The Smart Investor: Never Forget What 'M' Is Doing

Townsend Baldwin won't hesitate in telling you that when it comes to stock investing, it doesn't much matter where you went to school, how much you know about finance or where you've earned your professional stripes.

The reason: Ignore what the market is actually doing, and you can pay dearly for it, regardless of your expertise.

Baldwin knows this from firsthand experience.

In 2000, he joined a humanitarian mission and taught classes for troubled teens in the town of Burzaco, Argentina, just south of Buenos Aires. He thoroughly enjoyed the experience of helping others.

At the time, Baldwin unfortunately paid little attention to the action of the U.S. stock market as the Nasdaq topped in March 2000 at 5132.

Two and a half years later, the composite had slumped 78% to as low as 1108.40. Many publicly traded dot-com firms with no earnings and flimsy sales went out of business, and investors — including Baldwin — practically lost their entire stakes.

"I knew after the crash that I had been flying blind in the markets and that I was naive," Baldwin told IBD. "I learned a big lesson that market direction comes first and that the markets can be irrational and dangerous.

He also realized that having an MBA from Wharton, banking experience at Hambrecht & Quist (which got folded into JPMorganChase (NYSE:JPM - News), and work as a portfolio manager of convertible bonds at a hedge fund based in New Jersey did not matter when the market was reaching a critical turning point — at the top or the bottom.

Baldwin began reading IBD in 2004. Since then, he has capitalized on the newspaper's facts-driven coverage of what the market is really doing, not what some pundit thinks will happen a week or month or year from now.

He also gained the confidence and lifelong skill of making sound decisions on when to buy, what to buy, how long to hold, and when to sell and lock in gains or take losses.

"CAN SLIM runs counter to human nature. That is why it works so well," Baldwin said, referring to IBD's seven-step approach to making money in the stock market.

"The markets are human nature on display. So when comparing CAN SLIM to other strategies I think it works better. Many qualified and smart professionals seem to have opinions and fight the market.

Baldwin credits IBD's Big Picture column and related market analysis in 2008 for causing him to sidestep the perilous drop in stocks. He says his portfolio saw no more than a 5% drawdown that year.

"I remember in most of 2008 and the first part of 2009, I would get calls from all sorts of friends and traders asking me why I was just sitting in cash. The dot-com crash taught me patience and that cash is a position in itself," he said.

By the time the smoke cleared in March 2009, the S&P 500 had fallen to 666.70, 58% off its peak of 1576.

Baldwin, who graduated from Georgetown University's School of Foreign Service, credits IBD for giving him battle-tested rules to maximize gains, minimize losses and come out ahead in the long run.

One of his favorite rules: Cut losses on every investment play at 8% or less, no matter what. It's the ultimate form of portfolio insurance that every investor must keep. After all, Mr. Market does not care how much an investor is winning or losing.

"When you lose more than 8% on a trade you know you either bought an extended stock or the wrong stock and you need to move on to the next trade. In a corporate setting it is hard to move on since you have politics and ego at play," Baldwin said.

Nutrisystem (NASDAQ:NTRI - News), a huge winner in 2005, was one of Baldwin's top plays that year. He ordered the company's weight-management products and became convinced that it was changing people's lives.

According to Baldwin, he began buying shares in late June that year as it surged out of a tight trading range and notched all-time highs 1. At the time, Nutrisystem held a 95 Composite Rating, a 62 for EPS and 99 for RS Rating.

Less than a month later, he took some profits at 20% and held the rest of the shares for bigger gains later in the year.

Baidu (NASDAQ:BIDU - News) was another strong performer in his portfolio in 2009.

He also invests in his education by attending IBD's advanced workshops, where he can share experiences, perspectives on the market, and war stories with fellow portfolio managers and serious individual investors.

Baldwin is particularly a fan of IBD's New America features, saying it "is a great section of the paper as entrepreneurial companies are highlighted that could be big winners.

Despite his yen for travel, Baldwin pays close attention to the products and services he and his friends buy locally — and frequently. Many of these companies have gotten frequent airplay in IBD's market features and helped alert investors build profitable portfolios. They include Chipotle (NYSE:CMG - News), Amazon (NASDAQ:AMZN - News), Visa (NYSE:V) and Apple (NASDAQ:AAPL - News).

Concerned about the country's monstrous debt load, he thinks belt-tightening won't be enough to get the nation's finances on better footing.

"GDP growth is a viable solution that can come about through funding entrepreneurial businesses (and) through investing in the stock market and New America-type businesses," he added.