Stock Market Video Forget Regret
This Week’s Fortune Cookie
In Case You Missed It In this week’s Stock Market Video, I look at the perplexing state of the market, with the major indexes running merrily to new highs, but with many leading growth stocks either stuck in the mud or in declines. There are other technical warning signs to consider as well. But there are opportunities in the sectors that are providing the power behind the market moves, and I take a look at some winners. Click here to watch the video!
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Forget Regret
The stock market is always trying to separate you from your money. Everybody knows that. And today, with the major indexes continuing to climb while many leading growth stocks are stumbling and tumbling, it’s truer than ever. Personally, though, I think the market is equally good at separating you from your sanity.
My favorite crazy-making tactic on the part of individual stocks is an issue that trades sideways for weeks and then breaks out with a 10% gain in one day. Sometimes this is because of a good earnings report or other news and sometimes there’s no obvious reason.
When it happens, I tell myself that I can’t buy it now because it’s too extended. So I figure I’ll buy it when it corrects tomorrow.
Tomorrow comes and the stock continues to soar. Now I really can’t buy it.
And when the stock finally corrects for a day or two, it’s so high above its moving averages that it makes more sense to wait for the averages to catch up.
This isn’t just a random rueful comment. This has actually happened to me more than once.
And it seems to me to be one of a matched set of frustrating regrets that can take the sun right out of the sky for growth investors.
The first regret is: “The stock has gone up, I can’t buy it.” The second regret is: “The stock has gone down, I can’t sell it.”
If you’ve been following the examples and advice that Cabot’s growth analysts provide in these Cabot Wealth Advisories, you know that the first regret isn’t true. There are lots of rules for finding good entry points in stocks.
But the second regret is the really important one. It’s not only not true, it’s actually dangerous to your portfolio.
Psychologically, of course, being unwilling to sell makes a lot of sense. If you own a stock that has gone down in price, it’s hard to just sell it when it triggers your loss limits.
Selling forces you to admit that the stock isn’t working. Booking the loss is a pain in the pocket book and a bitter pill for your ego.
But, as we’ve said here time and time again, if you can’t set and stick to a sell discipline, you might just as well throw your money into the back yard and let the birds make nests out of it. A portfolio without a sell discipline is like a bucket with a hole in it.
The first regret—difficulty buying—is a little less common, but it’s a good one for growth investors to spend some time with. I took a long, long look at Baidu (BIDU) back in June after it made a run from 85 to 104, but didn’t advise subscribers to Cabot China & Emerging Markets Report to buy, even though the stock had made three upward surges along the way. I was worried that I had missed the blastoff in BIDU. Fortunately, the stock pulled back to 90 in late June and early July, forming a classic double bottom. So when the stock regained its momentum and gapped up to 105 on July 16, I was ready for it. I put a buy on the stock and the portfolio bought it at 110, just before it gapped up on an excellent earnings report.
BIDU is now trading just above 160, and has been consolidating at his level since the beginning of October. It’s nice when regret at not buying turns into a good buy.
There are plenty of other regrets, of course. China & Emerging Markets Report’s portfolio was shaken out of Vipshop Holdings (VIPS) last May after the stock spent two months trading sideways at around 30. VIPS ultimately came out of that consolidation in July, and has now run from 30 to 80. But a quick look at the chart will show that this rally has frequently been punctuated by sizable corrections that make it just about impossible to buy back.
But that’s the way the market is. As I said before, regret at not buying is sharp. But the losses that accompany your regret at not selling can be a real body blow for your portfolio.
The cure?
As usual, what the regret-filled investor needs is a dose of tough love. If you can’t sell your stocks when you should, you’re going to have a tough time as a growth investor. If you can’t find buy points for stocks that make sense to you, well, Cabot can help with that. There’s a kind of attitude that is shared by every successful growth investor I know, and it is optimistic, forward-looking and able to shed disappointments like a meter maid sheds abuse.
These are good traits to emulate, and Cabot’s growth letters are written by investors who have them. If that sounds good to you, we’d be glad to give you a hand. In Cabot China & Emerging Markets Report I search for strong emerging markets stocks with good profit potential.
To receive you no risk trial subscription, click here.
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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
“I’d be a bum on the street with a tin cup if markets were always efficient.” Warren Buffett
Tim’s Comment: America’s most respected investor exaggerates, but there’s much truth in his words. It’s only because humans are irrational (and markets thus inefficient) that equity prices fluctuate between undervalued and overvalued. It’s Warren’s ability to recognize value in what other investors are selling that has brought him great success.
Paul’s Comment: If markets were always efficient, equity investing would be about as exciting as watching television with the set unplugged. Not everyone can be as good as Warren Buffett at finding and exploiting the hidden value in companies, but the time and attention you devote to doing your own research can pay off quite handsomely. And the investment advisors who deny that anyone can beat the market on their own should pay more attention to what Warren has accomplished.
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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 11/25/13—Tesla Motors: The Car, The Company and The Stock
Tim Lutts, Cabot Stock of the Month’s head honcho (and owner of a Tesla S), uses this issue to do a comprehensive review of the Tesla story and the fortunes of its stock, including a tentative projection of what the stock will do next. Stock discussed: Tesla (TSLA).
Cabot Wealth Advisory 11/26/13—Google and C.R. Bard: Growth and Value Stocks
In this issue, I round out my survey of ten stocks that have characteristics that make them attractive to both growth and value investors. Rising stock prices have pushed many stocks out of their value range, but there’s still potential there. Stocks discussed: Google (GOOG) and C.R. Bard (BARD).
Cabot Wealth Advisory 11/28/13—Thanksgiving and Investing
In this issue, value chief Roy Ward of Cabot Benjamin Graham Value Investor shares one big reason he’s thankful this year and tells why it’s so important to be prepared for whatever the market throws at you.
Sincerely,
Paul Goodwin
