It’s late December, and that means a few things are on tap. Wintry weather, for one - we New Englanders had been celebrating global warming the past few weeks, until a fairly bad snowstorm last Thursday (including a horrific drive home; took most people about four to five times their average commute time, no joke) and another this Sunday (making the Pats-Jets game a weather nightmare) got rid of those thoughts in a hurry.
Another thing coming is vacation - most people are running on fumes right now, not only busy at work trying to wrap things up before ’08 arrives, but also busy with holiday shopping and parties. So most are aiming to take a little R&R in the weeks to come. I myself am taking Christmas through New Years off, leaving Tim and Paul to cover for me while I live it up with my future in-laws in Michigan. (Insert condescending “So Long Suckers!” quote here.)
But that vacation will not be all Manhattans and Christmas cookies - I always dedicate a few hours to reviewing my trades for the year, my results, how I handled certain situations, etc. In particular, I want to focus on what I did worst during the year (yes, even people like us who do this full-time still make mind-boggling mistakes every year, so you’re not alone), figuring that if I can come up with some common mistakes and eliminate them, I can really boost my performance.
This year has been a bit different, however, because November and December - usually two of the best three months of the year, and hence, demanding lots of attention - have revealed a downtrending market. (More on my market thoughts at the end of this report.) And that has resulted in lots of studying, but little buying, in recent weeks.
The upshot: I’ve been able to get a head start on my review process, examining stock charts of previous buys and sells, comparing them to market action, and so on. Thus, while I expect to learn much more over vacation, I wanted to use my soapbox this week to share some things I’ve learned about my investing self in 2007 - hopefully my list will open your eyes to some of your own investing strengths and weaknesses (we all have them!) ... and thus help you make more money in 2008.
So here I go:
-- My loss limits are usually too tight, especially early in new market uptrends.
I have always believed that cutting losses short is, by far, the #1 rule when investing in fast-moving growth stocks. So much so that my stops are often less than 10%, even 5%, as I try to buy a leader near a logical support level.
Problem is, as I wait for a stock to enter my so-called buy range, it refuses to pull back and heads higher without me ... especially during the initial “thrust” of a new bull move. The result isn’t all bad (lost opportunity is not lost money, after all), but I have to believe loosening my loss limit in the first two or three weeks following a new buy signal will help me get on board more big winners.
-- My results are better, and my “equity curve” is smoother, when I do some offensive selling.
I always learned that, along with cutting losses short, letting winners run was a mantra worth worshiping. And, for the most part, I still agree with that. However, the fact remains that, even if you’re a great stock picker, maybe 6 or 7 out of ten stock picks are going to be winners. And of those 6 or 7, possibly one is going to be a big winner, doubling in price.
Thus, in my case, it’s helped when I sell pieces of a stock on the way up; instead of waiting for a 15% drop off a stock’s peak to sell, I take some off the table (maybe selling 1/5 or 1/4 of what I own) after a few good up days, especially if I’m up 20% or more on my purchase. I still hold on to most of my shares, of course, so I can benefit if the stock keeps motoring higher. But it helps to know that I’ve booked some profit, and lessened my exposure, in a stock that’s already run meaningfully higher.
-- My success rate rises when I remain patient after a new buy signal, instead of jumping in full-force right away.
When I began looking back at our biggest winners in recent years - First Solar, Crocs, Nasdaq Stock Market, GameStop, Apple, etc. - I was surprised to learn that we bought these stocks about four to eight weeks after a market bottom. And because our market timing buy signals come an average of two to three weeks after a bottom, that meant our biggest winners were not purchased right as our indicators flashed green, but instead, a few weeks later.
What does it mean? Simply that, if you time the market like we do (yes, it can be done), it’s not all about getting back in earlier than the next guy. Many investors rush in, wanting to buy at the bottom, and the result is that they own a bunch of OK stocks - but not the true leaders, which are more easily identified a few weeks later. Thus, while it’s hard to do, I’m going to try to be better at wading (not diving) into the market’s waters after future buy signals.
