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The Money Pit

I’ve found that projects in the real world do have a lot in common with investing. Treat investments as a business.

Living the American Dream ...

Lessons Learned

Three ETFs You Can Buy Here

My wife and I purchased our first house back in 2009; before that we had been renting in Boston. We still miss the city but we thought it was time to begin living that Great American Dream—owning a house.

We luckily bought at a fortuitous time (when we agreed it was April 2009 ... you can remember what the mindset was back then; the Dow closed that month at 8,168!), and the house, while it was something we could grow into, was sort of a mix of a fixer-upper and turnkey—plenty of projects to do, but lots of updated stuff, too. It wasn’t something that needed to be gutted.

Which is good, because I’m about as handy as a three year old. (Have I broken a light bulb or two when screwing them in? I can neither confirm nor deny that, my friends.)

Anyway, we did some batten-down-the-hatches sort of things in our first couple of years (new roof, new skylights, etc.) before moving on to more rewarding renovations during the past two years—namely, two bathroom remodels. We did one last year, and are just a few days from having our master bath redone.

Now, to be completely truthful, my wonderful wife has handled 90% of each task ... hiring workers, shopping for tile, buying the vanities, etc. And the results have been awesome! But that doesn’t mean there haven’t been the usual, shall we say, potholes along the way.

Most have been minor, of course—being a few hundred bucks over budget, having the project run over by a week or two or finding the tile work wasn’t quite up to snuff.

But then there are the bigger mishaps. Our house was originally built in the 1930s, and it’s been added onto several times since. (We’re pretty sure an owner did much of the work himself 30 years ago, with what looks like bubble gum and duck tape. But I digress.) It turns out the space between the second floor and the ceiling of the first floor is … not that big.

This led to that phone call around 11 am on a random Tuesday at work that any home-improving couple has had. I answer my cell phone as it buzzes.

Me: “Hello wife!”
Wife: “Hi.”
Me: “Um, what’s up?”
Wife: “Oh, you know, nothing much.”
Me: “OK, spill the beans—what’s wrong?”
Wife: “What? Oh, nothing, they’re making great progress on the bathroom. I mean, they did accidentally puncture a water pipe beneath the floor, and water is spilling all into the downstairs bathroom, but they’ll fix that within a couple of days.”
Me: “&%$#@@%*&^^%!!”

Actually, it wasn’t that bad; the plumber actually came over the next day, fixed it all up and the contractor got the ceiling of the first floor bathroom back intact. I had completely forgotten about it until we started having work done on our master bathroom about three weeks ago.

This time, the alert came via a simple picture message—there was no water pipe that got hit, but somehow the plumber dropped something on the subfloor … and poof, there appeared a two-foot-long indent in our family room ceiling! Nothing like seeing a picture on email of the ceiling right above where I sit every night look like it’s waiting for me to come home to fall on my noggin.

Again, it wasn’t too bad—the contractor fixed it up a couple of days later, but it did make my heart skip a beat or two.

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Of course you know I am going to tie all of this back to the market, right?

What’s funny about the market is that so much of it really doesn’t follow the rules of life. I just wrote a piece in Cabot Market Letter about how, in the real world, bargain hunting is great, but if you apply that thinking to growth stocks the results are lackluster.

However, I’ve found that projects in the real world do have a lot in common with investing … partly because the more you treat your investments as a business, the better you usually do.

The first obvious lesson is to have a plan before you start the project—you wouldn’t have a few guys demolish your bathroom and then say, “Gee, I guess I also need to talk to a plumber and electrician, right?” No, you schedule stuff ahead of time.

Similarly, in the market, it’s imperative to have some plan in place when you enter a trade. How much will you buy? Where will your loss limit be placed? It doesn’t have to be (and it’s probably better if it isn’t) a black-box system, but guidelines are important. This will help you avoid those instances where you buy a stock, but after three bad days, you’re wondering what to do. Follow the plan.

Second, though, you also want to be flexible; a plan is great, but it should be more of a roadmap than a hard-and-fast system that must be followed to a T. In the bathroom example, if the tile guy needs some extra grout, you’ve got to be willing to scoot out at night and pick some up. If the workers have to come on the weekend, you might want to take your infant out for the day.

Similarly, if something changes, you have to change with the evidence. Maybe the stock you bought had a great story, but if two weeks later it bombs on earnings, you might have to reconsider. Or if the market itself turns down, you should be pruning your losers and laggards right away, no matter what your initial plan said.

Last but not least, you have to relax and worry only about the things you can control. This is a lesson I had to learn—when the worker nailed the water pipe last year I was a bit perturbed (my wife might have a different description). This year, though, when the ceiling nearly caved in, I took it in stride. It happens.

It’s similar in the market. Obviously, when a stock you own tanks on earnings, or when a recent new purchase falls apart and hits your loss limit, it stinks, and you don’t have to be happy about it. But you do have to just take it in stride—losses happen, and sometimes they’re sudden and quick.

Yet it’s important to remember the big picture—eventually, we want two new bathrooms that are more usable, nicer and improve the value of our house. But there are clearly hiccups along the way, and you can’t worry about everything that could go wrong ahead of time. At the end of the day, you have confidence it’s going to get done and you’ll be better off.

Similarly, in the market, the goal is to make big money over time, but that doesn’t mean every trade is going to work. Heck, many of them don’t! And sometimes those losses can get you down when they’re sudden. But it’s best to take the bad times in stride, with the confidence that your system (if you’re following one of our advisories) will guide you to solid profits in the months and years to come.

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As for the market, the bulls remain in control. We saw a little abnormal action two weeks ago, but the rally since then (even ahead of the deal in Washington, D.C.) has been solid. Of course, now we’re in the midst of earnings season, so I can’t say it’s time to buy with abandon. I think that, if things go right, some new leadership will emerge and show its stuff—and I’ll be more than happy to hop on those names.

For now, though, I’m keeping it very simple—hold a little cash, hold my best performers (there are many of them) and pick my spots when it comes to new buying. As usual, I’m not a fan of doing much buying right before a stock reports; it’s more like gambling than investing. So I’m either looking at names that are reporting in November, or potentially buying names if they gap out of bases on earnings.

However, if you want to get money to work, ETFs are a good way to play things as earnings season gets underway. Normally, I’m not a huge ETF fan, but they have their places, and the start of earnings season is one of them. So I have three ideas on this front.

First is the ProShares Ultra Russell 2000 Index Fund (UWM). This fund moves (about) twice each day what the Russell 2000 small cap index does … both up and down. But small caps have been leading the way in recent months, and they continue to even after the Washington shakeout two weeks ago. You could just stick with the non-leveraged version (symbol IWM) but I like the extra juice of UWM. A stop near 70 makes sense.

Energy stocks have come to life since the start of September. There are a few ETFs in the group but I like the SPDR Oil & Gas Fund (XOP), which owns a range of explorers and other energy names. After a very long consolidation from April 2011 through August 2013, XOP has spiked a few weeks in a row and looks ready to make a sustained upmove. A break of 64 or so would be a red flag.

Third is the Financials Select SPDR (XLF), which owns all of the big banks and financial services stocks. Financials have been lagging since mid-May; in fact, at the lows of mid-October, the XLF was at 19.5, compared to 20.2 in mid-May. But now they’re acting very strong, and my gut tells me that if the market’s going to run from here, financials have consolidated for long enough and could lead. A break of 19.8 or so would be your sign to exit.

Sincerely,

Michael Cintolo
Chief Analyst of Cabot Market Letter
and Cabot Top Ten Trader

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A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.