The following email came in last week.
“In the Cabot Wealth Advisory of 6/14/10 titled ‘Is
Google Making You Stupid?,’ Timothy cited a claim from Mr. Ranalli, founder of
Helium website, ‘that the wisdom of the crowd trumps the wisdom of any one
individual,’ and agreed with that statement by adding, ‘it’s a message savvy
investors know all too well,’ “
Now down further in the very same email where he hypes
the Iconoclast Investor there is the statement, “Outstanding performance
cannot come from someone who is always part of the herd.”
Has being an Internet user for the past 15 years made me
stupid or do I see two diametrically opposed ideas endorsed not only by the
same person, but in the same email?
What does Timothy Lutts have to say about that?
Waiting with worm on tongue,
I answered G.P., and I’ll elaborate on my answer here.
In the stock market, prices for each security are set by
every individual and institution with a financial interest in that
security. Thus, public opinion
sets prices. As an individual, you
may disagree with the market, but the fact remains that the market is never
wrong. Thus the crowd that sets
those prices is always right … from the current perspective.
On the other hand, market tops occur when the crowd is
most bullish. That’s the point of
maximum optimism, when people have the highest hopes for the future. However, when the last buyer has
bought, and there is no fuel to drive prices higher, that’s when prices start
to fall. So people who bought at
the top quickly become wrong.
Similarly, markets bottom at the point of maximum
pessimism. When the greatest
number of people are selling in disgust and capitulation, a market bottom is
created. And after the last seller
has sold, that’s when prices begin to rise. So people who sold at the bottom quickly become wrong.
In sum, therefore, while it’s good to be part of the herd
in the middle of a move, it’s best to lean the other way at periods of peak
crowd perception/emotion. Of
course, those points are only easy to see when reviewing the past.
And the worm on tongue? I had to go to Google to figure that one out.
Which reminds me:
Two years ago, a book came out titled, “Not Quite
What I Was Planning: Six-Word Memoirs by Writers Famous and Obscure.”
The book, spear-headed by the online magazine, Smith, had
its seed in the legend that Ernest Hemingway, once asked to compose a story in
six words, wrote, “For sale: baby shoes, never worn.”
You can still buy the book, which has some excellent
Not Quite What I Was Planning
No wife. No kids. No problems.
You can also peruse the Smith website
(http://www.smithmag.net/sixwords/), which has more than 1000,000 memoirs, many
of which are mediocre.
I found these amusing.
Wine a day. Keep stress away.
Inherited art supplies but not talent.
At 30, already crazy cat lady.
Failed the SAT, but I’m rich.
Work hard. Play harder. Love hardest.
Daughter, sister, wife, mother, grandmother, widow.
This too shall pass.
And you can submit your own.
I tried for a while, but couldn’t get past the thought
that my life isn’t over yet. I’d
like to wait until I’m closer to the end before I try to sum it up.
However, I am struck by the fact that the words of wisdom
on our office mantelpiece beside my desk are made up of just six words. They’re by the famous
investor/speculator Jesse L. Livermore, and they go like this.
“Markets are never wrong; Opinions are.”
Which takes us back to the topic at the start of this
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So what is the market saying today?
In my opinion, it’s saying that the downward market phase
that began six weeks ago with worries about Greece, and that accelerated as the
BP oil spill worsened, is over.
The bad news has done its job, raising the level of fear in the market
while correcting numerous overbought situations.
Hardest hit were some of the indexes.
But the market’s internal strength remains intact, as
illustrated by the reading of Cabot’s Two-Second Indicator. And the action of numerous leading
stocks is extremely encouraging.
One of my favorites is Isilon Systems (ISLN), a Seattle
company that’s growing fast by providing Network Attached Storage (NAS) to a
wide variety of industries that need to store increasing amounts of data while
enabling easy and fast access.
Isilon powers the research activities of the world’s
foremost cancer research facility.
Isilon provides delivery services for many of the world’s
leading entertainment and media companies.
Isilon supports huge galleries of images and other
user-generated content for numerous consumer web sites.
And Isilon gives major manufacturers the ability to
consolidate vast amounts of complex CAD into shared pools of knowledge, giving
engineers immediate shared access to critical data.
In short, as the world’s store of data grows, the needs
for services like Isilon’s grow along with it.
And the results are now becoming apparent in the
company’s bottom line. Isilon was
founded in 2001 and came public in 2006, and it’s grown revenues every
year. In the past twelve months,
it’s brought in $136 million in revenue.
But the company was a regular money-loser until recently, more intent on
growing than on making a profit.
Now that’s changed, as economies of scale are truly
In fact, Isilon has just posted two consecutive quarters
of positive earnings. Revenues are
now growing at an accelerating rate (46% in the first quarter), and the profit
margin is expanding (7.5% in the first quarter.)
Finally, the stock’s chart reveals strong support by
investors who are learning about this young company’s potential. Since gapping up to 14 after the
release of a terrific first quarter report in late April, the stock has spent
two months digesting that gain. In
the depths of the market correction, it had pulled back to its 50-day moving
average at 12.
But buyers stepped in, and last week the stock soared on
the heaviest volume in weeks, right back up to 14 and more, where it’s primed
to break out to new highs.
ISLN was featured in Cabot Top Ten Report back on May 17,
when it was trading at 12, so subscribers who followed the advice of editor
Mike Cintolo have a nice profit today.
If you’re not a subscriber, perhaps you should be. To get started with a trial
subscription (backed by our money-back guarantee) click below.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory