Amigos and Amigas, guess it was a good time to take a little break. Just catching up with news over the last few days, but wanted to post about market strategy and realistic expectations.
A review of the DOW's chart over the last ten years will reveal that half of the market's gain occured over just a handful of sessions.
A review of any individual stock's chart will also reveal that
most of the gain or loss over a period of time occurred in just a few trading days, while the stock maintained within a specific range for most of the period.
Conclusion:
1. Take a position in a stock or an index fund for the long term using fundamental analyses to determine which stocks to buy. A lot of the stocks discussed on this thread will do just fine over the long term, including some that have been stuck in the mud like APCO, STVI, etc. etc. etc.
2. Take a trading position in that stock to take advantage of its trading cycle using technical analyses for entry and exit points. TA will tell us when the stock has moved or is likely to move into a new
trading range
My personal opinion on the market's current position is that there are some compelling buys right now. These compelling buys may or may not perform right away. Bombardier's new contract, for example was fantastic !!!!!!! .........BUTthe stock's price has not moved to reflect the event.
We're going to see the market remain volatile, specially as we go through the end of the year tax selling season, but investing in solid stocks that have corrected and offer good value is an a great idea right now.
I found the following article at WWW.BIZFN.COM
Efficient Market Gurus Claim Small Cap, Value Strategies Work
By Joseph Dancy
Joe Dancy writes for the Lone Star Growth Investor newsletter. The newsletter is free of charge and is delivered to subscribers via email on a regular basis. For additional subscription information, you may visit their web site at: members.aol.com
September 30, 1998
Fortune recently had an interesting article on how rigorous academic research
is used by Noble prize winners Merton Miller of Chicago, Myron Scholes of
Stanford, professor Eugene Fama of the University of Chicago, Kenneth French
of MIT, and consultant Roger Ibbotson to invest their money - and that of
their clients. (http://members.aol.com/lsginvest/art238/)
All are proponents of the "Efficient Market" theory -- which claims that the
stock market is a continuous information-processing machine whose participants
collectively price shares correctly and instantaneously. They challenge the
fundamental assumption of many mutual funds that a stock picker, given enough
information and research, can consistently beat the market.
Under the Efficient Market theory even Nobel Prize winners cannot hope to beat
the market consistently. Some managers will outpace the market for a few
years, but proponents claim that it is impossible to prove that those runs are
more than just sheer chance. Many institutions have accepted the Efficient
Market theory and are avoiding actively managed funds, and an estimated 24% of
pension assets are now in index funds.
But the Forbes story does not end with the Efficient Market theory. While the
scholars noted above claim individuals cannot over time outperform the market,
their numerous academic studies did find that small-cap stocks produce higher
returns than big ones over long periods of time. Smaller companies, being
riskier than larger companies, have to provide excess returns in order to
attract capital under the Efficient Market theory.
Further, other studies they conducted have shown convincingly that the lower
the company's price-to-book value ratio the higher its subsequent stock
performance tended to be. No other measures had nearly as much predictive
power--not earnings growth, price/earnings, or volatility according to the
article.
Fortune notes that value managers "such as Warren Buffett and Michael Price
had long maintained that it was smarter to buy companies when they were out of
favor--thus trading at low price-to-book ratios--Fama and French proved the
point with statistical rigor. According to Fama and French's most recent data,
downtrodden 'value' stocks have outpaced high price-to-book growth stocks
annually by an average of 15.5% to 11% over the past 34 years."
Under the Efficient Market theory the value effect is similar to the small-
stock effect: the bigger risk pays off, in aggregate, with higher returns. In
fact, their academic studies showed that small stocks that also trade at low
price-to-book ratios provided the best results of all, returning an annual
20.2% over 70 years - eight points (8%) more than big growth stocks.
We're not sure that we accept the Efficient Market hypothesis - at least when
investing in underfollowed small cap companies. The number of publicly traded
smaller companies has increased substantially in the last decade, and many
have little or no institutional following or interest. With a market that is
increasingly dominated by institutions, we feel that many of these smaller
companies are being overlooked and that they are not being priced
"efficiently."
Non-the-less, we do buy into the theory that small cap stocks - and stocks
that are undervalued on a price-to-book basis - will tend to outperform over
time.
|
