Stock Market Video
Real Market Timing for Beginners
Fortune Cookie
In Case You Missed It
In this week’s Stock Market Video, I look at four different kinds of charts, rebounds, breakouts, tractors and setups. With markets quiet and plenty of apprehension and uncertainty, it’s a good time to do just a little buying, have a significant amount of cash on the sideline and pay close attention to buy points and stops.
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Real Market Timing for Beginners
Of all the Cabot techniques for growth investing, the one I have the hardest time explaining is our approach to market timing. I’ve worked here for so long that it’s pretty much second nature to me, so I sometimes take it for granted that everyone must understand it. But, for reasons that I’ve had a hard time zeroing in on, many of our subscribers just don’t get it.
And I’ve finally figured out why.
Cabot’s market timing is tough to understand because mutual fund companies have spent millions of advertising and brochure-writing dollars over the years convincing their investors that market timing is both impossible and positively injurious to your portfolio’s value.
We here at Cabot, on the other hand, have been successfully employing market timing disciplines for decades as part of our growth investment strategies.
So who’s right?
Well, as often happens with difficult philosophical questions, it comes down to a matter of definition.
When the big investment companies warn that you can’t time the market, they’re saying that you can’t anticipate what the market will do in the future. And I agree; that’s as true as true can be.
So if you’re investing in an index fund and you’re trying to jump in just in time to participate in a rally—or jump out in time to avoid a big correction—you probably are doomed to failure. Markets love to entice the unwary to try to call a bottom, yet they’re never so low that they can’t go lower. And they’re similarly perverse with fooling people about how long rallies can last.
The reason Cabot’s market timing indicators actually work is that they have nothing to do with predicting the market’s future. They’re only concerned with accurately describing what markets are doing right now.
Now you may be saying to yourself, “What’s the big deal about saying what markets are doing now? Anyone can do that.”
Well, not really. Do you know how many days markets have to go up to constitute a new bull market? How many weeks? Do you know what constitutes a retest of a previous low and what’s a new downturn? Can you distinguish between a correction within a longer uptrend and a full-on downtrend?
The strength of Cabot’s market timing indicators is that they are based on making all the mistakes that investors make in trying to time markets. And if, over a period of over 40 years, you made all those mistakes and gradually eliminated everything that didn’t work, what you would be left with would probably look very much like the Cabot market timing rules.
Our market timing indicators won’t tell you what stocks to buy. Stock selection is an entirely different set of skills. But even if you have done all the research and found what looks like a perfect stock, you need to know what the market’s doing before you hit the BUY button on your online brokerage account.
If you don’t, it will be like trying to walk up the DOWN escalator. You can do it, but the odds will be so shifted against you that any advantage you might have gotten from your diligent research will be squandered.
Once you finally tumble to the idea that a growth investor needs a healthy market just as much as a sailboat needs a fair breeze, the importance of real market timing—not that crystal-ball-reading-the-future stuff that passes for market timing among the ignorant—becomes as obvious as a petunia in an onion patch.
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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
Tim’s Comment: Well, I’m not sure about the universe, either. But I do know that in the investing world, we see amateurs make the same stupid mistakes year after year because they don’t understand the basics. They buy on news. They try to pick bottoms. And when they buy a stock, they always buy 100 shares, regardless of the stock’s price. These are mistakes made by otherwise smart people.
Paul’s Comment: It’s hardly surprising that a Jewish genius who lived through the rise to power of the Nazis would feel strongly about human stupidity. From the Darwin Awards to websites showing epic fails in every kind of activity, we get a kick out of the dimness of others. I’ve even raised a few eyebrows here at Cabot by noting that “statistically speaking, half of the American people are of below-average intelligence.” But the real problem, which is to say the curable problem, is ignorance, which can be deadly in investing and any other field of human endeavor.
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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Cabot Wealth Advisory 9/8/14—5 Game-Changing Forecasts and Technologies for 2015-2020
Our Chief Investment Strategist Tim Lutts takes a look at game-changing technologies that will affect your job, your family, and your financial future for the next 10 years: 3-D printing, sensor technologies, robotics and artificial intelligence, personalized medicine and space technologies.
Have a great weekend,
Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory
