Buying the Haystack
A Great Stock … for Your Watch List
Infrequently Asked Questions (IAQs).
Virtually anyone can put together a list of Frequently Asked Questions (FAQs), and such lists are often useful for visitors to websites. After all, if a lot of people are asking something, you may be, too.
But my interests always run to the exotic and the unexpected, so I try to shun the usual and the expected.
Accordingly, here are the answers to a few questions that I have not been asked very often. In fact, I’d be astonished if these questions had popped up even once in my experience.
Question: Since markets are volatile and stocks can move quickly, how do growth investors ever go on vacation?
Answer: This is a lot easier than it used to be. Writers used to love to tell stories about the days before the Internet and smart phones made life easier for investors trapped at the summering spots of Maine, Vermont and even Europe. Their novels often featured an investment addict who was searching frantically for news from the markets.
For these harried men in their linen suits and straw boaters–their wives insisting that they “just relax,” and leave the markets behind–nothing was more important than sneaking away to town to call their broker or bribing a servant to courier a recent copy of the New York Times or the Wall Street Journal. (Younger readers will probably have to be reminded that these publications used to print price quotes for every stock on the New York Stock Exchange on a daily basis.)
Nowadays, when you can watch cable TV shows on your bathroom mirror and your mobile phone offers videos and direct data feeds from the entire universe, staying in touch isn’t a problem.
However, if you intend to bob around the world in a rowboat or spend time in a cavern or climb a mountain, consider setting some stops under your holdings. You can probably do that on your phone, if not your watch.
Question: Identify for me the kind of investing that I should pursue if I can’t stand the thought of ever losing money … ever.
Answer: The safest investment in the world is U.S. Treasury bonds, bills and notes. But right now the yield on these instruments is so low that you will lose money to inflation just about every year. So, basically, you’re in a pickle.
Gold has many followers, and they’re understandably thrilled right now. But if you look at a historical chart for the price of gold, you’ll see a spike over $600 an ounce in 1980 (from $306 in 1979), then a drift back down to $317 in 1985. The price in 2001 was $271 an ounce, and the current rally really didn’t get started until 2003, and didn’t surpass that 1980 spike until 2007.
This historical volatility doesn’t bother the happy gold bugs, who are enjoying a price that’s now north of $1,500 an ounce.
If you’re loss-averse and looking longingly at gold, spend some time analyzing its historical price patterns. As soon as the global economic congestion eases a bit and growth reasserts itself, those who bought at $1,500+ may not be so cheerful.
As for index investors, buy-and-hold diversifiers and other fans of lower-risk stock investment styles, the picture is also grim. With the Tech Bubble and the Housing Bubble both taking huge tolls on investment portfolios, the decade from 2000 to 2010 just wasn’t a reassuring time for “set it and forget it” strategies.
And at this point, the interest rate that banks are paying on savings accounts is an insult to the idea of capital preservation.
So, when you get right down to it, in investing, the only good defense is a good offense.
You protect money the same way you make money, by investing your time, energy and intelligence in the job. There’s nothing passive about managing your money. Either you put in the time yourself, or you pay someone else to.
This is frustrating to lots of people. It seems that there ought to be a simple way to protect your capital from both the volatility of the markets and the erosive effects of inflation.
If you find one, be sure to let me know.
(Note: I’m leaving out the obvious step of “hiring” Cabot to help you manage your assets. That would be too blatantly commercial, and I try to avoid the appearance of being an arm of the marketing department. But I have to admit that Cabot’s newsletters can put decades of stock investing advice on your side. So if you’re interested, you can check them out here.)
John Bogle is a legend in the investing business, although many people consider him a pain in the industry’s well-padded rear end. His criticisms of the industry that nourished him can cut pretty deep, and he’s not one to pull his punches.
Bogle is most loudly critical of the high fees charged by companies that manage other people’s money. His major prescription for fixing the problem is the use of index funds that charge low fees. Needless to say, his efforts to keep management fees low are not hugely popular with many of the managers who benefit from them.
He’s just as critical of individual investors who try to beat the indexes, saying that he doubts that anyone can do that on a consistent basis.
One of Bogle’s famous quotes is, “Don’t look for the needle. Buy the haystack.” He means that instead of looking for the top-performing stock (the needle), you should buy the entire industry, index or asset class (the haystack).
I’m a huge admirer of John Bogle, and I consider him a rock of integrity and an effective gadfly for the complacent and comfortable (and greedy) in the mutual fund industry.
But the idea of buying a haystack instead of figuring out how to find a needle doesn’t make a lot of sense to me.
Admittedly that may be partly because finding needles in haystacks is what I do for a living. But not completely.
I think the generalization that you can’t beat the market and that you shouldn’t even try is just that, a generalization. And while it may hold true for a majority of people who either don’t know how or aren’t willing to do the work, it’s certainly not true for everyone.
Buying the haystack also isn’t much fun.
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I’ve developed my own method for growth stock investing, which I’ve dubbed the SNaC system. It requires a stock’s Story (business proposition, potential consumers, barriers to entry, etc.) to be accompanied by strong Numbers (revenue and earnings growth, high profit margins, etc.) and a supportive Chart (price appreciation, rising volume support, etc.).
And today I want to discuss LDK Solar (LDK) in that context. There’s no denying that the story on LDK Solar is strong. Solar power is clean, renewable and can be used almost everywhere. As the price of oil continues to rise, the cost difference between a kilowatt generated by a barrel of oil and one generated by a solar array continues to diminish.
The numbers are also good, with $2.5 billion in sales in the trailing 12 months and 129% growth in sales in 2010 and 202% growth in Q4 2010. Seventy-five percent of sales come from outside China, including a very important 21% in Europe, where generous subsidies in Germany, Italy and Spain boosted installations until the Eurozone economy started coughing.
LDK is a low-cost producer, with polysilicon production costs down in recent years from $58 per kilogram to around $40 per kilogram, with a target of $30 to $35 by the end of 2011. LDK is also the world’s largest wafer producer, with more than 3 gigawatts of manufacturing capacity and a target of 3.6 GW by the end of the year.
The problem for LDK begins when you look at the chart. The stock hit a double top at 15 in November 2010 and February 2011 and corrected to 10 in March. After a little rally, the stock really hit the skids in May, dropping from 12 to as low as 6 on rising volume. Bargain hunters moved in at that point, but right now the stock is stuck at 7.
Is LDK a bargain? Sure, from a valuation standpoint. Its forward P/E ratio is just 3, and it’s reasonable to assume that the global economic recovery will eventually turn the logic of the company’s value proposition into a rally in its stock price.
Still, I’m skeptical. A stock’s chart is a summary of everything that all investors know and believe about the stock’s value. But the stock is actually worth exactly what people are willing to pay for it. And until the chart shows that investors are actively bidding the price up, a movement we call momentum, the stock is just another undervalued speculation.
The bottom line is that LDK Solar is a perfect stock for your watch list. I liked it enough to have it in the portfolio of the Cabot China & Emerging Markets Report from January through March. And I expect to like it even more when its chart improves again.
Editor of Cabot China & Emerging Markets Report
P.S. Click here to learn more about LDK Solar and other top stocks recommended by Cabot China & Emerging Markets Report, which was the #1 ranked newsletter for five-year performance in 2009 and 2010 with a total return of 174%. Don’t miss another five years of monster growth! Get started today.