Markets have just put on a show of volatility that has left many investors bruised and depressed. So I thought it was a good time to re-run a piece I wrote in September 2008, when markets were going through their Mortgage Bubble meltdown.
The S&P 500 Index, which had topped 1,600 in late 2007, was down to 1,100. It would bottom six months later (in March 2009) at 667. And while that historic haircut is nothing like the relatively benign correction we’re going through now, I think the emotions are likely to be the same. Here’s what I had to say:
“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 Tim 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.
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.
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, particularly if it takes your fallible human instincts out of the equation and puts in their 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.”
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Growth investors are always looking for companies with huge potential, and we have different ways to express that potential. Sometimes we talk about “huge, mass markets,” meaning a large, or underserved, group of consumers. Sometimes it’s the revenue and earnings growth trends that we point to.
But my favorite label for a growth stock with enormous potential is to say that it involves a “disruptive technology,” or just that it has the potential to be “disruptive.”
Apple disrupted the computer market in its day. In fact, it disrupted several markets by the time its growth phase ended.
But disruptive technologies aren’t easy to recognize. By definition they don’t fit into any existing model, so they can seem odd and unlikely. I remember one critic asking, after Apple introduced the iPad, “but what can you really do with it?”
And some people throw the term around like something trivial, like talking about a “disruptive” toothbrush technology or a “disruptive” light bulb. (The disruptive lightbulb would be Cree’s LED bulbs, which last for many years, use less energy and don’t generate heat. But that’s not really disruptive, that’s just better. Cree bulbs will still screw into the same sockets as the old incandescent bulbs and the fatally flawed compact fluorescent bulbs. A great product with big potential, but not a disruptive one.)
My candidate for a genuinely disruptive technology is the emerging 3D printing industry. 3D printing is known to most people only as a novelty that will allow home users to create plastic toys or neat-looking iPhone cases, but for manufacturers, the technology has rocketed past the novelty phase into a mature business.
3D printers have often been seen as a way to produce fast prototypes of products. But newer machines can now create industrial parts in steel and bronze, construct intricate sand molds for investment casting and can do large-scale manufacturing of plastic objects and parts. And they can do so in increasing quantities.
So why is this disruptive? It’s because traditional manufacturing involves a web of suppliers for parts and a closely monitored supply chain that includes delivery and warehousing. Companies must expend capital to order parts in advance, to have them delivered and to store enough of them to meet current demand. It’s an art in itself, and has spawned a computer software sub-industry devoted to supply chain management.
But a 3D printer can short-circuit that entire process. Parts can be manufactured on site exactly when needed and only as many as needed. The only lag time is the time it takes the printers (or printers) to actually do the work. And the design specifications can be entered directly via computer.
The companies that manufacture 3D printers are also manufacturers in their own right, producing custom runs of products in various materials. Manufacturing setup and breakdown times and costs are much lower with printers, allowing quick changeovers.
It’s almost like what the Xerox copier did for the paper-publishing world, 3D printers could do for many big firms in the manufacturing world.
Two of the big kids on the 3D printing block right now are Stratasys (SSYS) and 3D Systems (DDD). But I have another candidate that I favor. It’s ExOne (XONE), a Pennsylania-based manufacturer of 3D printers that has a global footprint and a unique array of products. Last year, about two-thirds of ExOne’s revenue came from manufacturing and just over one-third from printer sales. But in the first quarter, printer sales accounted for nearly 60% of revenue. It’s still early in the evolution of this big change in the manufacturing industry, but ExOne, despite its small size ($34 million in annual revenue) could be a leader. The company also offers very specialized laser micro-machining services that command a premium price.
XONE has only been trading since its IPO in April, but it has put together a strong chart with no big pullbacks. If the thought of getting in early on a truly disruptive technology appeals to you, this may be your chance.
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory