Kent & Don - Very interesting discussion on Don's statistics. Looking at the ink "blob" I see a picture a little differently and think it has different implications to investors.
First, let me note that there are 100 valid strategies to make a lot of money in the market. If you have a system, whatever it is, and you stick with it you should do OK. That is the conclusion of Mark Hulbert and some others anyway when they have studied who is successful in the past anyway.
Second, I know there are people out there who trade and make good money, but I disagree with you Kent that "if you want to grow your net orth you have to trade". The reason is as follows: if you look at your after tax return (even with the new tax bill) you are giving the government 20% or more of your gains the minute you sell - and if your portfolio turnover is 100% a year (like most mutual funds) you could be penalized pretty severely from the tax standpoint. Also, the transaction costs between bid-ask and fees cut the return further. I'm not saying that you can't do real well with the 40%+ declines and rises that you note - but I'm just not sharp enough to know when to get out and when to get in. Trading is a lot of fun in that you are jumping into and off of a moving wagon. Mutual funds and professionals jump into and out of the market (100% turnover in most funds annually) and I recognize I can't play their game well.
Third, Don's point on "you really need to make sure you don't buy at the peak" is really valid here - or anywhere - if you buy a beaten up company with growth potential, and the downside is limited at least you won't be sitting with FSII for 2 years now and down by 60% from the peak in '95. Don't buy the steak if it is sizziling, I guess, you want the raw meat before it is cooked.
Fourth, you can make money in technology buying and holding to "grow your net worth" in my opinion. I own a slug of PLAB, one of the companies on Don's list, with a basis of less than $3 a share - and have held now for 5 years or so (it is around $24 now). There are a few others I own that have similar type gains. You need to watch technology really closely to make sure the company still has the products to be competitive - and when investing to be sure they have the research and potential to compete longer term (I think FSII meets the test here, which is why I bought and why I continue to hold).
So I guess what I'm saying is that looking at Don's figures I don't reach the conclusion that you have to trade to make money - although that could be one valid conclusion when dealing with the volatility of technology and small caps.
My conclusion is more along the lines that you should research the company well before you buy, be sure you pay a fair price and don't overpay (even if it means missing out on a real good looking "steak" with lots of sizzle), and limit your downside risk by buying companies with diverse products or with financials that insure they will be around for awhile. FSII is good "raw meat" from a valuation basis to own at this point in my opinion.
Best - Joe |
