The Market Wants to Take Your Money

Stock market old-timers will often tell newbies that “the market wants to take your money,” which, on the face of it, isn’t all that credible. After all, lots of people make lots of money on Wall Street. Still, there’s something to the warning, and the quicker you learn about it, the quicker you can start printing your yearly results in black ink, rather than red. The education of a stock investor isn’t exactly the stuff that Hollywood movies are made from. (No, that’s not what “Wall Street” was about!) There’s not a lot of excitement in digging into business models, studying chart patterns, and tracking revenues and earnings.

Investing does have its moments, of course. I’m thinking specifically about how some of the action in the stock market in the past couple of months has looked like Matt Damon driving a Mini-Cooper down those stone steps in Paris in “The Bourne Identity.”

And there are always a few exhilarating days every year when markets take off, giving you the same thrill that you got when the Millennium Falcon first went into hyperspace in “Star Wars: Episode IV.”

But I digress. The point is that learning to invest in stocks isn’t a barrel of laughs.

On the other hand, it’s a tough world out there, with lots of people working more than one job and scrambling just to stay even with their mortgage and the bills … and not even managing that. It’s hard to get ahead.

This feeling of powerlessness sends some people to convenience stores in search of lottery tickets or to a gambling casino, where the odds are astronomical (in the first case) and inexorable (in the second). In those cases, at least, people know the odds are against them.

The Market Wants to Take Your Money

Unfortunately, desperation also sends some people to the stock market … with the same results. People who go into stock investing in desperation often bring with them the same mindset (and the same lack of preparation) that accompanied them to the lottery window or the blackjack table. What they find out is that The Market Wants To Take Your Money.

Some people treat this truism as a general warning about equity investing. They don’t believe that the market is actively, forcefully and intentionally trying to take their money away. They’re wrong, and here are three reasons why.

– Institutions want to take your money away. Large institutional investors control a wide majority of the equity capitalization in U.S. and global markets, and they count on individuals being both over-enthusiastic and over-discouraged. The individuals who push stocks up the last 10% or so to their tops are setting the table for institutions to sell and begin the stock’s decline. And the last individuals who finally capitulate and sell a stock down to its low are tying a bow on the gift package for institutions, who will then quietly begin to buy up the discounted bargains.

– The bandwagon wants to take your money away. It’s hard to commit to putting a chunk of cash into a stock. As a result, a lot of investors wait to invest … and then they wait some more, trying to be sure that the stock they’re buying is the real deal. Eventually, as the stock rises, more and more people are reassured by the stock’s performance into actually pulling the trigger. It’s fun to grab a piece of one of these stocks that’s going through the roof, and some people actually make some money this way. But the last few people who jump on the bandwagon are doomed to go over the cliff with it. It’s the law.

– Good stories want to take your money away. Every great stock has a great story. Stories are how entrepreneurs win funding for their startups and how rising companies get the capital to expand. The trouble is that a lot of absolute mutts have stories that make them sound like the next Apple and Google and Microsoft all rolled into one. The guy who starts telling you about his favorite stock at a party will probably give you 95 cents worth of story with just a nickel’s worth of information about the company’s revenues, earnings and the performance of its stock.

There are other things in the market that want to take your money, but you get the picture. So what can you do about it?

As any of our longtime readers know, the answer is: have a system.

If you like the idea of buying stocks at a discount and then holding on for years while they appreciate to fair value (the Warren Buffett way), then you are a value investor and you should follow that system. You’ll make money.

If you’re more comfortable with the idea of buying dividend-paying large-cap stocks that are closely tied to the progress of the U.S. or global economy, then you’re a blue-chip buy-and-hold investor, and that’s exactly what you should do. You’ll make money.

If you cherish the thrill of finding hot, young stocks that are climbing like rockets and riding them to huge gains–and you can tolerate–and minimize–the losses that inevitably accompany this strategy–then you’re a growth investor, and you should stick to your guns. You’ll make money.

Whatever system you use, a strict sell discipline needs to be an integral part of it. If you ever forget that the market actively wants to take your money, the value of your portfolio will be glad to remind you.

