A book I read that stated exactly what you say, that is, that
different market participants have different time horizons, said
that volatility in the market increases out to times of four years,
but decreases after that. Economic growth is relatively small
compared to a time frame of 10 years. For instance, if you can
estimate average growth to an accuracy of +/- 1%, then you
can estimate the size of the economy 10 years from now to
an accuracy of +/- 10.5%. This is a small number compared to
a stock market that sometimes changes by twice that in a
single day.
This gives you some sort of estimate for how fast dividends are
going to increase in the future. You simply discount with an
interest rate that you think appropriate to the risk, and make
a decision to either buy or hold accordingly. (We know that
investors never sell, cause stock just keep going up. :)
Do you remember Clearly Canadian? They had a great growth
rate and one of my pals tried to convince me to buy the stock.
I told him that it could be a fad, so I was unable to figure out
what it was worth. Saved me a bundle when it came back
down:
iqc.com
tscn.com
Investors get in trouble when they misuse the techniques used
to estimate growth in companies. The current general market
investor error is to look only at earnings growth, never examining
total sales growth, which must eventually limit earnings growth.
This is an example of taking a one-time earnings increase and
treating it as if it were repeatable. Earnings that increase due to
increasing sales are a lot more repeatable, but no tree grows all
the way to the sky, and high sales growth companies always
eventually reduce their growth. Anyone who doubts this should
figure out what the annual sales of a small company that sold
$1,000,000 in 1897 would be today if they kept an annual growth
rate of 20% going for the last century. (I get $82,000 Billion).
The error with CLCDF (?) was also to extrapolate their fast growth
rate too far into the future. In their case, even 5 years was too
long.
One way you can tell the difference between a speculator
and an investor is by their actions when the price moves
against them in the absence of any other new information.
An investor will just buy more, while a speculator is more likely
to let his stop loss take him out. I should note that everybody
is partly investor, partly speculator, and I have been attempting
to hone my speculative instincts recently, as I have been unable
to find great investing bargains recently. I need to force myself
to not think as an investor, with those long time horizons, but
instead to think as a speculator.
When I make a lucky day trade, it really feels great. And when
I lose, it doesn't bother me as much as it probably should. I think
this may indicate a predilection to gambling.
-- Carl |
