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Technology Stocks : Lucent Technologies (LU)
LU 2.820-0.5%3:59 PM EST
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To: Mighty Mizzou who wrote (11131)11/16/1999 1:38:00 PM
From: John Malloy  Read Replies (2) of 21876
 
You miss the point of my post about the "Buy-and-Hold" strategy.

1. Take any hot growth stock that is growing rapidly and selling at a high price/book ratio today.

2. When you estimate what that stock is worth, recognize that today's rapid growth and high price/book ratio cannot continue unchanged forever. Forecast that growth will slow and the price/book ratio will gradually fall as the firm matures. Use whatever decay pattern you thnk is reasonable.

3. Now calculate what the stock is worth assuming you will hold the stock for 1, 2, 3, etc years.

You will find that what the stock is worth today increases the longer you plan to hold it, up to some critical investment period. The stock's value peaks at that point, then falls off at longer investment periods.

Given the forecasts I used for Microsoft's growth rate and price/book ratio, what Microsoft is worth today peaks if I plan on a two-year investment period. The two years applies only to an investment today. It has nothing to do with investments made in the past. Use different forecasts and Microsoft's value will peak at some other time. But it will peak somewhere. That means you cannot blindly "Buy-and-Hold". You need to revalue a stock frequently, and decide whether to sell or keep holding.

John Malloy
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