The Importance of Investing Stars

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The Importance of Investing Stars

This Week’s Fortune Cookie

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It’s hard to imagine a time when the National Football League wasn’t the most important professional sports league in America and the Super Bowl wasn’t the single biggest sports event of the year. But it wasn’t until 1969, when the underdog New York Jets beat the Baltimore Colts in Super Bowl III, that professional football really began to take off.

(Incidentally, although that AFL-NFL Championship Game is called Super Bowl III, the first two AFL-NFL Championships, both victories by the Green Bay Packers, weren’t called Super Bowls at the time. But once the Super Bowl brand stuck, the NFL was quite happy to hang the name on them retroactively.)

Part of the appeal of SBIII was the underdog story, of course, but even more important was the brash “guarantee” of victory by the Jets’ quarterback Joe Namath. The game had its celebrities before Namath, but the closest it had to a really outsized personality among players was probably Paul Hornung of Green Bay. It’s hard to overestimate the importance of Namath to the development of the league’s popularity. His headline-grabbing boast brought people into the game who otherwise wouldn’t have given a rip. Some watched to see the Jets’ loudmouth lose; some hoped to see him win. But others watched just to see what the hoopla was all about.

Other professional sports have had similar experiences, with outsized personalities bringing in throngs of viewers who otherwise wouldn’t take the time to watch. Golf had Arnold Palmer, who was the straw that stirred the drink when the more reserved Jack Nicklaus and Gary Player were every bit as good. Tennis had John McEnroe and Jimmy Connors to provide the sparks as they battled the stolid Bjorg and Lendl. The NBA had Wilt Chamberlain. And golf experienced a huge resurgence in popularity when Tiger Woods began to dominate.

The fact of the matter is that people need heroes (and heroines) to put a face on an activity, and to show that it’s possible to excel.

The modern market does have its stock-investing heroes, but their strategies aren’t very useful for individual investors. Here are three of my candidates.

Warren Buffett is the modern king of the value investors. You know he’s a star, because the Internet is full of offers to let you in on Warren’s secrets or his top stocks or (recently) the big threat to his financial success.

Unfortunately, the way Warren Buffett invests has about as much to do with what most individual investors are doing as a T-Rex resembles a horny toad.

Generally speaking, Warren buys entire companies that he thinks have growth potential that is either hidden or locked up. And he and his team work with the company’s management to find and unlock that value over a period of years. Warren has always said that his favorite holding period was “forever.” And you don’t have that long.

Carl Icahn is one of the rare breed called “activist investors.” Carl buys a substantial chunk of a company (say 5% of its stock float) then tries to get one of his people on the company’s board of directors. Then he will “encourage” the company to make a major move that he thinks will unlock value, like selling off a division. One example was Icahn’s 2006 use of a 3.3% stake in Time Warner to force a $20 billion stock buyback program, put more independent directors on its board and cut $1 billion in costs within a year.

(If this strategy interests you, you might enjoy looking at Bill Ackman and his crusade to bring down Herbalife (HLF), a company he accuses of being a scam.)

Not to belabor the obvious, but there aren’t many investors (certainly not me) who can swing a large enough purchase of a major company to force changes.

Jim Cramer is more of an entertainer than an investor, but he’s certainly widely known. His Mad Money show on CNBC is an impressive performance, highlighting an apparently encyclopedic knowledge of stocks. And that’s saying nothing about his sleeves-rolled, foaming-at-the-mouth review of stocks, complete with sound effects. Cramer used to manage a hedge fund, and he really knows his stuff. But what makes him a star is his outsized personality and the sheer fun of watching him.

Again, you’re not likely to follow in Cramer’s footsteps. Neither am I; my brain doesn’t work that fast.

So, given that stars help us to imagine ourselves getting competent in a given field, who would I identify as a good role model for you in your stock-investing career?

Even though you can’t match the three giants above in terms of financial clout (or skill as a performer), you can certainly follow their principles. If the Warren Buffett value approach appeals to you, Cabot’s own value star, Roy Ward, follows the same exact principles in his Cabot Benjamin Graham Value Investor. (Warren learned his craft from Graham, and Roy did too.) You can find out more here. 

If you admire the approach of the more aggressive Icahn, the best recommendation I can give you is to follow the growth-investing road. Growth investing uses momentum, market timing, fundamentals and strategic analysis to find winners. And Cabot’s Mike Cintolo is the best I know at that craft. Mike’s Cabot Market Letter (soon to be renamed Cabot Growth Investor) will guide you to growth expertise and supply you with winning stocks and strategies. 

If Cramer appeals to you, I don’t know what to tell you. Cabot’s investing advisories don’t come with sound effects. If you want them, feel free to make your own.

In this week’s Stock Market Video, I look at the neither-here-nor-there state of the U.S. stock market. Although the long-term trend of the market is still up, there’s not much short-term momentum, either up or down, to work with. It’s a good time to tighten up your portfolio a bit, purging losers and buying only when stories and setups are good. Keeping some cash around is also a good idea. I discuss some Chinese stocks, which have been very strong over the past month, as well as some setups among U.S. growth leaders. Click below to watch the video.


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

Tim’s comment: It’s difficult to comment on this without elaborating on how much more difficult the income tax has become in the 71 years since Einstein made his comment, but I’ll try. First, the original quote, spoken after Einstein ceded the job of preparing his taxes to his accountant, was more like, “This is too difficult for a mathematician. It takes a philosopher.”

And second, it’s comforting to know that Albert Einstein and I (and probably you) all share the same sentiment.

Paul’s comment: The tax code, all 74,000 pages of it, is a depressing record of the success of lobbyists at nibbling off a little piece of tax advantage for their clients. The tax code more than doubled in size between 1984 and 2004 (from 26k pages to 60k pages). And if Einstein, who was probably referring to the 1954, 14,000-page version, saw it now, he’d probably just walk away in disgust. And if the people who write the code, our U.S. Representatives, were completely frank, they’re probably delighted that nobody understands the monstrosity they have produced.


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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 3/30/15 – Spotting Big Profits by Following the Insiders

Options expert Jacob Mintz, Chief Analyst of Cabot Options Trader, describes his proprietary method of detecting unusual options trades and following the insiders who make them into profitable options positions. He also details some big wins and a few missed chances.

Cabot Wealth Advisory 4/2/15 – A Stock That’s Benefiting from Low Gas Prices 

Chloe Lutts Jensen, Chief Analyst of Cabot Dividend Investor, examines the idea of taking six months off from the market. She prefers the lower-risk strategy of buying dividend-paying stocks. Stock discussed: Costco (COST).

Cabot Wealth Advisory 3/31/15 – Most Recent Notable Mergers 

Nancy Zambell, editor of Investment Digest and Dividend Digest, writes about this year’s surge in mergers and acquisitions and gives some notable examples. She also gives tips on how to screen for stocks that may be good takeover candidates.

Have a great holiday weekend,

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

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