Back To The Basics … Again

Stock Market Video
Back To The Basics … Again
This Week’s Fortune Cookie
In Case You Missed It

In this week’s Stock Market Video, I talk about the paradox of a market that’s near all-time highs but is showing signs of potential weakness. I point out that there’s no use trying to anticipate what’s going to happen; the important thing is knowing what to do if markets actually begin a significant correction. It’s a good time to be a stock picker, and I give several long-term winners at good buy points to consider.

Click here to watch the video!

It may just be me, but I don’t think December puts me in the right frame of mind to learn any big lessons. There’s too much to do, too many events to shop and cook for, too many chances for celebration and enjoyment to allow for much reflection about my life, either financial or personal. That will have to wait for January, the Holiday Hangover month.

So for this week’s Cabot Wealth Advisory, I’m re-running a piece I wrote back in 2009 about the simple rules for investing. At the end of the day, it’s not the secret insights and arcane knowledge that separate all of us from the elites in any field of endeavor. It’s the natural talent, the hard work and the ability to actually follow the rules and stay focused that makes for greatness. I think it’s a powerful story to run over in your mind as you careen from one event to the next.

Back To The Basics … Again

I have a friend who’s an avid tennis player, the kind of guy who routinely finishes high in his club championships and sometimes wins. But he has always believed that with just a little advice from a top tennis coach he could be a truly great player.

He got what he wanted (in a way) when he attended the 2004 U.S. Open Tennis Tournament in New York and got a great seat at one of the quarterfinal matches, in the second row behind the end line. He realized that he was sitting two seats away from Andy Roddick’s coach (and brother), John Roddick. This, he hoped, might be his chance to overhear what a top coach had to say to a top player.

And he did.

After Roddick lost the first two sets, his brother screamed at him during the changeover, “Keep your eye on the ball!” Roddick eventually lost the match (to Joachim Johansson), but not before coming back to even the match at two sets apiece.
The lesson? Even at the highest levels of any enterprise, the most basic things are still the most important. If you’re looking for some inside trick that great growth stock investors use to make more money than the rest of us, you’re probably wasting your time. There is no Holy Grail, no Philosopher’s Stone.

But if you asked my opinion on the most important basic rule of growth investing, the one that’s the equivalent of “keep your eye on the ball,” I couldn’t pick one … but I could pick three. And here they are.

Follow the market’s trend.

If you buy when the market is going up, you put the odds on your side, because a bull market changes the odds. It’s always easier to swim with the tide or run with the wind at your back. Stock markets are no different. And when markets are going down, you should work extra hard to weed out your losers and move toward cash for the same reason.

Cut your losses short.

When a stock starts falling, you have no idea how far it might go. The only theoretical limit is zero. And the longer you stick with it, the less capital you have to put to work. No matter how much it hurts—and it does hurt, I know from personal experience—you have to admit that you made a mistake and sell the stock when it reaches your sell point. Cabot’s growth investing rules advise selling when you have a loss of 20% in bull markets and 15% in bear markets. But these are the absolute limits; we often sell at a 5% or 10% loss if the market has turned sour or a stock has been hit by bad news. Calculate the sell point when you buy the stock, write it down and stick to it. The number of times you get shaken out of a stock that then starts rising again will be more than made up for by the number of times you save your money to fight another day.

Let your winners run.

Some investors set buy points as well as sell points. When a stock is showing a 20% profit, or 25%, or whatever, they will sell the stock and book the profit. While booking a few smaller profits is fine, doing it across the board makes it impossible to enjoy the wealth-building benefit of a stock that doubles and then doubles again, which is how really enormous gains are made. The profit from these big gainers, which reward you with compound growth, is what makes aggressive growth investing a winning proposition. It takes just one of them to compensate you for a bunch of stocks that fall short.

There’s a reason that the same old rules are still the rules. Keep it simple. Keep your eye on the ball. And you’ll come up a winner.

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

You make most of your money in a bear market, you just don’t realize it at the time.”—Shelby Cullom Davis

Tim’s Comment: As we near the end of a very profitable 2013, it’s worth remembering that you haven’t really earned those paper profits until you’ve preserved them through the next bear market. Defensive strategy is the last thing on most investors’ minds today, which is exactly why it’s such an important topic to meditate on.

Paul’s Comment: When Mr. Davis (a cantankerous, but astute value investor) was making his fortune, it was his buying during pullbacks, recessions and slumps that made the biggest contribution. Today, with stock markets at record highs, there’s not much on the plate for value investors. But just wait—things will turn. And growth investors will find that their sell disciplines are their only true friends when the major indexes are falling.

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 12/9/13—Teenage Investors

Tim Lutts, who runs the show at Cabot Stock of the Month, answers questions from a couple of young investors, including some useful advice on both growth and value investing. ETF discussed: iShares MSCI USA Minimum Volatility Index ETF (USMV).

Cabot Wealth Advisory 12/12/13—How to Right-Size Your Portfolio

Chloe Lutts Jensen, co-editor of Dick Davis Digests, writes about the results of her Investor Survey on how many stocks are in subscribers’ portfolios, and how to get the number right for each person’s investing profile.

Have a great weekend,

Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

P.S. I’m going to be presenting a program on China at the World MoneyShow in Orlando, Florida on January 30, just before dinnertime. The World MoneyShow is a major gathering of investors of every stripe, including gold bugs, day traders, dividend investors, growth investors and vendors of every kind of investment software and service imaginable. The conference kicks off January 29 and ends on January 31. If you need an excuse to go to Orlando to build up your strength to get through February, I’m glad to provide it. I hope to see you there. 

Click here if you’d like more information.

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