-- I do better when I say to myself, “It’s hard to make money in the market; I’m just trying to scratch out some profits.”
Staying humble in the face of rising profits, or optimistic in the face of mounting losses, is a difficult task - for me as much as anyone. But I’ve noticed that the investors who always shoot for the moon - when their portfolio is up 10% halfway through the month, they start saying “Now I can really start to earn some profits!,” and that usually comes right near a market top - often have sub-par long-term results. Those who are humble usually have less spectacular peaks and valleys, but make great money over time.
Thus, I’m going to try to remind myself to be patient, to be humble, and to remember that this is a tough business; even the best are incorrect 30% to 50% of the time. Doing so will keep me in the right frame of mind for making sound decisions.
-- I do better when I have a consistent plan heading into earnings season.
In recent years, earnings seasons have been totally insane - many of our stocks will move 10% or more up or down based on their reports. In our Cabot Market Letter, we generally just hold all our shares through the report, and take what comes. (We figure the odds are in our favor, long-term, by owning strong leaders during uptrending markets.) Personally, I tend to lighten up a bit ahead of a stock’s earnings report, especially if I don’t have much of a profit in my position.
My biggest conviction is that, whatever I decide to do, I should do it consistently - if I’m going to sell a piece of XYZ stock ahead of its earnings report, I’m doing the same thing for all my stocks. In other words, having a game plan is key, as earnings seasons are quickly becoming a time where a full years’ profits can be made or lost.
Those are five goals for me next year; I hope to find a few more over vacation next week. I think every investor can benefit from such a post-mortem review, so if you have some down time during the holiday season, go back and look at some of your trades and see if you can find some common themes to improve upon.
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I can’t leave without giving you my latest thoughts on the market. I did think we were going to get some buy signals last week, but the Fed’s smaller-than-hoped-for rate cut, along with continuing horrible news from the financial sector, pushed the market back down toward its November low.
As of now, I’m still favoring the view that the market is re-testing its August low; more stocks are in decent shape now than they were in either August or at the end of November (the recent market low), and the number of stocks hitting new lows is slowly drying up. Toss in the fact that many leaders are still hanging in there - like the solar stocks, which remain amazingly resilient - and you have a recipe for higher prices in 2008.
However, I must say, the longer the market is unable to rally decisively, and the longer the worst sectors (banks, brokerages, homebuilders, lenders, retailers) are unable to get off their duff, the higher the chance that the second half of 2007 is really a big market topping process.
Of course, even if the bear-market scenario plays out, you must remember that the average bear phase lasts three to nine months - not three years, like the once-in-a-lifetime 2000-2003 downturn.
Right now, what you should keep telling yourself is that the market is going to do what it’s going to do. That means the best thing to do is remain patient and to study up - you want to be ready when the bulls re-take control, whether that happens in two weeks or two months. The good part about downturns like the current one is that it allows new leaders to take shape ... stocks that can take flight in the next bull market. Keep your eye on that prize, and you’ll be way ahead of most investors, who are busy worrying about the headlines.
That’s it for now - have a great, great holiday season, get some R&R, and I’ll be back with you next year. Cheers to 2008!
Mike Cintolo
Cabot Wealth Advisory
Editors Note: Mike Cintolo serves as Cabot’s Vice President of Investments, and is co-editor of Cabot Market Letter, the company’s flagship publication since 1970. The Market Letter’s specialty is investing in concept stocks - those companies with revolutionary new products and services (like the iPod was), sometimes inventing whole new industries in the process (like satellite radio). The Letter’s Model Portfolio is managed just like a real account, allowing you to follow along with all the buys and sells. Past winners include XM Satellite Radio, Nasdaq Stock Market , Crocs, Apple, and First Solar, helping produce a year-to-date return of 34% (vs. 3.5% for the S&P 500) and a five-year return of 16.3% per year (vs. 10.5% for the S&P). Give it a try today, and receive a special 2008 Stock of the Year as a free bonus.
