I’m really discouraged right now, and feeling pretty darned
humbled by this whole business of stock trading. Not that I’ve lost
money, I haven’t. I got my account up by about ten percent fairly
quickly, but I simply haven’t been able to get off that schneid.
I’ve reached 20 percent four different times, and fallen back each
time, usually in a matter of days.
Let’s find out something really humbling. I go now to my file of
stocks bought and sold, just to see how many times I’ve traded in
and out, at a cost of about $30 per round turn. That file lists
about 70 stocks. If I bought each one once and sold it once (and I
often bought each one more than once, and sold it more than once),
I have spent $2,100 in commissions alone. My wife says I’m getting
the equivalent of a graduate course in finance, and at a modest
profit. I know she turns her eyes away in horror, since she’s a
professional endowment and pension fund manager. What a wonderful
woman, to let me find my own way.
I could have done something worse. I could have stuck with my
first three buys, Boston Scientific, Dick’s Sporting Goods, and
Doral Financial, from May until today. I bought Boston Scientific
at $50; it’s now about $64. I bought Dick’s at $27.55. It’s now
$47.70. Doral? Bought at $38.46, now $50. I’d be up 30 or 40
percent, I’d think I was a genius, and I wouldn’t have learned a
thing.
Here’s something even more humbling. Out of those 70 stocks,
virtually all have gone up since my initial buys, sometimes by a
whole lot. There have been some collapses, can’t avoid that. But
I’d say that about 55 out of the 70 were winning picks, and I could
have sat still with any of them throughout all these months and
been in fine shape.
As Jesse Livermore, author of Confessions of a Stock
Operator, wrote, you don’t make money from buying and selling,
but “from the sittin.’” And as I said not long ago, “sittin’” is
the hardest thing in the world to do.
A good old pal of mine has built a fine career as a business
management consultant. He finds troubled companies, takes them
over, writes offering memoranda (debt or equity) to raise cash,
rectifies their corporate structure, takes a piece of the action,
and moves on. He once told me how he picks clients. “Just select a
company that would get better all by itself if management went home
for a year,” he said.
Human nature seeks to cause trouble, as any parent of boys can
tell you. “Things are often spoiled very near completion,” an old
Chinese proverb puts it. An individual investor, I have learned,
can probably not add much, if any, value to a portfolio by what is
called “active management.” In the ideal world, for me, I would
own, say, six stocks, bought at appropriate times on their charts,
so I can sit out price corrections without having to sell. The
market has been moving up in two- to three-week cycles, followed by
often severe corrections, especially at the margins, among smaller
growth stocks. If I can spot the peaks of those cycles, it might be
appropriate to sell two or three of those stocks at the peaks of
the swings, let the markets correct, then buy the same stocks back
at somewhat lower prices, and start another two- or three-week
cycle.
That’s the ideal, anyway.
So why is the stock market doing this cyclic thing? I disagree
to an extent with professional managers like my wife who see the
whole market as a bubble, as wildly overvalued. (“Five-dollar
stocks,” is how Sally describes eBay, Amazon, and Yahoo, for
example.) Some stocks certainly are over-valued; more important,
institutional traders view them as over-valued, and will sell them
on the least bad news. They will sometimes sell them on the least
good news.
We have just about finished what is called “earnings season” for
the third quarter (see my column, “The Yahoo
Effect”). I think it will take at least one or two more
quarters for the market to figure out where the real growth lies.
The traders have certainly wrung out many of the high-fliers. Here
are my opinions:
Forget the Internet and China for a while. Those stocks may well
come back next summer, but not much sooner than that. Housing
stocks, and some lenders, should have another month or two of
decent action in them. Retail and restaurants should play out
pretty well, with some new leaders coming to the fore, especially
in the restaurant sector. Biotechnology will, as usual, find itself
driven by headlines and breakthroughs and lawsuits. “Small
molecule” therapies may be the next big thing. Some niche consumer
services — companies that find a way to market broadly some
service formerly rendered by stand-alone single businesses — may
make remarkable progress.
I would bet, however, on high-technology manufacturing processes
and on very low-tech business support products for the winter.
Always keep in mind what Bill O’Neil, publisher of
Investor’s Business Daily, has said on TV lately. We’re in
a bull market, but it’s going to be “sloppy.”
