Practicing Patience Pays

Rainy Days

Practice Patience

A Blip on a Dismal Chart

It’s hard to remember now, but there was a time when a rainy day presented an actual challenge to parents. The assumption was that on sunny days, children would be outside, playing in a kind of Norman Rockwell wonderland, no matter what the season.

But when the sun disappeared and the rain fell, kids were cooped up indoors, bored, grouchy and itching to let off steam in the kind of activity that often resulted in raised voices, frayed nerves and broken lamps.

There were even activity books, called “rainy day books” that prudent parents kept in reserve against their hour of need. These books featured lots of quiet activities such as coloring, cutting and pasting and helping King Arfer to find a path through the maze to his king-sized doghouse, all designed to produce quiet concentration.  

For all I know, these books may still be out there, waiting to protect harried mothers from the energy and impatience of their house-bound kids.

But probably not.

Now that kids have phones, tablets, laptops, game consoles, TVs, CDs and DVDs, not to mention an entire armory of foam-tipped projectile launchers, I suspect that the challenge may be to get them out of the house even on sunny days. (I’m speaking, of course, only of the days when they’re not being chauffeured to soccer, hockey, ballet, etc.)

Please note: This isn’t another essay lamenting the loss of simpler childhood pleasures or decrying the potential dangers to kids who are either overscheduled or oversupplied with digital entertainment.

Frankly, I don’t give a rip. I think kids generally get what they need to grow up in the world they will have to live in. I also think that most of the essays that mourn for simpler times are exercises in cheap nostalgia and age-induced youth-bashing … not that there’s anything wrong with either of those activities, either.

But my topic today is aimed at mature adults who actually handle the investment of at least part of their own capital, especially those who buy and sell stocks.

Here’s the question: What does a stock investor do on a rainy day? And by that I mean, what do stock investors do when the market is just too volatile or too negative to allow traders (especially the growth investors for whom I write) to play safely on Wall Street?

The answer isn’t likely to please the Type A investors who feel the need for constant action and the overconfident investors who believe that they can prosper no matter what the broad market is doing.

The answer is “practice patience.”

Patience used to be taught as one of the seven cardinal virtues, and it was a popular name for women in Puritan America (probably wishful thinking, but there it is).  

But the modern attitude toward patience is aptly summarized in one of my favorite cartoons of all time from Gary Larson’s “Far Side.” The picture shows two vultures sitting on a branch. One says to the other, “Patience hell! I’m going to go kill something.”

I know that for some people, trying to be patient is like a teapot over a hot burner trying not to boil. Some people believe very deeply that their lack of patience is a virtue, although I doubt that they seek corroboration of this impression from their friends and co-workers.

These tendencies are deeply rooted in people, and there’s not much use in my advising impatient people to get a grip on themselves.

But I wish I could, at least as far as stock investing is concerned.

One of the biggest lessons of Cabot’s more than 40 years of experience in understanding how to make money in the stock market is that fighting the trend of the market is a great way to lose money. A down market makes weak stocks weaker and shaves the margin of safety in stronger stocks to a perilous thinness.

The trend-following Cabot market timing indicators are a simple way to judge the current trend in the market, and it only makes sense to take their advice. Cabot Market Letter uses three indicators. Cabot China & Emerging Markets Report (which I write) uses just one. But all of them have the same job, which is telling us to lower our exposure to the market when markets are headed down.

The other huge service that the Cabot market-timing indicators provide is that they tell us when markets are back in uptrends, which is our signal to increase buying.

That’s a particularly valuable service when the markets have been either falling or trading in a range for so long that investors are fearful or just plain worn out.

Patience will help you get through a dark spell–whether it’s the short, short days of December or the irritating fluctuations of a cranky market–but when the sun shines again, it’s nice to have objective confirmation from a proven indicator.

I want to say a quick word about stocks that experience big price increases in daily trading. I can usually predict that I’ll get a couple of questions about any emerging markets stock that throws a double-digit percentage rise in a day. That kind of jump is just catnip to investors who are tired of a market grinding downtrend and hunger for some upside.

My example is SinoHub (SIHI), a Chinese supply chain manager and order fulfillment service for cell-phone components that has suffered through a precipitous drop since it came public in August 2009.

The stock hit its all-time high above 5 a couple of months after its IPO. But 2010 and 2011 have not been kind to the stock, pulling it into penny stock territory in August 2011 and sinking even deeper from there.

The stock is thinly traded (average daily trading volume is just 53,000 shares), and its last two quarterly earnings reports have been profoundly disappointing, featuring earnings declines of 75% (Q2) and 62% (Q3).

The wild card here is that SIHI popped up 13% in intraday trading yesterday on the basis of a six-cent advance to 0.50.

To a prudent investor, one who will note that the stock has stuck like glue to its 50-cent price for two months, this isn’t of even passing interest. It’s just a blip on a dismal chart.

A classic Cabot growth stock must meet much more stringent requirements, including a double-digit price, better liquidity (at least 400,000 shares a day) and an uptrend that features both some persistence and rising volume support.

Obviously, SIHI doesn’t qualify on any reasonable basis. Even its one times price-to-earnings ratio is more of a raspberry to the stock than an indication of value.

I wish I had a great prospect for you rather than a great cautionary tale, but I hope the lesson will be of more value ultimately.

If it’s value you’re after, look at Baidu (BIDU), which is now trading below 120. After a calm quarter in which the company’s earnings were up “only” 87%, the stock’s 47 P/E ratio and projected 88% jump in earnings for 2011 look pretty darn good. That said, many former big winners are looking very tired, so we would guess that (again, if you fancy yourself a value player) BIDU will give you an opportunity to buy down toward 100 if the market remains grumpy.

If a 13% boink in SIHI tempts you, a warm bath and a relaxing beverage may be in order.

Sincerely,

Paul Goodwin
Editor of Cabot China & Emerging Markets Report

Editor’s Note: To learn more about high-potential stocks from Brazil, Russia, China and India (the BRIC countries), check out Cabot China & Emerging Markets Report. Hulbert Financial Digest has consistently ranked it as one of the top-performing newsletters for the last several years, quite a feat considering the market’s performance during that time. Click here to learn more today!

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