Back in 1965, Gordon Moore (then working at Fairchild Semiconductor, but soon to help found Intel) published an article called “Cramming More Components Into Integrated Circuits” in Electronics magazine.

Moore predicted that the number of transistors on computer chips would double about every 18 months.  Although he later amended the time scale for what would become known as Moore’s Law to every two years, it has remained The Law for 45 years.

To put it in concrete terms, when Moore published his paper, the most advanced chips contained about 60 devices, while Intel’s hottest new chip, the Itanium, boasts about 1.7 billion (with a “B”) transistors.

You can thank Moore’s Law for your GPS-capable, picture-taking, video downloading cell phone, your kids’ hand-held, 3-D video games and a host of other chock-full-of-chips devices.  You can also see it as the basis for the growth of the computer industry; if a device with double the power is going to be available in a couple of years, you’re going to need to trade in your old clunker for a new one a lot sooner than you would otherwise.

Moore has also noted that similar advances aren’t really possible in other industries.  If carmakers had been making parallel strides, cars would get 100,000 miles to the gallon and you could buy a Rolls Royce for less than a Starbucks latté.  Unfortunately, cars would also be about a half an inch long.

Chip designers say that they can obey Moore’s Law for a few more years, but then they’re going to run into some resistance from another set of laws, the laws of physics.  Increasing chip density means that smaller chips with more devices will generate more heat but have less surface area to get rid of it.  And if the infinitesimal circuits on chips continue to shrink, the thickness of the materials separating them will be so thin that electrons will start leaking through the boundaries!

Of course scientists are working on new ideas for processors and data storage and software.  But the computer/handheld-device industry is built around Moore’s Law and the rapid turnover that it dictates.  Spectacular advances in integrated circuits are so commonplace that the tech sector takes miracles for granted and expects consumers to throw out last year’s machines with the trash.

If Moore’s Law is going to lose traction, where will The Next Big Thing come from?  The bumper stickers that you see in Silicon Valley that say “Please, God, Just One More Bubble” could go on the bumpers of lots of investors, too.  The global recession and the surprisingly robust recovery in the stock market that followed seem to be at a crux, and nobody knows where things will go from here.  This leaves stock investors looking for the companies that are ready to take the elevator, not the stairs.

I don’t have any more idea than you do of what The Next Big Thing is.  All I can do is to keep my eyes open and identify the familiar patterns of technical growth, momentum, support, resistance and correction.  By staying out of the business of prediction, I can make the most of accurate description and analysis of what’s actually happening.  It’s the essence of what Cabot growth advisories have been doing for many years, and it pays off

Like most citizens of the United States, I had always thought of the U.S. stock market as “The Market.” And I can remember the efforts we made at the big Boston investment house where I used to work to get people to allocate a small amount of money to non-U.S. equities, which mostly meant Europe at the time.

Now, with exchange-traded funds, Standard & Poor’s Depositary Receipts, index funds and American Depositary Receipts offering instant exposure to every imaginable country, region, sector, industry and index, investors have every reason to be much more cosmopolitan.

So are they?

Investment advisors say that about 30% of an individual’s equity portfolio should be in international stocks.  Yet, research has shown that many individual investors (one out of five) think that they should have 10% or less of their stock portfolios in international (outside the U.S.) equities.

Why is this?

I think that part of the reason is familiarity.  In automotive stocks, people in the U.S. know Ford (F) better than they know India’s Tata Motors (TTM).  (And Ford actually outperformed Tata in 2009.)  But people also know Google (GOOG) better than they know China’s search giant Baidu (BIDU), and Baidu outperformed Google by a wide margin for the year.

The other reason, I suspect, is a kind of patriotism.  U.S. citizens want to invest in U.S. stocks because they feel a kind of loyalty to the U.S. and identify with its companies more completely.

It’s a reaction that leads many people to make “Buy American” their first priority, whether they’re buying stocks or cars or consumer goods.  (And by the way, it’s also the same reaction that leads Indian investors to their enormous preference for Indian stocks.)

There’s nothing wrong with patriotism, but if taken too far, it can become damaging.  Refusing to diversify a stock portfolio can lead to outsized losses.  Plus, the opportunity risk of avoiding international and emerging market equities (which have outperformed U.S. stocks in the last couple of years) is substantial.

Of course I’m prejudiced myself because I write Cabot China & Emerging Markets Report, and despite the recent dip in Chinese stocks, the Report is still the top-performing newsletter of all financial newsletters for the past five years.

