JB:
I find it strange that you and some others have been sending me
requests for my opinions on stocks to buy, price targets, short-term
movements, etc. Odd, considering that I publically blew it on my
MSFT sales Monday. To forestall further requests, I thought I'd
offer this little missive on Valley Girl's personal investment
philosophy. I am *not* offering investment advice here, simply
telling you what *I* have been and will be doing, and why.
I am a long-term investor. My investment objective is a nice
retirement while I'm still young enough to enjoy it. My plan is
simple: find some stocks with good long-term growth prospects, buy
them, and wait to get rich. Since I also have a steady supply of
additional cash rolling my way, I buy the same stocks steadily over
the years. Dollar-cost averaging is heartily recommended, though I
can't resist the temptation to accentuate my gains by aggressively
buying dips as well.
So, how do I find good stocks? The first thing I look for is a
dominant and hopefully unbreakable market position. The second thing
I look for is a growth rate in excess of 25%. This last is essential:
over 5 years, a 15% growth rate (e.g. HWP) will double my money,
whilst a 25% growth rate will triple it, and a 33% growth rate will
quadruple it. Since I don't have a large stake to begin with, I
need the bigger growth factor to reach my objective.
Any stock with a high growth rate also entails a high degree of risk,
so I make an evaluation based on risk versus reward. Guess which
stock fits this profile better than any other I've found? MSFT. It's
usually good for a 25% return, and currently it's better still at 35%.
It's my touchstone, my "bank", the default investment for any spare
funds I've got. Any other potential investment has to compare
favourably to it or I sit on my hands. I'm not concerned with
"diversification" into other stocks or sectors, because I'm not
managing a mutual fund and so face no pressure to show regular annual
gains. Time is my ally.
Still, one occasionally finds a stock with comparable fundamentals,
offering a higher growth rate (but at a higher risk). Two that have
done well for me are CSCO and ORCL. Except for a token stake kept
for old time's sake, I've exited CSCO because the growth rate appears
to be slowing, and competition is heating up. (I'm probably dead
wrong, but it sure looks to me like the networking sector is a little
rocky right now.) I'm still in ORCL, though again if the growth
rate starts to slow down I'll be back to Bill Gates' warm embrace.
I'm bullish on both INTC (long-term) and SUNW (only short-term), but
haven't bought them because they don't compare favourably to MSFT
except over short time spans. Thanks to its recent collapse HWP is
even starting to look tempting. I'm passing on the "bargain
basement" in semis right now, but might get hungry if things start
to pick up later this year (watching AMAT closely).
I'm always looking for another CSCO or PSFT to get me 100% growth.
Anything with that growth rate is highly speculative, so I never put
more than 5% of my portfolio into one of these until it's past the
"ignition stage". (I'm always prepared to lose 80% of my investment
in a pre-ignition high-flyer.) I considered NSCP, but the price
rocketed past my (low-ball) buy on day one, and we've not seen it
since. If you're curious, I've been sniffing 'round new issue SEBL
and like the aroma, but not the current price. Sigh, too cheap for
my own good sometimes.
The problem with stocks that everyone likes is, well, that everyone
likes them! It's hard to get them cheap. You have to wait for CNBC
to offer up some irrelevant twaddle that drives the price down to an
attractive buying range. A perennial favourite of mine is interest
rates -- like I'm really going to run for the exit from a 25% growth
stock to loan money to Bill and Hillary at 7.5% or even 8%. (In
the case of MSFT, perhaps we should start a letter-writing campaign
to Janet Reno to set another anti-trust investigation brewing.)
I usually resist the temptation to trade. It's tough, though,
especially in years such as 1993. When things are moving up, I keep
a 20% cash reserve in case of a correction, with the idea of
lightening up after things turn around. I bought MSFT big-time when
it was at 84 this year, and tried to sell a portion last month at
127 because it was overvalued by my model -- too greedy for my own
good, I missed the exit by a point! I sold my CSCO position at 57
for reasons stated earlier. I thought at the time I might catch a
"sympathy" drop in SUNW on HWP's news, then ride it back to the 60's.
This worked pretty well with ORCL earlier this year when SYBS started
to unravel. I never, ever make a trade where I wouldn't be willing
to hold the stock for a least 2 years if I've bet wrong. If it
becomes obvious I'm going to lose anyway, I take my loss promptly,
rather than sending good money after bad by "averaging down".
What luck then that instead of my sympathy drop the entire Nasdaq
slid into the loo! Alas for traders, the market's short-term
movements are a "random walk" unless you're very, very good. I don't
hold with charts, except to determine trends and support/resistance
levels. I love to watch the clever chaps plotting out "head-and-
shoulders" formations, etc. Utter rubbish if you ask me. So please
no more questions about where this or that will be in a week or two --
nobody really knows!
One big reason not to trade is taxes. Bill Clinton stands ready to
collect anywhere from 28%-40% of your short-term profits for the
welfare state, and (here in the Golden State) Pete Wilson's got his
hand in your purse for another 9%-11%. By going long-term, you can
earn returns on what would otherwise be your tax liability, and
defer payment for a long, long time. (Plus pay only 28% cap-gain
tax, attractive if you're in my tax bracket.) To break even, you'd
have to bail from a stock just before a 30-40% drop, then buy it
back with after-tax funds. Sorry, I'm just not a good enough trader
to do that.
I kicked my option habit years ago, and won't try 'em again. The
premiums have a way of eroding your capital rapidly, so you're
timing's got to be far too accurate to make money on them. LEAPs
(long-term options) and warrants (e.g. INTCW) are a different kettle
of fish entirely, and in fact I have some of these squirreled away
in my piggy-bank. (Got to get 'em when the premium is low, though.)
I don't buy on margin except when I need to act like quicksilver
(for instance, I used margin to grab MSFT at 108, then transferred
the cash to cover it afterward). I never short stocks: it's just
not worth betting against the long-term trend of the market.
Besides, there's a personal attitudinal issue: I like running with
a herd of big, strong bulls, not circling with a flock of buzzards.
Well, this is my last post for a while, I'm not sitting at this
infernal machine for the rest of the summer, no matter what happens
to the Nasdaq. Good luck to one and all! |
