The Comfort of Common Goals

This Weeks Stock Market Video

The Comfort of Common Goals

Fortune Cookie

In Case You Missed It

I don’t have any historical data, but I know that the practice of senior corporate executives getting part of their compensation in company stock has been around for a long time.

Compensation in stock is a win/win on every imaginable level, but the biggest bonus, at least from the point of view of stock investors, is that the practice aligns the executive’s interests with those of the investor. A CEO with a lot of stock has a built-in reason for trying to increase the price of his holdings. Every dollar the stock price appreciates is like getting a raise in pay, and if the exec chooses to hang onto them, the dividend income also boosts total pay.

But during the Tech Bubble days, when the future was so bright that you needed sunglasses even to think about it, the giving of stock options began to gather momentum.

Stock options-agreements to sell a specified number of shares to someone for a specified price at an unspecified future time-offered a way for a company with little of no profit to give key players a lot of money, presumably some time in the future when the stock was trading way, way above its option price. Needless to say, many of those options wound up about as valuable as paper towels, but not as useful.

These days, both stock and stock options are a hellaciously popular part of compensation packages for senior executives, and the justification for granting them comes right back to the incentive they give for everyone to work hard to increase shareholder value. (And, in fact, I always like to see that the C-level officers in a company I’m considering recommending have a significant equity stake.) It’s not that executives don’t always have shareholder value in mind when they make decisions, but it’s easier to really believe it when they’re shareholders themselves.

Small moral: In the same way that owning stock or stock options creates a strong connection between the fortunes of executives and interests of stockholders, Cabot’s way of doing business aligns our interests with those of our readers, which is you.

Here’s how that works.

Cabot publishes investing advisories, and our revenue comes from paid subscriptions. We don’t accept paid advertising in our letters and we don’t put advertising on our website. We don’t accept fees from companies to promote their stocks. We don’t handle money for people. We’re a private company, so we don’t have stockholders to answer to.

What we have are subscribers, and they buy our advisories and renew their subscriptions because they find them useful. Ideally, they make money by following our advice.

If people don’t get value out of our advisories, they don’t renew their subscriptions and we don’t stay in business. No amount of fanfare or sleight of hand can obscure that bottom line. If our subscribers make money, we get to keep doing what we do.

And that’s about as direct an alignment of interests as you’re likely to find anywhere.

And with all that said, here’s a little fanfare.

The Cabot Market Letter, which is our flagship publication, is now 44 years old and still going strong. CML, as we call it, does what most stock gurus say can’t be done; it outperforms the broad market year after year.

CML is a growth stock advisory that uses market timing to vary the amount of exposure that our subscribers have to the market. If markets are in a foul mood and stocks are trending down, CML’s Chief Analyst, Mike Cintolo, tightens up the loss limits on the stocks in the Model Portfolio (which can have up to 12 stocks when it’s fully invested) and moves toward a higher cash position.

This shift in market exposure alone kept CML readers from tanking along with the market in 2008; the Model Portfolio turned defensive in November 2007, averaged more than 50% in cash for all of 2008, and had 90% on the sideline just before Lehman Brothers went under! Today, the Model Portfolio holds four stocks and is 66% in cash.

Mike’s stock picks are based on the strength of the stock’s chart (momentum), the attractiveness of the company’s story and the soundness of the underlying fundamentals like revenue, earnings and after-tax profit margins.

The Cabot Market Letter tells you exactly what’s going on in the market, what (and when) to buy and sell, how our market timing indicators are faring, what stocks we have our eye on for future investments and, more importantly, how we think about growth investing. Subscribers receive weekly messages, with regular issues and updates coming out on alternating Wednesdays. And occasionally, there’s news about a stock that needs buying or selling or something happening in the market that’s so urgent that we send out a special bulletin.

More than anything, after all my years in the investment industry, watching the cynicism and weariness of professional money managers, what impresses me about the Cabot Market Letter is the degree to which Mike really cares about how the Letter is doing.

Tim and I also write part of each Letter, but it’s really Mike’s baby, and he’s as emotionally attached to the performance of the Cabot Market Letter as he is to the fortunes of the New England Patriots. And that’s a lot!

The final thing I have to say about the Cabot Market Letter is that it requires some commitment from its subscribers as well. You have to be prepared to follow the rules, including both the fun part (buying) and the sometimes not-so-fun part (selling).

If you let it, the Cabot Market Letter will change how you think about growth investing. And it will put you in sync with Mike Cintolo and the whole Cabot growth team. I think it’s a good idea.

For more details on the advisory, click here. 

In this week’s Stock Market Video, Mike Cintolo splits his discussion into two areas -the short-term view (Mike thinks we could bounce for a while), and the intermediate-term view (where Mike says the trend remains firmly down). He also dives into a couple of scenarios for the market in the weeks ahead, and provides a glimpse at some early potential leaders of the next advance. Click below to watch the video.

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: For some reason, humans have evolved to be quite stubborn about defending their beliefs and resisting ideas that challenge those beliefs. Thus investing is difficult for most people-simply because they’re human! Happily, education does help, and the most enlightened investors are always looking for new evidence, even if it contradicts their current perceptions.

Mike’s Comment: Aristotle was a few hundred years ahead of his time; my favorite equivalent saying is simply “don’t believe everything you think.” And you shouldn’t-while it’s good to believe in your family, faith and even politics down to your toes, in the market, it’s better to be more like a judge … listening to all kinds of evidence (bullish or bearish) before making a final decision. That, in fact, is exactly what winning investors do, and they take action when their thoughts are confirmed by the market itself.

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 10/13/14 – A Tale of Two Cities 

Tim Lutts, Cabot’s president and chief analyst of Cabot Stock of the Month, compares declining Wilmington, Delaware, and booming Cary, North Carolina-two stops on an east coast road-trip in his Tesla. Stock discussed: Twitter (TWTR).

Cabot Wealth Advisory 10/14/14 – Happy Anniversary Cabot Market Letter

On the 44th anniversary of our flagship growth advisory, I interview Cabot Market Letter Chief Analyst Mike Cintolo on the current market and he offers up some tips on how to handle it.

Cabot Wealth Advisory 10/16/14 – These are the Stocks You Want to Own in this Market

Our dividend specialist and Cabot Dividend Investor Chief Analyst Chloe Lutts Jensen explains how dividend-paying stocks will continue to provide steady income even during market corrections. Stock discussed: Canadian Tire (TSX: CTC.A).


Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
And editor of Cabot Wealth Advisory


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