A Simple Stock Market Rule– Market Down, Invest Less: Market Up, Invest More

What Would You Test?

A Simple Stock Market Rule

A Refreshing Beer Stock

When I was teaching, I had a favorite question I liked to ask my students: “If you could only test one thing about a candidate for an executive position, what would you test?” The question is really about evidence; of all the things you can test about a person, which testable quality is the single best predictor of success as a business executive.

The most common answer was intelligence, of course. It’s almost comforting to think that smart people are also competent, good decision makers, good planners and good handlers of people. But it’s just not true. (It’s not that smart people are, as a group, any worse at those things than their dumber peers, but intelligence doesn’t correlate well with success.)

The answer to the question was that if you could only measure one thing, you should test the candidate’s vocabulary. The point I was trying to make by asking it was that the analysis of experimental results is a tricky business.

In this case, it wasn’t the size of the person’s vocabulary that made them a good executive, it was the amount of reading that they had to do to get the vocabulary. Reading enriches your vocabulary, but it also exposes you to ideas and puts you in touch with lots of different ways of looking at the world. In a few cases, it might even teach you a little about business.

Investors are actually looking for a comparably simple indicator, one rule that they can look at that will tell them some Great Truth about the market. In fact, everyone is looking for simple rules. As evidence, consider this exchange between the leathery cowboy named Curly and the wimpy city boy named Mitch from the movie City Slickers:

Curly: Do you know what the secret of life is?

Mitch: No. What?

Curly: This. (holds up one finger)

Mitch: Your finger?

Curly: One thing. Just one thing. You stick to that and the rest don’t mean s–t.

That’s great. But what’s the one thing?

Curly: That’s what you’ve gotta figure out.  

If you’re looking for a simple stock market rule that will genuinely help you to make money in the market as a growth investor (or avoid losing money, which is the same thing), I have it for you.

And here it is: When the market is going down, get out; when the market is going up, get back in!

Being in sync with the market will be the greatest aid to making money you’ve ever had. Investing when markets are in a confirmed downtrend increases the odds that your stock will fail. Not all stocks fail in down markets, of course, but trying to stay heavily invested in a falling market is like trying to row a boat upstream against the current. You can do it, but it only takes one mistake and you find yourself rapidly heading back the way you came.

How do you tell if the market is in a real uptrend? That’s simple, too. You just go to your favorite charting facility, select a broad market index (S&P 500 Index, Nasdaq Composite or the Dow Jones Industrial Average, for instance), tell the chart program to display the 25-day and 50-day simple moving averages, then look to see whether the index is above those moving averages or below them.

If the index is on top of its moving averages, it’s a good bet that the market is healthy, and you can increase your buying. If the index is below both moving averages, chances are that markets are in a downtrend.

There are lots of other little rules about how you tell when markets change direction (especially for identifying new uptrends), but you don’t really have to worry about that.

If you need a quick mnemonic to write on a sticky note, use MDIL:MUIM. That stands for Market Down, Invest Less: Market Up, Invest More.

If you’re looking for the “one thing” that Curly was talking about in City Slickers, you’re on your own. But if you seek a simple stock market rule that will get you in step with the market, you now have it.

I usually confine myself to stocks that get a majority of their revenue from China and the other emerging markets, but I’m going to stick very close to home today and recommend Boston Beer Company (SAM), a company that began the revival of the Boston brewing tradition in 1984. With Samuel Adams Boston Ale and Sam Summer leading the pack, the company’s product lineup includes Twisted Tea, hard cider and a raft of flavored, seasonal and occasional beers.

Boston Beer has a solid revenue picture, with double-digit revenue growth in six of the last seven years and earnings that are projected to increase from $3.72 per share in 2011 to $4.18 in 2012. A Q1 earnings report featured a 100% jump in earnings. Distribution is wide and growing with exports heading to Canada, Europe, the Caribbean, the Pacific Rim and Mexico.

SAM is a thinly traded issue (just five million shares in the float and an average trading volume of just 115,000 shares a day), but it has a technical setup that looks quite positive to me. SAM touched 115 briefly at the end of 2011, and has traded sideways ever since. Except for one dip to 94, the stock has traded mostly in a range between 98 and 108 for the last five months. And the last two weeks have seen a significant tightening into a range between 104 and 107. That’s a pattern that frequently presages a move of some consequence.

After a long pause in its long-term rally, Boston Beer looks like it should have good support once it breaks out of this holding pattern. Look to get in on a rally above 110.


Paul Goodwin
Editor of Cabot China & Emerging Markets Report

Editor’s Note: Wouldn’t you have loved to invest in Britain during the Industrial Revolution or the United States right after World War II? Well emerging markets today are like those two periods of yesteryear–the next great profit opportunity set to make investors millions.

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