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.”
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