Fore!!
Focus on the Process, Not Just the Result
The Latin American eBay
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My wife and I are amateur golfers; her parents have been playing for decades, and we both started getting into it a couple of years ago … until a bun showed up in the oven! That, of course, put the plans on hold, but with the baby now a few months old, we’re looking forward to some R&R on the golf course this summer, as a babysitter entertains the little one. Hopefully we’ll be able to get out every other week to play nine or 18.
To prepare for the coming days of wearisome hooks and maddening slices (why do I want to play this game again?), I’ve taken advantage of some good weather to head over to the local driving range a few times. I’m actually relatively decent with my irons (at least up to my 5 iron), so my main focus has been on straightening out my drives.
Anyway, at the driving range this past weekend, I got out there, lined up my first shot and focused on the basics—head still, twist the hips, swing through the ball, etc., etc. Well, I did all that and, wouldn’t you know it, I hit that ball straight as an arrow, about 230 yards (good for me), no hook or slice to speak of. I was feeling good!
As I said, I’m a beginner, so after that first good drive to start the afternoon, the next two or three were, as we say in the investment world, “not ideal”—one went very long and very far to the right, the next one was similar, and the third one (naturally) hooked to the left and didn’t go all that far.
After three bad ones in a row, I stepped back and thought about what went wrong. I was lining up a little incorrectly, leading to a bit of an inside-out swing. And sometimes I have a tendency to not twist my hips enough on the backswing, which leads to my hips being out in front of my arms, so to speak. There were a couple of other small things, too—nothing revolutionary, just standard problems for a beginner.
So I got back on the mat and took a couple of practice swings while correcting the prior errors. Then I placed the ball down, took a swing, and … hit it dead straight, but only about 50 yards in the air before it skidded along the course for a bit.
Now, two years ago, I would have moaned about the result—the goal, after all, isn’t to hit a 100-yard drive, half of which comes on a roll! However, that particular swing felt good; my head came up just a bit, so I ended up topping the ball by a fraction of an inch. But the mechanics were solid, and the ball went straight. No inside-out motion on the swing and my hips twisted as they should. I tried again, not changing a thing, and sure enough, I launched a great drive with the very next ball.
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Am I writing all of this because I’m starting a new Cabot Golf Advisory? No chance! But I think the golf story can help relay the importance of focusing on the process, not necessarily the result. On the drive that went only 50 yards in the air, the result wasn’t good, but the process was solid—not perfect, but solid. And repeating it led to some good drives the rest of the day.
It’s the same in the stock market—on any one trade (or, really, on any few trades), the investment gods can frown on you. You might buy a good technical set-up in a stock with good liquidity, a great story, great fundamentals and a top-rated group … and yet the stock thumbs its nose at you and sinks like a stone because of a random downgrade, negative rumor or poor market action.
However, just because the trade went awry doesn’t mean you were “wrong.” You followed a proven system and process that if you do it consistently, you will come out on top—as opposed to being happy when random luck goes your way.
How do you do this? For starters, when conducting some post-analysis of your trades of the prior month or quarter, put all your trades into one of four categories:
1. Good Process, Good Result: This is obviously what we’re shooting for—following the system, and being rewarded for it by making money.
2. Good Process, Bad Result: Similar to the above example, you followed the rules but the market just wasn’t in a giving mood.
3. Bad Process, Good Result: You were lucky—you bought extended, or didn’t cut your loss short, but the stock went higher anyway.
4. Bad Process, Bad Result: The source of most of our losses … we make mistakes and the market punishes them.
All you really need to categorize your trades is to jot down some very brief notes (explaining your reasoning) when you buy or sell a stock. The goal is to get as many trades into categories 1 and 2 and to have as few as possible in 3 and 4. That’s right—even if you lose money in a month, if you found that all (or nearly all) your trades were 1s and 2s, you should throw yourself a bone; take the spouse out to a nice steakhouse or line up a round of golf at that fancy, expensive course you rarely visit.
Similar to a correct golf swing, the more you focus on the process or system, the better your results. I can promise you that.
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On to the current market, it remains a choppy environment. After a four-week pullback from mid-February to mid-March (bottoming as fears of Japan’s nuclear troubles reached a fever pitch), the market spiked back toward its bull market highs (and some smaller-cap indexes actually ripped to new peaks). Many leaders took flight. It looked like the bull run was ready to resume.
But the action of the past week has thrown some cold water on that idea; many indexes are back to, or slightly below, their key 50-day moving averages, and more than a few leaders have given up a good chunk of their gains. Plus, seeing as how the market had “only” a four-week correction after a six-month advance, there weren’t a plethora of long, sound launching pads among stocks, as we saw last September.
Where is the market heading? Honestly, I’m not sure … and I don’t have to be. While many investors crave certainty, the fact is, at times like now, it’s best to play things halfway. I wouldn’t be aggressively invested at this point, because the market has stalled out for the better part of two months, and many leading stocks look a bit tired after huge runs since last fall.
That said, I also think this two-month pause is just that—a pause within an ongoing, longer-term bull move. I haven’t seen any real signs that a damaging bear phase is on the horizon. Because of that, I wouldn’t be overly defensive.
Bottom line—I’m optimistic longer-term, but a bit cautious shorter-term. That means holding some cash and cutting back on most new buying, but also holding resilient stocks and doing some selective new buying when opportunities arise. In other words, these are the times when solid stock picking (and chart reading) can shine, as the throw-a-dart-and-make-money environment has passed.
On that note, one name I’m watching closely is MercadoLibre (MELI), also known as the Latin American eBay. (In fact, eBay still owns a chunk of the firm.) The business is very similar to eBay, with online marketplaces in a dozen countries, as well as its own payment system that is growing rapidly. And of course, it also has some advertising revenue, helping to monetize its 32 million unique visitors per month.
The stock actually hasn’t been a leader for a while, peaking back in late-September around 77, and then consolidating until mid-March (when the stock was 64). Part of that was due to decelerating growth—earnings, which had been advancing at triple-digit rates, grew “only” 38% in the fourth quarter.
However, estimates call for 25% growth this year and 32% in 2012, and both of those figures are likely conservative. Impressively, the stock has been shot out of a cannon during the past few weeks—lifting to 87 on good volume, and has refused to give up any ground during the market’s dip of the past week.
My only rubs with buying MELI here are, first, it’s a relatively thinly traded (and historically, a very jumpy) stock. Plus, earnings are likely out the first or second week of May, which is always a risk. And, of course, the market itself, while not in terrible shape, is basically on the fence here.
Even so, the story and price action of MELI is enough for me to put it on my watch list. If you’re aggressive, you might try to buy a little on weakness (maybe in the low 80s) and then see how the stock reacts to earnings.
All the best,
Mike Cintolo
For Cabot Wealth Advisory
Editor’s Note: Mike Cintolo is VP of Investments for Cabot, as well as editor of Cabot Market Letter, a Model Portfolio-based newsletter of the best leading growth stocks in the market. It’s been more than four years since Mike took over the Market Letter, and during that time, he’s beaten the market by 14.1% annually (up a total of 65% since he first took the reins, compared to a loss of 6% for the S&P 500) thanks to top-notch stock picking and market timing. If you want to own the top leaders in every market cycle, be sure to give Cabot Market Letter a try by clicking HERE.
