Drownproofing Your Portfolio

Stock Market Video

Drownproofing Your Portfolio

Fortune Cookie 

In Case You Missed It

In this week’s stock market video, Mike Cintolo discusses his “lean bullish” stance toward the market as the evidence continues to improve, especially when it comes to growth stocks—in fact, he’s most impressed with the number of “liquid leaders” that have launched of late, usually on earnings. There are still some flies in the market’s ointment, and stock selection is key, but overall, Mike advises latching onto these leaders and enjoying the ride. Click below to watch the video.

Drownproofing Your Portfolio

Back in my university professor days, I used to speak to community and professional groups on communication topics. When I talked to business groups, these talks often got around to putting communication into action. One image I used to explore the plight of a small business trying to decide on a communication strategy was “The Four Things You Can Do In the Water.” It goes like this.

“If you’re in the water, there are four things you can do.

“The first is drown. Let’s keep that in mind, because if you do nothing when you’re in the water, you really can sink, die and disappear.

“The second thing you can do is float. It has the advantage of not drowning, but unless you trust the tide to put you on the shore or you think someone is going to come along and rescue you, that’s about it.

“If drowning and floating don’t suit you, the third thing you can is swim! All of a sudden you have a direction, momentum and some control over your destiny. Good for you!

“But there’s a fourth option, one that not many people think about. You can surf. Surfing is just finding a wave, letting it pick you up and falling down its face for as long as it will carry you. (Of course a board is handy.) If you can find a wave that’s heading in your direction and ride it successfully, you can outdistance even the strongest swimmer while expending just a fraction of the effort.”

At the time, my point had to do with communicating with customers, with investors and with your employees. But I’ve realized that it can also have a lot to do with investing. (You knew there had to be a connection, right?) It wasn’t what I had in mind when I first wrote the image up, but here it is.

The person who drowns is the person who does nothing with money but spend it. No budget, no plan, no savings, no investments. Nothing. This is the strategy that leads to huge debts and bankruptcy, which is about as close to drowning as you can get in the financial world.

In investing terms, the person who floats is the person who saves. The more you save, the bigger your financial cushion is, but you hear stories every day about people whose savings have been blown away by illness or some kind of accident. Money in the cookie jar or under the mattress is better than nothing, but that’s the best you can say about it. Completely safe investments—an insured bank savings account or a Treasury bond—used to allow your money to grow fast enough to keep up with inflation. Not any more, of course. It’s a strategy that qualifies as better than nothing, but it’s still a minimal kind of action.

The person who swims is the one who invests. Investing in anything from an index fund to a highly leveraged derivative always involves risk, and the relationship between risk and reward always follows the same formula. Low risk investments bring low returns. The more risk you are willing to take on, the higher the potential reward. This is a strategy that gives you a direction and some control over your financial future.

The surfer is the investor who figures out which direction the market is going and gets in step with it. This takes skill and nerve, and there is always the chance of wiping out. But if you ask an investor who has ridden a bull market what it’s like, the answer will be ecstatic. It’s not just the money—although that’s a huge part of it. It’s the sense of being locked in to a bigger movement, letting the market do the work while you make huge gains. Skiers and snow boarders can get the same feeling.

Cabot’s growth advisory letters—Cabot Growth Investor, Cabot Top Ten Trader, Cabot Emerging Markets Investor—use market timing to identify positive market conditions, essentially telling you when the investment surf is up. Their advice is especially important when market conditions are negative. Knowing when to get out of the water is how surfers—and growth investors—stay safe.

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

“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”—Bill Gates 

Tim’s comment: Gates wrote this regarding the time Microsoft was being threatened by Internet startups eBay and Yahoo; his early success had not prepared him for these new challenges. Similarly, the investor whose first stock purchase succeeds learns little about adversity. He who fails several times learns faster.

Paul’s comment: Writing about growth stock investing can be a little perverse, because whenever markets are heading up, we preach that you should always be ready to get out. And when markets are in a bearish mood, we preach that you should be ready to get in. But for people who have been enjoying success in the market, we always haul out the old maxim, “Don’t confuse brains with a bull market.” Success rewards, but failure teaches.

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 11/2/15 – The Enormous Potential of Chinese Stocks

I write in this issue about why buying stocks (capital investing) is superior in the long run to just putting money in a savings account. I also recommend an ETF that I think has a lot of power behind it. Stock discussed: PowerShares Golden Dragon Halter USX China Portfolio (PGJ).

Cabot Wealth Advisory 11/3/15 – A Crazy Idea?

Cabot Stock of the Month’s Chief Analysts, Tim Lutts, floats a “crazy” idea for a guaranteed basic income for everyone, whether they work of not! It won’t sound so crazy after you read Tim’s reasoning.

Cabot Wealth Advisory 11/5/15 — Is It Time to Buy Energy and Gold Stocks?

Mike Cintolo, Chief Analyst of Cabot Growth Investor, looks at the possibility that energy and gold may have bottomed and says Newfields Exploration (NFX) has the look of a possible leader. Mike also mentions his upcoming free Lunch with the Analyst webinar on November 18 at 1:00 pm ET. For a full market analysis, some strong stock recommendations and a chance to have you questions answered, don’t miss it! Click here to register.

Sincerely, 

Paul Goodwin

Chief Analyst, Cabot Emerging Markets Report


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