Your Investment Personality
The Fate of the Family Farm
Feeding the Piggies
Every once in a while, we’ll get a message from a potential subscriber asking how it is that we can have different newsletters that use different investing styles. When we’re trying to explain, we have a maxim that we sometimes cite. The maxim is, “You can make money in any proven investment system if you follow the rules.”
This isn’t an easy idea to explain, but I’ll take a run at it.
And if you’re a new, or even just a potential individual stock investor, this topic should be of interest to you. The big divide in buying individual stocks is between the growth investing style and value investing style.
Both growth and value investors are looking to buy stocks and then sell them for more than they paid. But they go about it in different ways.
In general, growth investors buy stocks of companies that are expected to achieve higher earnings in the future. They often buy stocks whose prices are already rising. They aim to ride the rising stock price until it tops out and then sell it. Growth investors typically own a stock for less than a year, although there are exceptions.
Value investors use a strategy that involves less risk than growth investing, but more time. The value style involves calculating a company’s intrinsic worth, then buying the stock at as big a discount to that worth as possible. Value investors buy undervalued stocks and then sell them when they appreciate to the point that they’re fairly valued. They expect this process to take a long time, as much as three to five years.
As a rule, growth investors tend to be willing to accept more risk than value investors. Growth stocks exhibit higher volatility (price swings) than value stocks, and a piece of bad news (a disappointing earnings report, for instance) can take a growth stock off at the knees, sometimes even at the hips. As in a poker game, growth investors have to be prepared to take a big beat every so often.
A value investor hopes to avoid big beats, often by buying stocks that are already beaten down. Value investors get interested when companies with sound business models and good revenue and earnings prospects fall out of favor for some temporary reason.
Both growth and value investors can be mild or extreme in their style. The most aggressive growth investors are day traders and swing traders who try to ride the daily fluctuations of stock prices. On the milder end, there are growth investors who share value investors’ enthusiasm for forecasting future earnings.
The most extreme value investors look for “fallen angels,” once-loved companies that have fallen on hard times and are facing a long, hard slog before they get back on their feet.
The growth/value dichotomy leaves out strategies like income investing, in which investors buy dividend-paying stocks and look to hold them indefinitely for the cash flow they produce.
And options … well options add a whole new dimension to the game that can’t really be explained in a few sentences.
But the big growth/value distinction is important for new investors because an investing style really has to be in sync with your investing personality if it’s going to work in the long run.
If you’re going to be a good growth investor, you’re going to need discipline, because knowing how to sell quickly and avoid big losses is a prime attribute for great growth investing. And you’ll need a relatively strong stomach and self-confidence to keep you on track when the inevitable bad stock hits.
If you’re going to be a good value investor, you will need patience, because once you’ve done the research, you can’t jump out of a stock just because it’s not moving up.
For new and prospective investors, a little time spent figuring out which style fits your temperament can make a huge contribution to your satisfaction with the outcome.
Cabot has newsletters that appeal to just about any investing personality, and we have a quiz on the front page of our website to help you get the right one for you.
Personally, I like a little more action, so the aggressive growth stance of the Cabot China & Emerging Markets Report (which I write) fits me to a T. Good thing, too, because if I had to do the labor-intensive calculating and projecting that makes for a good value investor, I’d be up a stump.
If you like your stock market action with a little more hot sauce in it, you should check out the Cabot China & Emerging Markets Report. After a long time in the doldrums, things are just starting to heat up in the fast-growing developing markets around the world. Give it a try … but only if it fits your investing personality.
I have a quick Tale of Two Businesses to tell about a couple of New England companies. One of them is Tuttle’s Red Barn, an upscale farmstand, greenhouse and gourmet food shop just south of Dover, New Hampshire, which is also where I’ve lived for more than 30 years.
Tuttle’s has been there for a heck of a lot longer than that. The original Tuttle arrived from England with his land grant from King Charles II some time in the 1630s. The family acquired more land over the years and started selling produce wholesale in the early 1900s. Retail operations (seasonal only) started in the 1950s in a red barn on the property and led eventually to year-round operations, a broader product offering and a new building.