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Buffett Surpasses Gates

Warren Buffett has (*big yawn here*) replaced Bill Gates as the world’s richest person, a fact that’s more interesting to headline writers than to either Warren or Bill.

In many businesses, however, filthy rich people–or, to use the more polite handle, “high net worth clients”–are pursued with single-minded devotion. Investment houses, financial advisors, all kinds of designers, casinos and just about anybody else who sells products or services wants to do business at the Rolls-Royce end of the scale rather than the Hyundai end.

It only makes sense. If you’re selling real estate and you make one sale a week, it makes a difference if the sale is a $250,000 starter home or a $2.5 million McMansion. Ditto for the casino that will go all out for big spenders (“whales”) who drop a grand a hand.

I’ve pretty much resigned myself to being the small fish in a world that cherishes whales. But even a small fish can occasionally go in style.

I remember taking a train from Champaign, Illinois, to Boston back in the early ’80s. I couldn’t afford the sleeper, so I was stuck in a seat. But my wife packed me such an amazing collection of food that I was the envy of the entire train car. People coming back from hunting and gathering with bags of chips and sandwiches in cellophane could only marvel at my fragrant smorgasbord of cheeses, pickles, salami, chocolates, French bread and red wine (in a plastic camping bottle). For just a few hours I got to feel like the people in First Class. I slept well on that train seat.

Right now American society is fascinated by the rich. We follow them as celebrities, we watch TV shows about their lives and homes and what they buy and their spas and watering holes. This is preferable to the historic approach to the gap between rich and poor, which all too often ended with envy and resentment-fuelled outbreaks of violence and even revolution.

China is very familiar with the sentiments that inspire revolution, and they’re working on the wealth problem. High party leaders have officially acknowledged that too large a difference in wealth can lead to turmoil, but they don’t seem to be making a lot of progress on the issue.

For myself, I’ll take the life of quiet prosperity every time. Living well may be the best revenge, as the metaphysical poet George Herbert wrote back in the 17th century, but our era seems to prefer living large. Give me the simple life.

Darling International: Transforming Grease

Today’s investing idea is an illustration of how a company can take a supposedly small-time business and build it into a profitable enterprise.

The company is Darling International (DAR), and the product is grease. Darling takes the goo that congeals in restaurant grease traps and the unused body parts that accumulate in slaughterhouses and transforms them into compounds that can be used for pet food and fertilizer.

This isn’t a jam-packed industry; Darling is said to be the only publicly traded company in the business. And yet, as noxious as the raw materials may be, the company has been turning them into nice profits for years. After-tax profit margins just reached a record 8.2% and the roster of institutional investors on board has now topped 60.

Turning out tallow and yellow grease isn’t a dainty business, but it’s good to look to the Roman Emperor Vespasian for guidance here. When the Emperor was given a hard time by his son for taking money from an unworthy source (a fee on public toilets), he is supposed to have shaken the bag with the proceeds in it and said: “This doesn’t smell.”

Darling’s revenues were up 32% in 2006 and 59% in 2007, with earnings up 157% in Q4. 2008 earnings estimates are for a gain of 41%.

Investors have been supporting DAR, pushing it up from its 2004-2006 range between 3 and 5 to a peak over 14 at the end of February. Since then it’s pulled back to its 50-day moving average just above 12. A weak market can take the wind out of a small stock’s sails pretty quickly.

Still, rapid, profitable growth attracts attention wherever it shows up, and if the next move for the stock is up, it could have a great future ahead of it.


Paul Goodwin For Cabot Wealth Advisory

Editor’s Note: Darling International won’t be followed here, but the emerging markets generate this kind of rapid growth and exciting chart action all the time. If you’d like to gain some insight into how Brazil, Russia, India and China are faring, and how their stocks are appreciating, as well, you might want to consider a no-risk trial subscription to Cabot China & Emerging Markets Report, which I edit. Subscribers get complete analysis and full buy/sell advice on a concentrated portfolio. Click on the link below to get started.

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