A couple of days ago, I received this question from a reader who had read my Weekend Cabot Wealth Advisory about the new bull market and why you should be putting money to work in great growth stocks. Here’s her question, shortened a bit.
One of the great lessons that Cabot (and the stock market) have taught me over the years is that trends can go higher (or lower) and continue for much longer than you think. One way to prove this is to look at the weekly chart of a big winner (say, NVDA). You can find several points in the stock’s advance where it would have made perfect sense for it to have folded its tent and gone into a correction. (I’m looking at January, April or June 2016.)
But trying to figure out when a stock or market has topped is precisely as difficult as figuring out when it has bottomed. The only way to spot either the top or the bottom is in hindsight.
The other lesson that Cabot (and Mike Cintolo) have taught me is that markets can re-set themselves during long advances. If you look at the S&P 500 Index over the last year or so, you see that the market really spent 17 months (from February 2015 to June 2016) trading sideways, with two major pullbacks along the way. So the rally that began after the Brexit vote isn’t really a straight-up rally; it’s a sharp advance following a long base-building effort. Some would even call it a modest bear market.
That said, I understand completely that you are apprehensive about buying growth stocks. If nobody were nervous, the rally would likely be over by now. The discouragement/apathy of the average investor is one reason the rally has the potential to go farther. The market has yet to convince the bulk of individual investors that it’s a good time to get back into the stock market.
If the rally continues, the stock market will eventually make its case to small investors. And when it has convinced enough of them that it’s safe to get back in, it will be time for the big correction to harvest their capital.
So my advice is to follow the Cabot growth rules, and let the market pull you in slowly. Pick one or two stocks that you like most and make your buys. Then, if you get a profit, increase your exposure by buying one or two more. And as long as you’re making money (even if you have to jettison a loser or two along the way), you keep buying into the rally.
Growth investing requires a ton of optimism, a strong stomach and resolute adherence to sell disciplines. But when you have the market on your side, like today, that’s when you need to be buying. Cabot can help you pick the best stocks in the market today. To pick the right advisory for you, click here.
Fortune Cookie
Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
“To a coward, courage always looks like stupidity.”
-Bill Maher
Tim’s comment: Cowards fear failure more than they value success. Thus any venture where failure is possible looks stupid. The most courageous men and women, however, relish the very possibility of success so highly that the fear of failure is of minimum concern. And that’s how we get progress.
Paul’s comment: I was looking for a quotation on optimism for this week’s Weekend Wealth Advisory when I stumbled across this sarcastic gem. While it’s overstated (it is by Bill Maher, after all!), there’s the saving kernel of truth there. Anyone who exceeds our own risk tolerance can look foolhardy. But the market teaches us that seizing the day when the bulls are in control and buying great growth stocks is not only courageous, but also profitable.
