What’s in Store for 2014?
A Stock to Watch
By now you’re probably sick about hearing of New Year’s resolutions. Even so, I like to write down some New Year’s investing resolutions every January, and I think you might get a valuable nugget or two out of them. So here are 10 to consider (in no particular order):
1. Cut ALL losses short. You’ve read enough about this one, from me and others, so I’ll just leave it as is.
2. Calculate your risk for every trade before (or as soon as) you execute it. That means you’re effectively telling yourself, “I’m buying XYZ at 50 a share, and I’m buying $10,000 worth of it. If it falls 15%, I’m selling, no questions asked, which means my total risk is $1,500.” It’s just that simple … but it means you’re not extending yourself too far if things go awry.
3. Keep records of every stock you buy and sell. You can’t expect to learn if you don’t review at least some of your trades (preferably, the really good ones and really bad ones). You don’t have to be overly meticulous, but keeping transaction records, printing out a few charts and jotting down some notes (on why you bought or sold) every few weeks can prove valuable.
4. Keep records of your portfolio. Far too many investors simply go day-to-day, week-to-week, without really knowing how much money they’re making or losing. I know you get statements, but you should also enter your portfolio’s total value into a spreadsheet at the end of each month. (Don’t do it every day … it can be overwhelming and tedious.) Make a few charts to track how you’re doing, too.
5. Set performance goals. It’s easy to say, “I want to make 50% this year!” But better goals might be, “I’m going to outperform the market by 15%,” or “I’m going to avoid having three losing months in a row.” In other words, something that’s more under your control, as opposed to effectively hoping the market acts well (which might allow you to make 50%).
6. Find someone else to share your goals, successes and failures with. Goals are nice, but if you’re the only one who knows them, it’s too easy to lose track of them. Thus, even if it’s someone who’s not in the market (you might share some investment goals with your spouse, and he/she might share some professional goals with you), letting someone else in on your aspirations is a good thing.
7. Set a maximum percent-invested position when the market’s trend is down. You may want to alter this resolution, but the point here is to force yourself to respect market timing. If the market turns down (possibly as depicted by our Cabot Tides, which measures the intermediate-term trend), you want to raise at least some cash.
8. Sell some winners on the way up. I call this “forcing yourself to fall out of love.” In my experience, most investors hate to sell their stocks, both winners and losers. Hooey! If this is you, then you should try to sell some of your shares on the way up in 2014 … yes, even if the stock still acts great. Doing so will put some profits in your pocket, while also getting you mentally accustomed to selling offensively, instead of defensively (i.e., waiting for a stop to be hit, etc.).
9. Reward yourself. Too many investors buy and sell, buy and sell, until the profits and losses lose some of their meaning. Thus, if you have a good first six months of 2014, or a good quarter, or even one superb trade (say, doubling your money on a stock), don’t be afraid to take some of those winnings out of your brokerage account and enjoy them; take your spouse out to a fancy dinner or plan a family vacation. If it’s a retirement account you’re using, you can’t take the money out … but you can still use some of your “regular” money to reward yourself for a job well done.
10. Take a couple of regular breaks during the year, and also a couple of spontaneous ones if your stress level gets too high. If you’ve made a few losing trades in a row, or if you’re in the midst of a losing streak, there’s nothing wrong with walking away for a week or so, taking a deep breath, and re-assessing. The investors who keep forcing the issue usually are the ones that dig themselves into deep holes.
So consider this list. Adopt one of them or adopt them all—whatever works for you. I’m hoping to adhere to all of them (and more) in the months ahead.
So what’s in store for 2014?
This is a bit of a trick question—if you’ve been reading Cabot Wealth Advisory for a while, you know we don ’t predict what the market’s going to do, preferring to simply interpret the action of our market timing indicators and leading growth stocks. But we’re also students of the market, and it turns out that, after the market posts a strong year, the odds strongly favor another year of solid gains going ahead.
Here’s what I wrote in the Cabot Market Letter on January 8, 2014.
Since 1950, there have been 23 years when the S&P 500 gained at least 20% (including dividends). Looking at the years that followed such heady advances, 18 of the 23 produced gains, with an average gain of 12.9%. To be fair, five of those plus-20% years came during the late-1990s bubble, but even excluding that time period, the results were bullish—14 of 18 years were positive, with an average gain of 11.2%.
Interestingly, if you look at plus-30% years (the S&P 500 returned just over that amount last year), the results are even better—nine of the 11 following years produced gains, with the average return 15.2%. And, again, if you want to ignore the late-1990s, you’re looking at seven of nine positive years, averaging 12.9%.
There’s no magic to the study—if a market rose more than 20% (and especially at least 30%), it’s indicative of a strong bull market. And bull markets usually persist! There’s no certainty in the market, but this observation of the market’s past performance tells us the bulls are likely to keep control in 2014.
Signs of strength and warning signs are equally evident, but getting to know strong stocks with big potential is always in season. Here’s what I wrote about Pandora (P) in Cabot Market Letter Other Stocks of Interest on January 8:
Pandora Media (P 33) — Pandora Media is an Internet radio service that streams unlimited music and comedy via 100 personalized stations that will play only the stuff you want to hear. The company, which was founded in 2000, has about 76 million active users (up 13%, year-over-year) and in December, it had an 8.6% radio market share, up from 7.6% in 2012. It’s the biggest radio station in the U.S.! Pandora has made several moves that allow it to monetize its listener base more effectively, especially its latest deal to air ads in cars that offer its service. Investors have been worrying about Apple’s new iTunes Radio stealing share, so the news this week that listening hour growth was up 13% gave the stock a big boost. The stock kicked off a renewed advance this week. BUY.
This week, I selected Pandora (P) as one of our Cabot Top Ten Trader stocks. Here’s an excerpt from what I wrote in Cabot Top Ten Trader on January 27:
The market’s downdraft provides an opportunity to see just how strong the stock really is. So far, we’re very encouraged—P’s pullback has been modest and came on very light volume, despite its recent pop higher. Earnings are a risk, of course, so it’s fine to wait for the report before deciding whether to jump in.
To receive further updates on Pandora, as well as additional growth stocks with strong profit potential no matter which way the market goes, consider a trial-subscription to Cabot Market Letter. For details, click here.
You can find additional updates on this stock as well as 10 additional momentum stocks emailed to your inbox each week in Cabot Top Ten Trader. For details, click here.
That’s all for this week. I hope I’ve given you some ideas to think about.
Your guide to growth investing,
Chief Analyst of Cabot Market Letter
and Cabot Top Ten Trader