Winning and Losing in the Insurance Game
First Graders Playing Soccer
Two Great Growth Stocks
When the very first issue of Cabot Wealth Advisory was published, back
on February 1 2007, the lead article was about insurance. Today I’ve
decided to run it again, since we have so many more readers, and I
believe strongly that the facts (and opinions) in the article are
important for you to think about.
“I begin today with an anecdote about my father, Carlton Lutts, who
landed a job as a building inspector for an insurance company soon
after he received his degree in mechanical engineering.
He didn’t stay long in the insurance business; he quickly found better
opportunities elsewhere. Nevertheless, he learned something valuable
about the industry and many years later, when I was old enough to
appreciate it, he passed that bit of wisdom on to me. It makes perfect
sense, when you think about it. It’s saved me a lot of money over the
years. Yet it’s something that no one else has ever said to me.
This nugget of wisdom is this: “Only buy insurance for things you can’t afford to replace.”
That’s all. It sounds simple, but it’s big. And when you use this
precept as the guiding principle whenever someone tries to sell you
insurance, you end up buying a lot less!
The extended warranty on that new computer? No thanks.
Loss protection on your teenager’s new cell phone? Nope.
Insurance on the rental car? Never. It’s covered by your credit card, anyway.
Trip insurance? I’ve never bought it and I’ve never regretted it – and
I’ve traveled to over 30 countries, including places many Americans
would rather avoid.
But people don’t think like that. Because they’ve been conditioned to
avoid risk. And because–as psychologists tell us–they fear loss
twice as strongly as they crave gain.
So when someone tells them they can protect themselves from loss,
breakage or simple malfunction for just a few dollars, they say, “Why
Well, the reason why not is that over the years, those dollars add up.
And where do they go? To the insurance company. Now, these guys
aren’t stupid; in fact they’re very good with numbers. And they know
that if they can sign up enough customers, and thus spread the risk far
enough, they’ll come out as winners. And they do.
So if the winner in the long run is the insurance company, the loser in
the long run is the average consumer. You and me. And the more
insurance you buy the more likely you are to be a loser.
Sure, you can come up with anecdotal evidence of “winners” in the
insurance game. A friend’s two-year-old computer died and was replaced
for free because he’d bought the extended warranty. Or a relative’s
cruise was canceled because of mass illness and he got all his money
But it’s not good logic to use anecdotal evidence in an argument.
Contrarily, these people are the exceptions. The simple truth is that
most people never collect on their insurance policies … and thus they
So, going back to my father’s advice, if you can afford to absorb the
loss, don’t buy the insurance. Over a lifetime, you’ll come out a
winner. And equally important, you’ll make yourself just a little more
independent from the insurance establishment, and that’s a good thing.
Now, there are some policies that you simply must buy. If you’ve got a
mortgage, the bank requires that you buy homeowner’s insurance. If
you’ve got a car, you’ve got to buy auto insurance–at least in 45
Life insurance is generally a good thing for breadwinners, and
disability insurance can be good, too. But you don’t buy life
insurance for children. Cold-hearted as it sounds, the loss of a child
generally does not bring financial hardship, except in cases where the
child is actually a breadwinner.
But beyond those major assets, you’ve got to remember the golden
precept. “Only buy insurance for things you can’t afford to replace.”
Because in the long run, the insurance companies will emerge as winners.”
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As to the stock market, here’s the way I see it.
The market is in a correction. We’ve been telling you that for weeks
and it became QUITE clear to most people when the Dow plummeted more
than 1,000 points mid-day last Thursday.
Today we had a great rebound, and while that helps to repair some of
last week’s damage, by no means does it mean the correction is over.
To me, it seems the market is acting no more sensibly today than a
bunch of six-year-olds playing soccer, who rush from end to end of the
field en masse.
So what comes next?
Well, I think the correction has farther to go. Mainly, I think we
need more TIME for a sense of malaise to spread among investors.
So I’m continuing to recommend that you be cautious, and build up your
cash reserves, so you have some ammunition to use once the market
But I’m confident that once this correction runs its course, the market
will resume its major uptrend, and even break out to new highs. And
that’s not blind optimism talking; it’s a disciplined interpretation of
our time-tested market timing indicators.
You can get the full explanation behind this optimistic reading in the
latest issue of Cabot Market Letter, edited by Michael Cintolo.
For more information, click below.
As to individual stocks, the cool thing about this correction is that
it provides a great opportunity to build a watch list, a list that you
can use to “go shopping” when the pressure comes off the market. But
how do you build a watch list? By watching charts, and digging for
true growth stories.
Ideally, what you want to see are stocks that resist the broad market’s
selling pressure, stocks that are not yet well-loved (or even
well-known) but that demonstrate the growing presence of institutional
support, and stocks of companies that have great growth prospects.
Below are two to look out for that have been featured in recent weeks
in Cabot Top Ten Report. Both are technology stocks with great growth
prospects, not least because demand is growing fast for their products!
Back on March 1, editor Michael Cintolo wrote this:
“Acme Packet (APKT) is the leader of the session border controller
market. The 1% of you who know what that is may already own the stock.
To the rest of you, we’ll explain. A session border controller is a box
that controls the activity of a VOIP (Voice Over Internet Protocol)
call as it passes from the border of one network to the border of
another. The networks might be two ISPs, or even two networks of one
business enterprise. In any case, the session border controller
protects the networks, ensures quality of service and gathers
statistics that empower managers to optimize performance. And business
is very good, as more and more phone calls move to the Internet. The
company was founded in 2002, and has grown revenues every year since.
Profit growth has not been quite as smooth, but the company exceeded
analysts’ expectations in the fourth quarter of 2009, and raised
guidance for 2010, projecting that revenues would range from $182 to
$186 million, and earnings would range from $0.44 to $0.47 per share.
Note: 42% of revenues come from Alcatel Lucent, Nokia Siemens and
Sprint. Fundamentally, we like it.”
Mike liked it so much, in fact, that he named it Editor’s Choice that
week. It was trading at 17. Since then APKT has earned a spot in
Cabot Top Ten Report three more times, most recently last Monday when
it was trading at 27.
The market wildness on Thursday took it down (briefly, of course) to
its 50-day moving average at 20, but it’s bounced right back up,
showing strong institutional support, and I think it has further to go.
Then there’s SanDisk (SNDK), a stock that has appeared in Cabot Top Ten Report 15 times over the past seven years.
One of those was on March 22 of this year, when Mike Cintolo wrote the following:
“SanDisk is the ultimate feast-or-famine chip stock. Its products are
basically commoditized-flash memory-and fall in price most years.
However, the flash storage business topped out well ahead of the
economy, and thus the industry was slashing capacity even before the
2008 and early 2009 meltdown. That left the industry short of supply
… just as demand was picking up! The biggest driver of this demand is
the surge in smart phone usage-an iPhone, for example, uses much more
memory than a standard cell phone-though the bigger picture is that, in
the years ahead, untold amounts of data will be stored on possibly
billions of consumer devices. In terms of bits stored, the industry
could ship seven times as much within the next few years! Of course,
long-term projections in this sector are not advised, yet the fact
remains that SanDisk is firing on all cylinders right now.”
When that was published, SNDK was trading at 34. Since then, it’s
climbed to 44, thanks to a crackerjack earnings report (it earned 95
cents per share, while analysts had projected 59) and then pulled back
to 34 at last Thursday’s low. But now it’s back up at 41, showing that
institutions are still in buying mode. As long as this persists, I
think short-term investments in SNDK (the King of Flash) will work.”
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory