Stock Market Video Planning for Your Growth Portfolio
This Week’s Fortune Cookie
In Case You Missed It
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In this week’s Stock Market Video I sing the praises of the current bull market. While there is still plenty of volatility, some of it caused by earnings season, the general trend of the market is still up, and you should be increasing your exposure to great growth stocks. That’s not to say that there won’t be corrections and nasty surprises—that’s what the market does—but it’s a shame to let a good bull market go to waste. I look at several stocks that have had exceptional recent strength and also a few that look like good setups. Click below to watch the video!
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Planning for Your Growth Portfolio
“In preparing for battle, I have always found that plans are useless, but planning is indispensable.” – General Dwight D. Eisenhower
“Life is what happens while you’re making other plans.” – John Lennon
Plans are a tender subject for me, because I’m frankly not very good at making them, at least long-range ones. I’ve had a lot of jobs in my life and I’ve lived in many places, but very few of either were the result of following a plan. I just followed opportunities and followed my father’s maxim to “bloom where you’re planted.”
But I know I’ve missed a lot because I didn’t have a plan for where I wanted to be or the job I wanted to have by the time I was xx years old. I’ve been at Cabot for nearly 10 years now, the longest time I’ve spent at any one job in my life. And I can say that one of the satisfactions of my tenure here has been learning the ropes of the growth investing game, including the absolute necessity for the successful growth investor to make plans. The plans that a growth investor needs are tactical, rather than strategic, but the requirements are absolute.
When Eisenhower, who knew a thing or two about Big Picture planning (take D-Day for example), said that plans are useless, he was talking about what inevitably happens when something comes up that you haven’t planned for. Battles quickly become so chaotic that neatly diagrammed movements become so much scrap paper.
But planning is done on many levels, and Eisenhower knew that when everyone knew the larger objective, individual soldiers and small groups would create new plans on the spur of the moment. For growth investors, the things that can ruin our plans are pretty easy to understand but impossible to predict.
Probably the biggest adverse event we can experience is a shift from a bull to a bear market. When the bear takes over, stocks that have been in strong uptrends usually slow down, and the marginally positive often wither up and die like unwatered houseplants.
But there are plenty of other unforeseen dangers to worry about. Earnings reports can fail to live up to expectations. Product launches can flop. Scandals can hit. Competitors can bring out killer products. Clinical trials can reduce promising drugs to M&Ms. Oil wells can blow out and wars can break out and casinos can crap out.
You can’t plan for what you can’t predict. Or can you … ?
For a growth investor, the most important planning of all is what you will do if your holdings begin to lose value. Some investors are so risk averse that if they buy a stock on Monday at 20 and it falls to 19 on Tuesday, they sell the stock. Then they cry on Wednesday when it rises to 21.
Growth stocks are volatile, which means they move quickly and in both directions. So that drop from 20 to 19, which is just 5% after all, was substantial, but shouldn’t have been such a shock that it knocked someone out of a potentially profitable position.
Unless, that is, they didn’t have a plan!
Over the years, Cabot has boiled down a large part of growth stock planning into a couple of selling rules that are easy to understand and will give you the protection you need. There are just two of them.
One. If the general trend of the market it up, you should hold a stock until it gives you a maximum 20% loss from your original buy price at the market close. This will give your stock room to move around, allowing for shakeouts and normal jumpiness. And as you get a little profit margin, this will give the stock even more leeway, where a trailing stop or an intraday price trigger would run the risk of kicking you out of a position with good potential.
Two. If the general trend of the market is down, you should tighten up that maximum loss limit to 15%. This lower loss tolerance will give you a little more protection during correcting markets but still allow for normal volatility.
Planning what you will do when your stocks are losing altitude is the most important difference between investors who make money in the market and those who don’t. It’s every bit as important as your actual stock selection process (assuming that your selection process doesn’t involve either a dart board or a monkey).
That’s because holding one dead dog of a stock can turn your otherwise brilliant stock selection and portfolio construction into a losing proposition. If you’re going to plan for anything in the world of growth stocks, loss limits are the plan to make.
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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: The man behind the Investor’s Business Daily, William O’Neil is not a high-profile investor; he doesn’t appear in his competitors’ newspapers. And he has little reason to seek the spotlight. But he bankrolled the early days of his newspaper with profits from a successful investing career and he’s made it his mission to teach others how to invest successfully, too. I like that.
Paul’s Comment: All investing involves some kind of risk; even a T-bill or a sock full of krugerrands can lose value. But a true pessimist can’t imagine a positive outcome to any transaction, which makes it hard to make a reasonable estimate of the balance between risk and reward. Certainly pessimists can make a living, and pessimists can take a sour satisfaction from being right when things go wrong. But they will never know the satisfaction that comes from taking a calculated risk and having it go really right. That’s what makes me a growth investor.
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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 7/29/13 — The Music Revolution After Apple
In this issue, Cabot Stock of the Month honcho Tim Lutts reviews the history of the recorded music business, from vinyl to iTunes. He sees the future looming as a time for the third of his revolutionary stocks. Stock discussed: Pandora (P).
Cabot Wealth Advisory 7/30/13 — Stock Investing Made Easy
In this issue, Roy Ward of Cabot Benjamin Graham Value Investor gives a life-stage mini-primer on how to build and manage your portfolio to prepare for a comfortable retirement, with an emphasis on value stocks.
Cabot Wealth Advisory 8/1/13 — Luck and Randomness in the Market
Mike Cintolo, editor of Cabot Market Letter, writes about the role of luck in stock investing success, but points out how following time-tested rules can put the odds in your favor. Stock discussed: Cree (CREE).
Have a great weekend,
Paul Goodwin
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory
