way of comparison, in 2013, a good year by any standards, I counted 16 stocks that were up over 400%! (If you’d like to see my report on the top stocks of 2014, I still have it on my desktop, and would be happy to send it to you. Just reply to this email and I’ll send it along.)

Looking at a stock like Avanir Pharmaceuticals (AVNR) that blasted off to 404% gains in 2014 is seductive. Owning just one stock that goes ballistic like that can make you feel like a genius and will make you a hero anywhere stocks are discussed. It all looks easy in retrospect. (Here’s a chart of AVNR in 2014.)

But the absolute fact of the matter is that there is never, ever, reward without risk. It’s not something that people want to hear, but it’s a carved-in-stone truth that you can count on.

The music of reward is as easy to hear as a favorite song from your best year in high school. The music of risk is as easy to ignore as an airline’s safety presentation.

Personally, I think it makes more sense to talk about the market in terms of hope and regret. It’s not as dramatic as the usual way of explaining what moves the market, which is “fear and greed,” but it’s closer to how people actually feel about what they do when they get into growth investing.

Hope is optimism in action. It’s a dangerous emotion, because it produces such a rosy glow that losing it can be painful.

But it’s also an essential part of a growth investor’s tool kit because it lets you actually put money on the line. Without hope, you lose the opportunity to do well.

Regret is a less pleasant emotion, but it’s one that any growth investor knows about. I’ve been just a second away from hitting the BUY button on my online brokerage account and then pulled back—and regretted it.

I’ve also hit the SELL button on stocks in my portfolio that were correcting sharply, only to see them bounce back the next day and resume their advances.

If you talk about investing with investors who work on the growth side of the market, they will start out discussing the trades that justified their hopes … and more. But if they get to know you a little better, they will end up telling you about the ones that got away and the ones they held onto for too long.

The bottom line of these musings is that growth investors need to have hope tempered with discipline and an ability to keep regret under control. Since we seek big gains, we have to have the right combination of ambition, patience, prudence and a tolerance for adversity.

If you don’t have those traits in your character, the market will be happy to teach you to look for another investing style.

Cabot’s family of investing advisories offers good advice and sound strategies for investors of all types. You can find out more about your investing personality by visiting the Cabot website and doing a little exploring among our 11 advisories.

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My stock pick today is an Indian stock that used to be a big part of the tech outsourcing movement that swept the world eight or 10 years ago. The company is Wipro (WIT), a company that was founded in 1945 as Western Indian Vegetable Products Limited. The company put its toe into the swift-moving waters of the tech revolution in 1981 and never looked back.

Wipro is now a global IT consulting and outsourcing company with over 150,000 employees on six continents. Any company that has a need for insight into business practices, analytics, applications, Cloud computing, EcoEnergy or just about any other aspect of modern business, can find help from Wipro.

The company has been a model of slow, steady growth, with revenue increasing by double digits in three of the last five quarters and earnings up 23% or more in three of those same five quarters.

Investors see Wipro as a company that’s perfectly positioned to become a huge part of India’s developing information infrastructure as the pro-business climate there builds the pressure for growth.

WIT has run quickly from 11 on January 15 to 13.5 in recent trading. This move builds on a base that dates back to the stock’s correction in April 2014. Support at 11 has been strong for many months, and the stock’s blastoff is a sign that investors are starting to get their bets down on the strong economic future of India.

If you’d like continuing advice and guidance on strong stocks like Wipro, you can get my continuing insights with a subscription to Cabot China & Emerging Markets Report.

Sincerely,

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

Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.