With Changing Market, Time to Adjust the Sails

Today is Valentine’s Day, so in honor of all the romantics reading this (including my wonderful wife), I offer these facts.

Numerous early Christian martyrs were named Valentine. Until 1969, the Catholic Church formally recognized eleven St. Valentine’s Days!

The ones honored in February, who might be considered responsible for today, are Valentine of Rome and Valentine of Terni.

Valentine of Rome was martyred about A.D. 269; his relics are at the Church of Saint Praxed in Rome and at Whitefriar Street Carmelite Church in Dublin, Ireland.

Valentine of Terni was bishop of Interamna (modern Terni) and was probably killed in A.D. 275. His relics are at the Basilica of Saint Valentine in Terni.

But neither Valentine was associated with our modern idea of love until the Middle Ages, when Geoffrey Chaucer and his pals popularized the idea of courtly love.

The popularity of the holiday has grown immensely since then, driven in large part by members of the U.S. Greeting Card Association (you know who they are), who estimate that approximately one billion valentines are sent each year worldwide, making this day the second largest card-sending holiday of the year behind Christmas!

I hope you enjoy it!

Happy Birthday Cabot Wealth Advisory!

Now on to the birthdays. The first, which actually passed unrecognized 13 days ago, was the one-year anniversary of the birth of Cabot Wealth Advisory.

When we started this letter, we had little idea how it would develop; after 37 years of writing in the anonymous third-person corporate voice, the shift to writing in the first-person – about our individual lives – was a major change.

But I’m happy to report that all the editors, myself included, have enjoyed it immensely. Equally important is the fact that so many of you have enjoyed it too.

You give us a reason to write about things important to us that could never appear in our publications devoted to investing. Things such as football, travel and music. And when we find ways to relate those subjects to investing, we all end up just a little better informed about what it takes to pursue this difficult activity successfully.

So, as we begin our second year, I just want to say thanks for reading. And, if you’ve ever taken the time to share your thoughts with us, thanks for writing. I promise you more entertaining, educational and profitable letters in the year ahead.

Expert on Change

The second birthday belongs to a fellow who was an expert on CHANGE, and I trot him out today because I believe that adapting to change is vital if you want to be a successful investor.

This mystery man (his birthday was actually yesterday) was born in Shropshire, England, in 1809.

His parents were Unitarian, but his mother’s family was adopting Anglicanism, and C.D. was baptized in an Anglican church.

Yet he attended Unitarian school.

His mother died when he was eight.

He studied medicine, learned taxidermy, and enrolled in the Bachelor of Arts course at Christ’s College, Cambridge to qualify as a clergyman, so he could earn a good income as an Anglican parson.

In his finals in 1831, he finished tenth out of 178. He was a gifted young man.

But he never took holy orders.

He was diverted by an opportunity to embark on a two-year sea voyage to South America. His father thought it a waste of time, but was persuaded by his brother-in-law to accede.

The journey, in fact, took five years, two-thirds of which C.D. spent on land. And the discoveries made on that voyage are familiar to most of us today.

Less than three years after returning, C.D. married, but only after carefully weighing the pros and cons of the union. On the plus side, he noted, “constant companion and a friend in old age … better than a dog anyhow.” On the negative side, “less money for books” and “terrible loss of time.”

The lucky (?) woman was his cousin Emma, and she bore him 10 children. Two died in infancy and one at age ten, but the other seven grew to be fine adults, many distinguishing themselves in various scientific fields.

He died at age 73, was given a state funeral and was buried in Westminster Abbey, close to Isaac Newton.

His name? Charles Robert Darwin, popularly known as the man who discovered evolution.

The famous book that resulted from his sea voyage on the ship, The Beagle, was “On the Origin of Species,” published in 1859.

But the truth is that Darwin, like most great men, only achieved that status by building on the work of those who came before him. Had he fallen overboard and drowned on his voyage, the truth about evolution still would have come to light, and not much later.

In fact, the great Isaac Newton, beside whom Darwin rests, acknowledged this truth in a letter to fellow scientist Robert Hooke in 1676, writing, “If I have seen further it is by standing on the shoulders of giants.”

