3 Lessons Learned from the Greece/China Wildness
Move Gradually, Follow Your Plan
A New Leader in the Healthcare Space
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3 Lessons Learned from the Greece/China Wildness
You’ve already heard everyone and their cousins’ opinions on Greece, China and all of that (including mine a few weeks back), so I am not going to bore you with a new in-depth analysis of those situations. Instead, I’ve been thinking of the many questions/comments/criticisms I’ve gotten during the past month and three lessons that we can learn from this wild period.
Here we go, in no particular order:
Don’t be afraid to make a “mistake.”
One trade is just that – one trade among dozens you’ll make in the months and years ahead.
One thing that can rear its ugly head when markets get volatile is the inability to make a decision. Most investors are fine with pulling the trigger, but some hesitate, analyzing and re-analyzing the story, numbers and chart, trying to predict what will happen tomorrow and after.
When I sense this, I usually say three things: First, spending an extra few hours diving deep into all that information isn’t going to tell you what’s going to happen, so it’s not worth your time. Second, it’s just one stock—obviously, every trade is important, but assuming your position size isn’t too big, the decision is not going to kill you either way.
Third, in the market, you should be decisive—don’t be afraid to make a “mistake” (if that’s what you call selling a stock to cut a loss and then seeing it go higher). The goal isn’t to handle every stock perfectly … because that’s impossible! The goal is to make money, and you do that by consistently putting the odds in your favor by following a proven methodology. As long as you’re following your plan, you’ll do fine over time.
Keep your emotions in check by having some sort of plan and sticking to it.
When the sky was falling last week, I received more than a few questions about why we hadn’t sold this, that or the other stock, which had just dropped sharply, etc. My answer: We have a stop in place, so we’d rather lose an extra 3 points from here (should the stock continue falling and stop us out), than sell it now and watch in agony as it rises 10, 15 or 20 points.
My point isn’t that I’m always right; heck, I frequently say that I make as many mistakes as anyone. But having a well-thought-out plan (and sticking with it) is a must at all times, especially when the markets get volatile.
Moving gradually is usually best.
This is probably the biggest lesson of the three. When the markets get volatile, it’s natural to want to do something—some investors want to sell a bunch of stocks to protect themselves, others want to declare the selloff is overdone and load up on call options. In other words, they want to follow their emotions, either fear (selling everything) or the hero complex (buying a ton on the way down). Neither is a good idea.
Don’t get me wrong. If action needs to be taken, you have to take it; you should always honor the stops you’ve set. But, generally speaking, the environment doesn’t go from really good to completely horrible in just a day or two, so it’s best to dump your weakest stocks but also give your resilient performers a chance to hold up. In other words, move gradually.
Of course, if you do this, you’ll never be the guy or gal at the cocktail parties who brags about selling at the top or loading up at the bottom. But you also won’t be the fellow who dumped all his stocks at the lows or, even worse, loaded up on stocks during a decline and watched them all plunge further.
As a student of the market, I know that the recent news—Greece, China, etc.—will be mostly forgotten a few months from now. But as investors, the lessons we can learn from such volatile episodes will help our bottom lines for years to come. Now’s a good time to look at any mistakes you might have made during the past couple of weeks and develop a trading rule or tool that can help you in the future.
As for the market, here’s what I see. First, there’s no question the snapback that began on Friday has been very positive, with the most bullish action coming from growth stocks—many that had held up well zoomed to new price highs on Monday.
Second, I continue to like the fact the various worrisome headlines, along with the recent volatility, has dampened investor sentiment. The percent of investment newsletters that are bullish just hit a nine-month low, while individual investors (measured by AAII, the American Association of Individual Investors) have shown a tremendous apathy toward stocks—an average of just 26.5% of individuals have been bullish during the past two months, the lowest reading since the bear market bottoms of 2009 and 2003!
What about the big investors? They’re getting nervous, too—the monthly survey of well over 100 portfolio managers found that they’re holding 5.5% of their portfolios in cash. That doesn’t sound like a lot, but, like the AAII data, it basically matches the caution seen at the 2009 and 2003 lows.
Thus, I’m encouraged we might finally get a growth stock-led advance here that lasts for more than just a few days before petering out.
However, from a top-down perspective, I also think it’s important to keep your feet on the ground. We’ve seen numerous short-term dips and snapbacks this year, but those snapbacks haven’t yet led to any persistent uptrends. And right now, the major indexes are only back near the top of their multi-month ranges—better than they looked a week ago, obviously, but you can’t conclude the trend has turned strongly up.
As I said, though, I’m encouraged, especially as a growth stock investor. I’m still advising holding a chunk of cash and being selective when doing new buying, but there are enough growth stocks acting well that I’m also OK holding what’s working and picking up shares when the proper set-up arrives.
A New Leader in the Healthcare Space
My stock pick today is a bit thinly traded, but it’s one of my favorite stories out there. The company, HealthEquity (HQY), is one of the largest administrators of Health Savings Accounts, an industry that’s large and should grow rapidly in the years to come. Here’s what I wrote about the company in Cabot Top Ten Trader two weeks ago:
“HealthEquity is a small company with a big story that’s taking advantage of the major changes going on in health insurance. The firm is a leading administrator of health savings accounts (HSAs), which are generally offered with high-deductible health insurance plans and offer a tax-free and portable way to save for healthcare expenses—the company offers an easy-to-use website and payment platform for customers. The number of HSAs is expected to grow from 17.4 million last year to a whopping 50 million by 2020 as more customers look to cut costs. Thanks to deals with 27,000 employers (34% of the market is covered by HealthEquity’s partners), the firm has 1.47 million members (up 46% from a year ago) that have combined assets in their HSAs of $2.54 billion (up 50%), and, impressively, retention rates are north of 98%; once a customer opens an HSA, he sticks around for years. The company collects money through account, custodial and card fees, all of which are growing strongly. Overall sales growth is accelerating, earnings are surging and profit margins have the potential to expand in a big way over time. Of course, many investors have high expectations here—the valuation is huge—but 187 mutual funds have already taken a position, a good sign that many big investors like what they see. So do we.”
HQY did fall a bit during the market’s recent maelstrom, but never came close to breaking any key support and has since bounced well. The stock can be volatile, but the uptrend is intact, pullbacks and buyable, and long-term, I believe HQY will do very well.
HQY is just one example of the top stock ideas I bring to Cabot Top Ten Trader subscribers every Monday evening. Each week, I highlight 10 high-potential stock ideas, giving in-depth analysis, buy ranges and loss limits, plus follow-up on every recommendation. I look at just about every advisory in our industry, and Cabot Top Ten Trader is by far the best source of new ideas I’ve seen, especially for growth investors—I know it’s personally helped my own trading immensely since we began publishing it back in 2002.
If you want to follow along with my advice on HQY—and be continually on top of the market’s best stocks and where the big money is flowing—you should take a no-risk (60-day full money back guarantee) trial to Cabot Top Ten Trader today. And I’m here to answer any questions you have so you can get off on the right foot. Click here for all details.
