How Many Shares Should I Buy?
The Fabulous Admiral of China
Burn (More) Coal
In my last Cabot Wealth Advisory I talked about the difference between value investing and growth investing, and why it’s important to invest in a way that’s consistent with your investing personality.
So, let’s suppose that you have done your introspection and you’ve figured out that you’re a growth investor (a good choice, at least from my point of view!). This means that you’re prepared to buy stocks that are in strong uptrends and sell them quickly when they show signs of deteriorating performance.
The Internet will be happy to introduce you to any one of a half dozen online brokers, all of whom have made it quite easy to set up a trading account. Fill in the blanks. Send in the check. You’re good to go.
And now you’ve done your homework and you’re ready to make your first stock purchase.
You’d think that the next question would be, “How many shares of this stock should I buy?”
You have a tiny bit more homework to do before you actually hit the “BUY” button.
The real question is “How aggressive a growth investor do I want to be?”
(If you were a value investor, you would want to buy lots and lots of different stocks. Value investors seek to minimize risk and one way to control risk is to spread it out over a large number of investments. That way, any holding that tanks won’t drag down your results too much.)
As a growth investor, the most aggressive stance you could take would be to take your entire allocation and buy one stock. That way, an 10% appreciation of that one issue would raise the value of your portfolio by 10%.
Of course, the converse is also true.
We consider the Cabot Market Letter’s Model Portfolio to be fully invested when it has 12 holdings. That’s a moderately aggressive stance.
The Cabot China & Emerging Markets Report has a portfolio that’s considered to be maxed out when it has 10 stocks. That’s even more aggressive than the Cabot Market Letter.
With 10 stocks, if one of our holdings goes up 10%, the value of our portfolio goes up 1%.
So, if you want to be an aggressive growth investor, you should (mentally) divide the value of your growth allocation into ten equal-dollar amounts, and use that as your full position amount. Then you let the price of the stock decide how many shares you buy.
If you have $10,000 allocated to aggressive growth and you want to add a stock that’s trading at 10, you will wind up with 100 shares worth $1,000. If you want to grab some Intuitive Surgical (ISRG), which is trading at around 327 as I write this, you will purchase three shares.
Don’t let the old idea of 100 shares being a full position fool you. That’s a holdover from the days when you had a real human broker who did the buying for you. He would get a small price break for buying a round-numbered lot, which he might have passed along to you.
But the big electronic online houses don’t give a rip how many shares you buy.
So there’s your answer to the question “How many shares should I buy?”
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Chinese civilization has been around for a long, long time. That’s a fact.
But Chinese civilization has also largely remained in China, as the emperors over the centuries apparently didn’t see any reason to mess around with the rest of the world. China had everything it needed, and blocking the rest of the world out must have made sense to the absolute rulers who guided the Middle Kingdom.
There is one legendary period that forms an exception to this exclusiveness, and that’s the early 15th century, when the Chinese sent out seven naval expeditions that were larger and more powerful than anything the west could muster. The first of these expeditions, with an official count of 317 ships and 28,000 men, set off in 1404, and the last in 1433. With 62 treasure ships boasting, according to records of the time, nine masts and a length of 416 feet, the first fleet sailed into the Indian Ocean, seeking peace and friendship and distributing gifts from the Chinese emperor. (The Niña, the Pinta and the Santa Maria of Columbus could all have fit inside one of these ships.)
By the seventh voyage, the Chinese fleet had reached at least as far as Mogadishu in Africa, having visited Hormuz on the Persian Gulf, and had brought back many wonders, including a giraffe, envoys from 30 states who came to pay their respects to the emperor, and an enormous number of trade goods. The voyages also suppressed pirates, made war on land when necessary, established permanent colonies and trading relations and mapped the coastline from China to Africa.