But part of being a patriotic American is embracing the capitalist ideal that has helped to make the U.S. a world leader.  (I recognize that capitalist excesses also caused us to shoot ourselves in the financial foot, but the principle stands.)  And the rational capitalist finds the most advantageous investments available, subject to risk tolerance.

Cabot China & Emerging Markets Report is rewarding its subscribers with a 164% total return over the past five years (an average annualized gain of 21.4% every year), compared to the S&P 500’s increase of a mere 2.1% (dividends included) over the same period. And I think this is just the beginning, so if you’d like to have my advice on what emerging market stocks to buy, you can get started with a no-risk trial subscription by clicking here.

My stock tip for today is Banco Santander (Brasil) (BSBR), a subsidiary of Banco Santander that’s based in Sao Paulo. Santander is a big operation, with a market cap of $21.5 billion.  This Brazilian bank came public at 13 last October, and after a post-IPO droop, managed to push above 14 in December and early January.  But since then, BSBR has been under heavy pressure, falling along with the global finance sector.

My stock recommendations usually follow the traditional Cabot growth disciplines, so it’s unusual to shout out a stock that’s just fallen back toward its lows this month.  But I think it’s okay to put a stock on a Watch List even if it’s had a brick on its head for a few weeks.

Here’s why.

Santander is a full-service bank with over 2,000 locations in southern and southeastern Brazil.  It does commercial and wholesale banking as well as asset management and insurance.  The company’s Q3 earnings were up 100% on an 84% jump in revenues, with an after-tax profit margin of 12.0%–that’s registering a multi-year high.

With a trailing P/E ratio of 19 and a forward P/E of 10, it’s certainly cheap enough.  Plus there’s a hint in the chart that the stock might actually find support at 12.

Big solid company, thriving home economy, cheap stock price, small dividend … that’s enough to put an emerging market stock on my Watch List.  And when it shows some signs of life … well, we’ll see.

If I decide to put BSBR in the portfolio of the Cabot China & Emerging Markets Report, you can be among the first to know by trying a no-risk introductory subscription (for new subscribers only).

Last week, I wrote about the problems and solutions I see for e-reader technology, which was complicated this week by the release of the Apple iPad. The iPad will feature what looks like a very cool iBooks application that will likely compete with Amazon.com’s (AMZN) Kindle, Barnes & Noble’s (BKS) Nook and Sony’s (SNE) multiple e-readers. I asked you to send me your thoughts on e-readers and many of you did, some of which are printed below. Thanks for writing in!

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Thank you! As an owner of a first generation Kindle I fully agree with everything you wrote.  I *really* want to upgrade my Kindle already, but I’m holding out for a Kindle with a color display.  If Amazon (and the other companies!) don’t get their acts together soon they’re going to miss the boat.  I happen to also have the Droid cell phone with the Google Android OS.  I found a very interesting (and FREE) app known as Aldiko–it’s a FREE e-reader for my Droid phone!  There are a number of FREE books available to download through the app.

So if you are waiting in the sidelines to join us, the masses who enjoy our e-books, perhaps consider a cell phone with an e-reader app capability.

J.

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You missed my favorite drawback: Someone can delete your book without your knowledge. How ironic that it was “1984″ deleted! This time it was private enterprise, next time … government??

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I have two of them [e-readers], and bought them for my adult kids and their wives, for Christmas! What are the benefits? I recently took a trip and did not want to take the owners’ manual for the camera, GPS unit, etc. With the big Kindle I just imported the PDF files and had lots of manuals and they did not take up any space! Probably the best and the worst thing is hearing about a book that sounds good, and having it to read in less than 15 seconds. The next best thing is you can search a book, or all your books for a word. You can turn down the corner of a page and you can underline what is important and then get a print out of all your underlined stuff. A student without one will be at a disadvantage. I love them.

P.H.
Green Valley, Arizona

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I have a Kindle 2, had an original Kindle (sold it in two minutes at lunch).  Background, I have read over 50 books on my palm devices over the years, small but clear screen, great while waiting in line or other times.  But you are missing the point on the Kindle, it gets AP news, blogs, newspapers from all over the world, magazines, PDF files and books.  I have hand problems so it helps me a lot.  If I want a book that is part of a collection of favorite authors, I just buy a real book.  Several friends have brought Kindles after looking at mine.  It can open a whole world to you.

P.

