The Iconoclast Investor

You’re living through a historic stock market event, one that will be dissected in texts and articles for as long as people study the market.  Congratulations!

If your grandchildren ever get interested in the stock market and its history, you have a first-class, first-hand war story to tell them.  It’s a tale of greed and fear–the constant poles of stock market emotion–plus a clash of opinions about the proper role of government in the market.

It’s a classic case of good news and bad news, and there’s been plenty of each.

Suppose you’re a classic free-market capitalist, one who believes that government action in capital markets is a threat to the exquisite balance between risk and reward.  If so, you were delighted to see that Lehman Brothers was allowed to fail.  You know that bailing out companies that over-leverage themselves and make excessively risky choices is bad business.  By letting Lehman flop into Chapter 11, you say, the government took a huge step toward cleaning out the festering toxic debt problem.  After all, as one of our readers wrote to Timothy Lutts, “Capitalism without bankruptcy is like Christianity without hell!”

Of course, if you’re a true free-marketer, you’re also more than a little grumpy about some of the other actions the U.S. government has taken, including bailing out Bear Stearns and AIG, flooding the markets with liquidity, guaranteeing money market funds, declaring a temporary halt to short selling in financial stocks and preparing to buy up huge wodges of bad debt.

If your position is anywhere to the left of the capitalist high ground, you’re appalled that the government is putting in the most time and money to rescue the corporate greed-heads whose rapaciousness filled the toxic landfill of bad mortgages that’s creating the problem.  You’re also fairly miffed that a “Get Out of Jail” card is being issued to the clever folks who bundled those shaky mortgages into bonds and then misrated them, creating the bogus CDOs that are stinking up the vaults of our financial giants.  Every time a foreclosure terminates a mortgage that should never have been written, you should be seething.

Personally, I’m pretty much beyond anger.

I know it’s the way of the world that the smart and connected will (almost) always come out of this kind of crisis with a whole skin while the ignorant and gullible will need a box-full of Band-Aids.  There’s no use wishing for jail time–or even a good Singapore-style caning–for the guilty parties.  They were just doing what the market told them to … and the government allowed them to do it.

The one lesson I’d like you to learn from all this is very specific, and it has to do with … Surprise! … growth stock investing.

Individual investors, still bleeding profusely from the punishment issued by the bear market, are leery as heck of getting back into the market.  I have some important words for them.

Lesson #1: Follow the System

Dear Nervous Investors:

After a yard-dog whipping like the one we’ve been through, your instincts will tell you never to go near another stock … ever.  Even after a new bull market begins, you will hold onto that hard-learned lesson.  You will begin to reconsider your resolve after the market posts some big, tempting gains, but you won’t bite.

But eventually, the temptation will be too much for you.

It may not be until the headlines are trumpeting the glorious bull market (watch the cover of Time magazine for the story) that you will finally take the market back to your heart and start buying.  And you will find yourself in exactly the same position as the over-enthusiastic mortgage writer in the last weeks of the housing bubble.

Think about it!  When the last buyer is in the stock market, there are no new buyers to keep the ball rolling, and the market is ready to top out.  And when the aging bull steps politely aside and opens the door for the bear, it will be the late buyers who will hold onto their declining stocks the longest.

(Note: This is the growth stock investor I’m talking about here.  The value investor and the income investor have different agendas.)

So, if you’re going to invest in a way that will save you from your enthusiasm and your instincts, you need a system.  While I am obviously biased toward Cabot’s growth investing system, which has kept subscribers out of the current fiasco, just about any system will do.  A system takes your fallible human instincts out of the equation and puts in its place a set of principles based on market reality.  (Note that if the mortgage brokers had stuck to their system, we wouldn’t be in this mess.)

I call the system I use for the Cabot China & Emerging Markets Report the SNaC system, because it requires a positive Story, supportive (fundamental) Numbers and a technically attractive Chart before I make a buy recommendation.

I’m also helped by Cabot’s use of trend-following market indicators to get me into markets when the tide is going my way and out when the tide is against me.  The system regularly saves me–and my subscribers–from the risks that gut feelings and hunches can bring.

That’s what I’d say to all the jumpy investors out there.

There’s not much any of us can do to affect the course of this historic market meltdown except cross our fingers and stay out of the way.

But we can resolve not to be the victims of market forces any more.  While your 401(k) is being shredded and your IRA is bleeding, you can take charge of at least part of your own portfolio.  If you have the taste for growth investing, you can use a system to ride the bull and avoid the bear.  Cabot can help.