As you know, I'm out of this stock for now. It's getting too slow to profit trading. In any case, I thought today's Worden report is of value to long term investors.
The Worden Report (Wednesday, April 5, 2000)
We Dub Thee ? Sir Long Term
This Knight's approach is simplicity at its essence. At first glance, you may wonder why we are knighting him for such a seemingly artless approach. But we regard this as independent thinking at its best. Sven takes the obvious and is successful with it. It's natural to him. He can't comprehend why people get involved with complicated formulas. Because he has his eye on the ball, and he doesn't care how his swing looks to the gallery. I'm especially interested in publishing this approach, because technical analysis is often over-focused on short-term oriented investors. Longer term investors ? especially those getting on in years ? sometime feel frustrated and left out. I'll have some more comments on this approach further down. And so we hereby induct Sir Long Term into the Order of Knights Who Think for Themselves and place a chair for him at the Roundtable. A bottle of Veuve Clicquot Ponsardin will be on the way in short order.
Dear Don,
I read with complete amazement all the user comments about complicated formulas trying to get a winning trade over a short time frame. My approach seems to be the complete opposite and so far with satisfactory results. I get input and recommendations from many places -- your notes being one of them.
What is the first thing I look at? Is the company making money? Most of the time I use your data window as a quick reference. If they are losing money I am not interested. I realize I am throwing out some babies with the bath water but at my age I would rather be safe than taking chances. The next thing I look at is a 15-year chart. Why? Because if a company has been doing well for 15 years I believe there is a better than average chance they will do well in the future.
So what does doing well mean? I have set my limit at a stock price that has gone up at least 10 times in 15 years. I have even become disinterested in the company I worked for despite the fact that their stock plan turned out to be the base for my investment activities. Their return over 15 years is only about 6 times. What if a company is not 15 years old? If they make money and you have the chart it is easy to figure out how it compares with older companies.
So when do I buy? Needless to say -- not at the top but on a dip of about 15% or more. With all the indicators available with your charts it is rather easy to see when a dip is likely to turn around. If the indicators are all pointing up I am ready to buy. My only problem seems to be that I am mostly fully invested and may not have cash available.
Yes, indeed GE turned out to be one of those rare buying opportunities 2-4 weeks ago. I used it to full advantage. Since GE has gone up over 20 times in 15 years it is a good example of what I am looking for. A couple of other examples of favorites of mine are INTC, SCH and LU. So when do I take profits? Again using all the indicators available, when a stock starts turning down and most of the indicators look negative I might sell and if my sell turns out to be the wrong decision I just buy it back later. Commissions these days allow this approach provided you use an efficient on line broker. Best regards, Sven
I have no doubt Sven's approach works well for investors who possess that most valuable quality of all. PATIENCE. In real life, it isn't easy to wait around for 15 and 20 percent corrections in stocks you like. When it happens, you are apt to be tired of waiting and in a discouraged mood. But if you have the fortitude, this is the basis of a sound strategy that I believe will beat almost any mutual fund. However, I think this approach can be optimized considerably.
I think Sven could be stricter than he is on basic qualifications. Admitting a stock as a candidate that has advanced 10 times in 15 years is possibly too loose. XOM, for example, has had only three misses in 15 years. And oil is such a sure thing in the long run. SBUX, surprisingly, since it started trading in 1992 has never had even one year in which it didn't post a new all-time high. But it's not a blue chip and doesn't fit the strategy very well.
Another factor that I think should be built into this approach for optimum results is FX. Why not take stocks that not only rise consistently from year to year but also stocks that are ascending at a rapid rate? Consider MSFT. Since it started trading in 1988, it has never missed a lick. It has made a new all-time high every single year ? and that includes this year. But further, it has ascended at an annual rate of approximately 50 percent compounded. Construct a monthly bar chart. Logarithmic if you please. Make it a zoom 4. Snap on a linear regression line extending back to the beginning of the chart. Now put an FX50 Comparison chart on. You would ordinarily find this by trial and error. Too time consuming? Come on, now. You're probably talking about two or three transactions a year. Try an FX20, then an FX40 and you'll arrive at FX50 soon enough. You are looking for an FX line that is roughly parallel to your regression line. I hope you've paid attention, because now I'll tell you that I already did it for you and attached it to today's Note on MSFT. Click on the paperclip.
Sven talks about GE. He loves the stock and wrote me a somewhat indignant email a couple of months ago when I was pointing out the technical weakness in GE. But I was focusing on the intermediate term. He was looking at the long term. We were both right. Since 1984 GE has had only one miss. That was 1988, while it was recovering from the 1987 crash. Since then it has made a new high every year. Rate of increase? Twenty percent compounded. Not good enough? Well, you have to factor in the quality and reliability of a company. This is number one. Besides, since 1994 it has ascended much more rapidly. We attached a paperclip chart to this one as well.
Besides those Sven mentions, others to check out: WCOM ? no misses since 1989. EMC ? no miss from 1989 on. AOL ? no miss from 1992. AMAT ? two misses since 1990. MRK ? missed 88 and 93. MCD ? since 1984 missed only 88 and 91.
But nothing is perfect. MO had a long run and it may be heading for the big smokehouse in the sky. WMT was great until 93. Then 3 down. Now 4 up. HD had no misses from 85 to 92. Then it stayed flat for three years. There was a time when some people's investment strategy consisted of two words: ?Buy IBM.? That worked better than most approaches for decades. Eventually, that most successful commercial enterprise in the history of the world ran into problems. Now flying upward for 5 years. PG was a great champ. Like GE, from 1984 it missed only 1988, the year after the 1987 crash. But this year is a disaster. It has wiped out the gains of the previous three years. No matter what your approach, you need exit strategies. ?DW
The Trend Ain't Your Friend
We see nothing to suggest the market is out of trouble. The Nasdaq/tech sector is locked into a serious correction of bear market proportions. The Dow moved up at an unsustainable pace following the March bottom and needs a retracement, possibly even a test of that bottom. |
