tekboy,
Selling a REIT investment and plowing the proceeds into G&K stocks was not a good move, but you are certainly not alone. There were plenty of posts on this thread - often with the portfolio surveys - where people mentioned selling other investments, such as large company stocks, mutual funds, etc. to invest in technology. Few, if any, of those decisions look smart now, unless they were later reversed.
At best we can hope to accomplish two things by investing and hanging around here. The first is to increase our material wealth. The second is to increase our wealth of knowledge, so that we will make better decisions in the future. For a while it seemed most things we did were a big help to # 1. Funds were invested, and portfolios grew. Then, over the last two years, most here probably did not gain much money, but perhaps we gained some knowledge that could help us make more money in the future. That is no small thing. Most make the same mistakes over and over again.
As I've said before, one of the problems with the stock market is that it answers questions too quickly. The answer to "Is Amazon a good investment?" when asked in 1999, was yes, since anyone buying was probably richer the next day, week, month etc. In the long, take-no-prisoners bull market we were in, advice such as "any time is a good time to buy a gorilla" was good advice. There were plenty of stocks in 1998 and 1999 that rose and then crashed. Remember K- Tel Records? They sold 70's music on late night TV. When they opened a web site the stock went from something like $2 to $80. It was a great investment, for a few weeks, before it crashed.
Gorillas, on the other hand, although volatile, were generally volatile to the upside. The mistake, of course, was believing that the situation would always be the same. That's the most common stock market mistake - the belief that what happened in the recent past is going to continue in the future. The belief that we could buy the stocks that rose 100+ percent last year and expect that they will be winners again this year.
I don't think many people began their investment careers with a G&K strategy. Most likely other methods were tried first. Several here were likely drawn to day trading a few years ago and found that it was actually a rather difficult way to make money. The GG offered an elegant alternative. Cut the stock universe down from thousands to a handful, and instead of buying and selling, just buy. Instead of being a day trader, be LTBH investor - like Lynch and Buffett.
Perhaps Apollo's friend offered the most valuable insight when he said tech investing and LTBH are a dangerous mix. Now, perhaps many of the stocks followed here will reach new highs in the next few years. Perhaps a stock like RMBS will be selling at $100 in 2004. Perhaps someone who bought at $80 and held as it fell past $8 will feel vindicated at $100. But regardless of what happens, can holding a stock that falls from $80 to $8 ever be justified?
I think that in a broad sense two factors ultimately affect the price of a stock. One, of course, is the earnings per share, while the other we might call market momentum. Lets look just a the first one for a moment: Buying a stock is no different from investing in the corner pizza parlor. Either the business generates an acceptable return on your investment or it does not. If it costs $100,000 to partner up with the pizza guy and you expect to make $500 a year on it, then it is a real bad idea. Similarly if you buy a stock with a trailing p/e of 200 you have to realize that you are taking a gamble, and the only way for that gamble to pay off is for something extraordinary to happen. The company has to conquer new markets, earnings have to grow at an incredibly high rate, competitors must be fought off successfully for years. Because ultimately, in the long run, earnings will determine the price of stock.
The second factor distorts that simple truth that earnings drive prices. Over a shorter term market momentum plays a much larger role. This factor actually allows someone to make money on a unsound investment. So what if Amazon is losing money. So what if they may never turn a profit. If I can buy the stock at $100 and sell at $200 a month later, who cares about the fundamentals. The trap, of course, is that things change - like the song stopping in a game of musical chairs. If sentiment is upbeat, and rose-colored glasses foresee an astounding future then prices can leap far above what earnings can support - at least for a while. In a similar way, if negativity is rampart, even a sound money- maker can be trashed.
Perhaps, every time we make a decision we should write down the stock, its earnings, it's potential earnings, the reasons why we think it could fulfill that potential, and the market phase we think we are in. The latter is important because, as we have seen, market phases do not last forever. They call them cycles for a reason. It's fine to buy during a mania, just as it is fine to sell into the teeth of a bear, but such actions probably make a poor opening in a LTBH strategy.
StockHawk |