And Newton himself seems to have borrowed the idea, because way back in 1130, Bernard of Chartres appears to have written:

“We are like dwarfs sitting on the shoulders of giants. We see more than they do, indeed even farther; but not because our sight is better than theirs or because we are taller than they. Our sight is enhanced because they raise us up and increase our stature by their enormous height.”

So here’s to the giants on whose shoulders we stand, to Charles Darwin, and to evolution, without which I wouldn’t be able to write, and you wouldn’t be able to read!


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Change is Key to Successful Investing

Charles Darwin wrote, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

It is change that is my final subject today.

My thesis is simple: that the market is always changing, and that to succeed as an investor, you’ve got to change with it.

William Arthur Ward (1921-1994) said it like this: “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

Well, I think it’s time to adjust the sails, because as the market works to build a base here, the strongest stocks in the market are coal stocks … and never before in my career have coal stocks been attractive investments.

Yet they’re the odds-on favorite in our office to lead the market higher in the next major uptrend, and when you stand back and look at the big picture, you can understand why.

It’s all about supply and demand.

The biggest reason for the strength of coal stocks lies in China, where demand for electricity continues to grow. Last year, Chinese demand for coal grew 9%. In the first half of last year, China imported more coal than it exported for the first time.

And this year, China’s supply of coal was reduced further by terrible blizzards (the worst in 50 years) that have led to a two-month suspension of exports.

Added to that are flooding problems in major Australian mines, and rail-car shortages in Russia, all of which mean supplies are thin.

Yet demand continues to grow, and not just in China. In Japan, demand is up because an earthquake damaged a nuclear reactor last year, and in India, demand is up because of an expanding industrial base.

Ironically, there is plenty of coal in the ground … enough to last 150 years at current consumption rates. (There’s oil enough for only 42. Figures from BP, formerly known as British Petroleum.)

But the infrastructure to mine and transport it is lacking.

Coal Stocks

Back in December, I recommended buying Bucyrus (BUCY), a company whose mining tools, both surface and underground, are in big demand these days. Back then, Bucyrus was trading at 86; two weeks later, it was at 104!

But then came the January market weakness and profit-taking; BUCY fell all the way to 67. But it didn’t stay there long. Today it’s back up at 98. Earnings will be out tonight and I have no doubt they’ll be good. But I don’t recommend buying here; in this gun-shy market, the smallest hint of bad news can trigger selling … and the stock is ripe for a rest.

Instead, today I’m recommending Arch Coal (ACI), but only if you know how to manage your risk.

Arch is one of America’s largest and most efficient coal miners; it contributes roughly 11% of the country’s coal supply, mining low-sulfur coal in Wyoming, Utah, Colorado, West Virginia, Kentucky and Virginia.

Two weeks ago, when it was 48, the stock earned a spot in Cabot Top Ten Report, where Mike Cintolo wrote, “ACI is not quite as strong as some of its peers, as the stock is still below its mid-2006 peak in the upper 50s. Still, with all the volume that’s poured into this sector during the past two weeks, we believe the landscape has changed – ACI, in particular, has zoomed ahead to multi-month highs the last two weeks on its heaviest volume since last summer. To us, the stock is unlikely to simply move straight up from here … but with big investors clearly getting in, we don’t expect a huge price decline either. Our advice: Buy a little on any weakness in the days ahead.”

Following that, the stock did decline to 46 in three days’ trading, and then boom!, it jumped up to 55! If you’re a Cabot Top Ten Report subscriber and you were able to buy on that little pullback, congratulations. Now you should hang on tight.

But if you haven’t bought yet? I think aggressive investors who can manage risk and cut losses short can buy here; the bulls are in control of this stock.

Most investors, however, should wait for a setup with better odds, ideally including a more supportive market.

Editor’s Note

Arch Coal may never be mentioned here again, but if you’d like continued updates on the stock you’ll find them in Cabot Top Ten Report, which every Monday brings you a capsule analysis of the market’s ten strongest stocks. In-house, our analysts love Top Ten for the way it ferrets out new leading names, allowing them to get the jump on the top performers of new bull markets. Past big winners include Crocs, Intuitive Surgical, DryShips, Research in Motion, Priceline.com and many, many more.

To get started with a no-risk trial subscription (highly recommended if you appreciate the value of buying when the market is down) simply click the link below.


Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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