One of the most fascinating aspects of the Chinese voyages of discovery was its leader, a Muslim named Zheng He, who served the emperor Zhu Di. Zheng He was a eunuch whose father had been killed by the Chinese army. He caught the eye of someone in the court who saw to it that he received an education and he became a trusted advisor to Zhu Di and later the greatest admiral in China’s history.
Zheng He died during the last of the great voyages and was buried at sea, presumably along with the box that he always had at his side, and which contained the private parts he had been separated from at an early age.
The ships he commanded were left to rot, as the attention of the new emperor (Zhu Di had joined his ancestors in 1424) was shifted to the threat of the Mongols to the north. The Confucian scholars, who were always in competition with the court eunuchs for influence, regained the upper hand and they disliked both trade and the outside world. It was forbidden to build any ocean-going vessel, and constructing a multi-masted ship was a capital offense for a while. The energy, manpower and intellectual work that had gone into the assembly of the fleet was refocused on construction of The Forbidden City and restoring the Great Wall.
Like everything about China, the story of Zheng He has become fodder for controversy. The state just opened a $50 million monument to him, and critics of China accuse the state of using him as a propaganda figure.
I don’t know. If I were a leader of China and found a Muslim who had served the emperor with distinction and had ruled the waves as Zheng He did, I sure as heck would make some hay out of it.
The withdrawal of China from the big-time maritime world for hundreds of years probably wounded the country deeply. Certainly it contributed to the insular backwardness that left the Middle Kingdom vulnerable to the depredations of the Western powers that wracked the country in the 19th century.
I can only wonder what might have happened if the Chinese had turned their eyes across the Pacific and gained a foothold on the west coast of North America as Columbus and the Europeans began their push from the east.
If I were forced to produce an investing lesson here (since this is an investment advisory), my takeaway would be that world history, like the market, demands that you do everything well. If, like China, you have a seacoast, you need a fleet. If you have hostile neighbors, you need an army. Likewise, your exposure to the market, whether it’s in the form of stocks, options, exchange-traded funds (ETFs) or index funds, requires that you pay attention on all fronts.
The threat in a downtrending market is holding on to losers. The threat in bull markets is not getting heavily invested in the leading stocks. But just like history, the market will test you on all fronts.
Editor’s Note: If you don’t feel quite up the task of anticipating and dealing with the market’s challenges, you might want to consider finding an advisor you can trust. From my point of view, a list of suitable advisors would certainly include the Cabot newsletters, especially the Cabot China & Emerging Markets Report. The Report has been getting investors into strong markets and out of weak ones for years, and we can help you spot the challenges and jump on the opportunities. A click right here will get you started.
An interesting random news story essentially picked today’s stock for me. I had attended a presentation for L&L Energy (LLEN) last month, but I didn’t see anything about the stock that indicated to me that it was ready to take off.
Then I saw an August 10 PR Newswire story announcing that Norman Mineta—a former U.S. Secretary of Transportation under George W. Bush and Secretary of Commerce under Bill Clinton—had joined L&L Energy’s board of directors.
If this was a cheap trick intended to borrow a little credibility from a former high-ranking official of the U.S. government, I have to admit that it worked. At least it got me to take another look. And I liked what I saw.
L&L Energy is basically a Chinese coal company, producing both thermal and coking coal. But it has one key difference from a pick-and-shovel miner.
The company has realized that it can acquire existing mines more cheaply than it can dig new ones. And since the government of China has announced that it wants to shut down all mines that produce less than 300,000 tons per year, it’s a great environment for acquisitions. L&L, which was formed originally to help Chinese companies access U.S. capital, has already acquired three operating mines, two coal-washing facilities, a coking facility and a coal wholesale and distribution network in China.
L&L’s coal washing yields cleaner-burning coal and plans are already underway to increase capacity.
With triple-digit growth in both revenues and earnings in the last three quarters (plus a P/E ratio of just 9), LLEN looks like a good way to play a country that uses nearly 43% of the global total of coal burned every year and gets 71% of its total energy from the black rock.
For Cabot Wealth Advisory