Conservative vs. Aggressive
When I was in graduate school, the school of psychology known as Behaviorism was near its peak of influence and acceptance. Behaviorism is the idea that a person’s actions can be reduced to mere behavioral patterns, and that hypothetical constructs such as mind, thinking and feeling have no real meaning.
Radical Behaviorists, epitomized by B.F. Skinner, concentrated on the importance of conditioning in either reinforcing or extinguishing behavioral patterns. Maybe you remember the white rat in the box pushing down the lever to get the pellet of food?
Skinner and Behaviorism have mostly faded from the scene, but the man’s big finding–that you could get the rat to push the little lever hundreds or thousands of times even if you only gave the reinforcement (the food) intermittently–has retained lasting relevance.
(If you don’t believe me, just walk through any casino floor, where glassy-eyed gamblers are repeatedly pumping their savings into slot machines. You can almost hear Skinner, in his white lab coat and holding a clipboard, chuckling softly to himself.)
Skinner’s concept of intermittent behavioral reinforcement relates to investing in the stock market because it rewards those who are willing to take on heightened risk to achieve larger returns.
As the editor of the Cabot China & Emerging Markets Report, I’m an enthusiastic advocate of growth investing. For me, there are few experiences more thrilling than watching a stock that I have recommended shooting higher in daily jumps.
Likewise, happiness is a stock that goes up when the rest of the market is going down. As far as I’m concerned, nothing makes you feel smarter or more self-satisfied.
Sometimes I ask myself, why doesn’t everyone do it? But if I’m completely honest with myself, I already know the answer. It has to do with a concept that Skinner rejected, which is personality.
At Cabot, we think people have investing personalities.
This isn’t an abstract concept. It’s as concrete as your driving style, your eating habits or your taste in music. And it profoundly determines how you manage your investments.
There is a spectrum of investing behaviors, with infinite variations, the ends of which are populated by investors in these two camps.
The Conservative Investor
You’re a conservative investor if you’re interested primarily in conservation of capital. Avoiding losses is your highest priority, so if you’re a C.I., you tend to head for bonds (especially Treasurys). If you’re invested in mutual funds, they’ll probably be bond funds, balanced funds (a variable mix of bonds and equities) or index funds. If you’re a C.I. who owns individual stocks (which is unlikely), they’ll be blue-chips or stocks that pay dividends and are held for income. C.I.s as a group see the possibility of experiencing a decline from personal investment decisions as outweighing the satisfaction of owning a big winner.
The Aggressive Investor
On the other end of the scale, if you’re an aggressive investor, you’re interested in capital appreciation. Any bonds you own (which is unlikely) will be high yield corporates or municipals, instruments with higher risk, but higher yield. If you have mutual funds, you’ll have them allocated to growth funds, sector funds (like technology, small cap growth or emerging markets) or other specific areas that you think will outperform the market. As an A.I., it’s likely that you own individual stocks, and you tend to be an active trader with an average holding time of less than a year. Successful A.I.s understand that occasional meltdowns are par for the course when you aim for higher returns.
Financial advisors generally tell clients that they should be diversified across asset classes, that they should invest regularly, and that they shouldn’t sweat the ups and downs of Fed policy, GDP growth rates, quarterly earnings season, bailouts, tech trends and the rest of the deluge of economic and market information that rains down steadily day after day.
For those people who are confused about how markets work, apprehensive about taking charge of their own investing decisions or just not interested in learning about how markets work and how to find profitable investment avenues, this strategy is the line of least resistance. If you’re not interested, you won’t put in the work it takes to be a success as an individual investor.
But if you have at least a portion of your investment personality that’s interested in the Aggressive end of the investment spectrum, Cabot has decades of experience with helping people take charge of their own investment programs.
We don’t give specific advice about how you should allocate the funds in your portfolio. But we offer newsletters that give very specific advice about value stocks, growth stocks, high-potential tech stocks, market leaders, emerging market stocks, options and dividend stocks.
Feeling a little aggressive? Even the slightest urge to get your hands on the reins?
There’s a Cabot newsletter that can put years of experience in your corner.
Click here for details about our newsletters and to discover which one is right for you.
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My stock recommendation today is a Chinese company that presents an interesting mix of attractive qualities. It’s China Unicom (CHU), a Hong Kong-based Chinese telecom company that has a total of 323 million subscribers, including 146 million wireline accounts and 177 million mobile subscribers, of which a little over 20 million are 3G accounts.
With sales of over $27 billion a year, China Unicom is a sizable business.
But the big opportunity here is reflected in the company’s revenue structure, which was skewed 54% to fixed-line services in 2009, and 46% to mobile.
China Unicom’s business mix is a result of a reshuffling of wireline and mobile responsibilities in 2008. China Unicom, which had been primarily a fixed-line service provider, was delegated a significant chunk of wireless business. Efforts to build out wireless infrastructure (cell towers, submarine cables, etc.) have kept a lid on earnings, with five declines in the last six quarters.
But as these infrastructure outlays slow and higher-margin 3G service becomes a larger part of the mix, investors are anticipating a sizable improvement in earnings growth.
Since the beginning of December 2010, CHU has soared from 12 to 20, with a nice intermediate base centering on 17 in February and March. The stock broke out to new multi-year highs in April and looks to be putting in a new base around 20. CHU isn’t cheap, but it pays a small dividend and is the best available way to play the mobile revolution in China. It looks buyable on any dip below its 25-day moving average.
Editor of Cabot China & Emerging Markets Report
Editor’s Note: Paul Goodwin is the editor of Cabot China & Emerging Markets Report, which was the #1 rated newsletter for five-year performance in 2009 and 2010, according to Hulbert Financial Digest. During that time, Paul nabbed his subscribers a 174% total return, while the Wilshire 5000 gained only 15.4%. And there’s more to come. Click here to discover why Paul thinks this is THE year for his favorite Chinese stocks.