But what has stayed consistent is that when my wife and I drove down Dover Point Road during the growing season, we could follow the progress of the strawberries, corn, tomatoes and other rotating crops in the Tuttle fields. And we would also see local teenagers on their hands and knees weeding and cultivating, a summer rite of passage for generations of young farm hands.
Unfortunately, there’s no such thing as forever in a family business, and Tuttle’s recently announced that it would be selling out and leaving the farm work to others.
The culprit? After 11 generations, the latest crop of Tuttles didn’t include a single one who wanted to assume the tractor seat of power and with it the long hours, grueling work and constant tension that marks the life of a farmer with retail responsibilities. The economic slowdown that dampened enthusiasm for gourmet goods didn’t help, either.
I’ve known the current Tuttle-in-charge for years, and I will miss her and the entire enterprise. It will seem odd not to read the sign on the Point Road that says: “The Oldest Continuously Owned and Operated Family Farm in America.” The Tuttles put the lovely land that they’ve nurtured for so many years into a conservation trust, so there’s no danger of a group of ugly condos turning up there like so many mushrooms. But it will leave a hole.
The second business, and one I’ve run across just recently, is Sheldon Slate Products in Monson, Maine. Monson slate was first mined in the 1870s, and has a reputation as some of the finest black slate in the world. It was so fine that it was used to form the grave marker for John F. Kennedy.
Sheldon Slate is owned by the Tatko family now, and my wife and I recently made the long, sometimes torturous trek to Monson—heavy frost and extreme cold produce a distinctive corduroy surface on much of Maine Highway 15—to look at slate for our new kitchen countertops.
We found the slate we were looking for (plum slate with green streaks), but we also got to meet John Tatko and his son Steve, the fourth and fifth generation of owners of Sheldon Slate. Steve, the son, has already taken his degree in history and has a position on the Natural Resource Council of Maine. But from watching his enthusiasm for the slabs of stone stacked in the company’s huge yard, I think the succession of Tatko ownership is safe, at least for the time being.
There’s no real investment moral to this story. I might point out that Tim Lutts, the current Big Cheese at Cabot Heritage, is the second generation of Luttses to be in charge. And I could remark that a small family business can be run with a degree of regard for the satisfaction and success of both customers and employees that would be completely foreign to a big corporation.
But I’ll just say “good luck” to all the family businesses out there. I hope the years treat you well and that each generation will be eager to take up the reins.
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My investment idea today is a low-priced stock of a Chinese company whose presentation I attended at the 2010 China Conference put on by Global Hunter Securities earlier this month. As with many of the presentations at the conference, the strength of the story isn’t matched by the performance of the stock (nor, frankly, by the earnings numbers), but a good story is enough to put a stock on your Watch List, and that’s what I’m recommending.
The company is AgFeed Industries (FEED), a Chinese pork-producing company that’s bringing advanced Western hog-raising techniques to China.
The background of the story is that 63% of the meat consumed in China is pork, amounting to about 63 pounds per person per year. China harvested 625 million head of hogs last year. (The U.S., despite my constant hunger for more bacon, consumed just 100 million head.)
AgFeed raises its pigs on two breeder farms, and has 31 producing farms. Taken together, the hog producing side yielded 37% of last year’s revenues.
The other 63% of revenue came from the sale of the company’s premix, concentrate and complete hog feeds, which AgFeed markets through 1,400 retail stores to backyard farms, and 780 contracts with large commercial hog farms.
The quality of food is very important to Chinese consumers, and AgFeed considers its business plan to be a food safety story. While efficiency increases are important—the company was founded by animal nutrition experts—it’s the production of high-quality, disease-free pork that can command a premium price that will make the difference in the company’s results in the long run. And management knows it.
FEED had a great four-month run in 2009 that rocketed the stock from penny status to within a few cents of 8. But since that run, the stock has meandered its way down to below 3. It’s not really an unappreciated stock (its P/E is still 15), but it needs to deliver better earnings than the 76% dip it reported in Q1.
The next quarterly report is scheduled for August 9, and a good report could provide the fuel for another blastoff.
And if the stock catches fire and begins to stage a strong rally, you might just read about it in Cabot China & Emerging Markets Report.
For Cabot Wealth Advisory