Three Comments on Smart Investing

Stock Market Video
Three Comments on Smart Investing
This Weeks’s Fortune Cookie
In Case You Missed It

In this week’s Stock Market Video, I talk about the uncertain state of the market. There is still a technical buy signal, but also a high degree of uncertainty about what the market’s next move might be. It’s a time for caution, but not panic, for cutting back on buying, but not going totally to cash. The investing order of the day is to look for big, well-known names that trade on good volume—these are the stocks that we call “liquid leaders.” I point out a few in the U.S. and a few in emerging markets. Click below to watch the video.

Think You’re Smart? The Market Doesn’t!

The investment game attracts lots of smart people who believe that they should be able to think their way to investment success.

This is no surprise, because smart people are always trying to solve problems with their intelligence.

It’s an example of The Law of the Instrument, which states that if you give a small boy a hammer, he will perceive that everything he encounters needs hammering on. I think this applies to everything from WD-40, duct tape and hammers to computers and cell phones. If your cell phone is your favorite tool, you’ll always be asking: Isn’t there an app for that?

If the tools you have at your command really do guide how you look at problems, then smart people will want to use their brains. And smart stock investors will want to bring their intellect to bear on the problem of how to make money in stocks.

I have three comments to make on the proposition that smart people should be able to do better in the stock market than their less-brainy peers.

1) For years, recruiters for hedge funds have been cruising like great white sharks around the graduating classes of brainy locales like MIT, CalTech and other centers of technical education. Hedge-fund types like to recruit smart graduates who have a practical turn of mind, much preferring a tech whiz who speaks the language of math to a brilliant English major.

Unfortunately, having a hedge fund with certified geniuses stacked three deep isn’t the guarantee of robust, repeatable returns it once was. There are too many competitors, for one thing, and the market seems to be quite happy to produce as many “black swan” events as it takes to prevent trading algorithms from producing reliably.

Hedge funds returned an average of just 2% in 2014, and the industry had its worst year for fund closures since 2009. These people may be smart, but the market still outsmarts them.

2) Many smart people I’ve run into in my life (and hanging around universities for a bachelor’s degree, graduate school and a short career as a professor allowed/forced me to meet lots of them) are quite confident. Being smart and being trained to think can give people the illusion that their conclusions are more accurate/useful than those of others. Or, at the very least, they can argue for them with greater sophistication.

Confident people are exactly who the market loves to see walking down The Street. Confident people are more likely to stick with their losing stocks long after their humbler cousins have sold and are sitting in cash, bruised but not beaten. The market’s favorite lesson for people with “conviction” about a stock is to deliver the Death of a Thousand Cuts. And where investors who take less pride in being right will admit defeat pretty quickly, people who think they’re smarter than the market will get the full lesson.

3) Smart and knowledgable are two different things, especially when dealing with a contrary beast like the market. If all the smart person entering the market has to work with is a single idea spawned by a keen intellect, the market will go to Plan B and beat the person like a Turkish carpet.

The smart person who doesn’t research some market history, paper trade for a while, read a few memoirs by market legends, check out the various strategies and attempt to figure out their own investing personality is just asking the market to teach them a series of expensive lessons. And the market is always happy to take that assignment.

Fortunately, the investing veterans who write Cabot’s various advisories have all been through the process. And we’re here to help you become knowledgable without the scars and expense of learning from your own mistakes.

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: When you join a crowd, whether it is a political party, a group of sports fans or a group of investors owing an index fund, you sacrifice a part of yourself for the comfort of conformity—and there’s nothing wrong with that, except that it appears dull.

Paul’s comment: If you do what everyone does, you probably get what everyone gets. It’s as simple as that. Reading, thinking and doing things that other people are not makes you a more interesting person and gives you a leg up on investors who are following the same old advice.

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 11/9/15 – 3 Flavorful Stocks to Spice up Your Portfolio

Tyler Laundon, the guy who writes Cabot Small-Cap Confidential, takes a look at seasonal flavor fads and tracks down three companies in the flavor business. Stocks discussed: Senomyx (SNMX), International Flavors & Fragrances (IFF) and McCormick (MKC).

Cabot Wealth Advisory 11/10/15 – What’s Happening with 3-D Printing Stocks?

In this issue, Tim Lutts publishes some responses to his “Guaranteed Basic Income” idea. Tim also looks at the disappointing performance of the 3-D printing stocks that were all the rage in 2012 and 2013. Stocks discussed: 3D Systems (DDD) and Stratasys (SSYS).

Cabot Wealth Advisory 11/12/15 – How to Fed-Proof Your Portfolio

Chloe Lutts Jensen, Chief Analyst of Cabot Dividend Investor, writes about the stock market’s history of climbing after the first Fed rate increase, while bonds fall. Stock discussed: The Travelers Companies (TRV).

Have a great weekend,

Paul Goodwin
Chief Analyst of Cabot Emerging Markets Investor 


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