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For the exact reasons you mentioned, I did not buy an e-reader (too new, wait to work out the bugs, I like the feel of a real book, etc.).

Yet, the kids bought mom and me a Kindle for Christmas, so I am using it. My first book, “Stones to Schools” by Greg Mortenson was so great that I wanted to share it. How? I bought a new real book from Amazon and had it shipped to my brother!  Yeah, I bought it twice! Then I bought Mortenson’s first book, “Three Cups of Tea,” but will not buy my brother this one; if he thinks it is good, he can buy it himself.

End result, he will have two books he can share.  I have two books stored away in a Kindle that I bought but cannot share. You know, when you find something that is truly amazing, you want to share it.  Kindle had better find a way for me to do that or I will probably use it to download only the free books that are available and go to Amazon.com or Barnes and Noble to purchase all other books.

Another problem with the Kindle: It is a painful process, when reading in the middle of a book, to go back to a reference page (a map, etc.) that is located in the front of the book. And once you get there you have to zoom in to read the writing on the map. Now, where was I reading when I abandoned my place?

My bottom line: Don’t buy an e-reader.
R.L.
Murrieta, California

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As an older adult with aging eyes I don’t like to read on the computer or other technology at all. If I hold a book in my hand I can read comfortably by getting under enough light, and if necessary I can put one of those magnifying sheets on the book to make the print larger. I cannot do that with Kindle or computers and frankly I can barely see the screen on my cell phone. But the latter is OK because I only use the phone for talking anyway.

L.B.
Park City, Utah

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I agree with you completely. The e-bookers have not yet figured out how a love of literacy and sharing supports their model. Netflix is the perfect model.

T.

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Excellent idea, believe you’re on to something. Which company will be the first to implement your idea? Good article.

F.V.B.
Winchester, Massachusetts

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I don’t know which company will be the first to implement it, but the next letter writer may have some clues:

I just completed a survey for Sony today. I think I can safely assume from some of their questions that they are considering a Netflix-like subscription service, as you suggest.
Should be good.

E.

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Thank you for allowing me to comment on e-readers. Regarding the sharing of books, in my area there is a small store with hundreds of used paperback books of many different types and topics for sale. Most of these books are approximately $2. E-reader Web sites are asking $28 for a Clive Cussler action-packed book. It represents quite a difference in the price of enjoyment. If paper books are to be replaced by the expense of e-readers, I assume I’ll give up reading. In my profession, I produce engineering component drawings from computers. That’s nine hours minimum in front of a computer monitor. When I arrive home after my stressful drive, leaning over my monitor is the last thing I want to relax in front of. And that is why I need books.

A.W.

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Excellent editorial.  A library approach could very well be created by Netflix or a similar entity.  It would no doubt be appreciated and probably successful.   What about Google as a purveyor?

J.R.
Racine, Wisconsin

All of this brings me back to market timing, something every investor was focused on a year ago.  Good market timing helped Cabot Market Letter avoid most of the bear market.  But now, after the market has motored higher for months, few are concerned with market timing, and as I mentioned yesterday, that’s a mistake.

The key to good market timing is to keep it simple.  There is no perfect system, of course, but we think getting too technical and following too many indicators will lead you off course.  That’s doubly true if those indicators focus on what we call secondary or tertiary indicators … things like sentiment, interest rates, the U.S. dollar, the economy, etc.  None of those have a consistent record of successfully calling major market turning points.

Instead, we have found that the most reliable indicator of future market moves is the market itself.  In Cabot Market Letter, which I edit, we have three key market timing indicators.

One is called the Cabot Trend Lines; it’s a long-term trend-following indicator.  Its signals are less frequent (last signal was a buy back in early April 2009) but when they appear, they are usually important.

The second is the Cabot Tides.  It’s our intermediate-term trend-following indicator.  Combining the Trend Lines and Tides, you can never be on the wrong side of the market for long.

Last but not least is our Two-Second Indicator, which gives us a clue to the broad market’s health.  Its real value is by signaling major, bear market-type market tops way ahead of time–it began flashing red, for instance, in June 2007, and continued to do so for most of the bear market.

These are the indicators I use and they’ve treated us (and our subscribers) well.  Maybe there are others that you know of that also consistently point you in the right direction.

But the main point here is that you need to have some system that will get you out of the market the next time it heads down for a few months.  Doing so will help you avoid some steep losses … which, as we saw above, will make it easier for your portfolio to keep stretching to new heights.  Something to think about.