Joe,
Just to follow-up to your post about holding long term. The bite of taxes is an argument ( and a very good one I must agree) that proponents of buy and hold make, but with some very simple assumptions, let me present a scenario.
Assume that at the beginning of the semi-equip runup in early 1995 an investor had 50K to invest. He (it could be a "she" as well) said "the time is now to invest" (more words about this later) in the group of 41 stocks (actually there were only 38 then). So he put the list up on the wall and threw his darts at the list and selected five stocks in which he invested equal amounts of 10K each. At the end of the 5 month period in 1995 after the group had doubled, he sold the five stocks for 100K - he had a gain of 50K. Now the tax man, state and federal, (could be a woman) came pounding on his door - pay up he says! Let's assume a worst case situation of having to pay the tax man 50 percent of the profits, or 25K. Now the investor has 75K in his pocket.
Since I made the remark earlier about investing in Coca Cola, I will have the investor stick with that stock and look at what it was selling for in the fall of 1995. Let me round the number off at 35 per share. He invests all his money in KO. He waits until the spring of 1997 and he says - Oh,Oh - the semi-equips are about to go on another run - I'll sell all my KO and invest the money in the semi-equip sector. Selling KO in April of 1997 gets him 58 per share, for a gain of 23 per share or a gain of 66 percent - his stash is now worth 125K. However the tax man wants his due so he forks over 50 percent of his gain, or 25K ( I am being very conservative here since he has long term capital gains at 28 percent max federal rate). He is now left with 100K to invest in the semi equips.
He puts up his dart board again and this time he selects 10 stocks out of the group of 41. This should give him pretty close to the average gain of the group which was approximately 100 percent by September 1997. Now his worth is 200K. Of that he gives 50K (short term gain) to the tax man, and he is left with 150K. He now goes back to KO and invests the 150K at 60 per share. The closing price on Friday was 87 and change. That brings the story up to date - sitting in KO with a 27 per share gain or a 45 percent gain for a total investment value of 218K - not bad for starting out in the spring of 1995, a little over 3 years ago with 50K. Assuming the period at 3.5 years, the yearly gain of this approach is 52 percent.
If I had been that person, and presently invested in KO, I would not be selling today to invest in the semi-equips - there is no sign of life there as of the week just ending.
I hope nobody takes me too seriously with the above scenario and my proposed approach. I was just having a little fun by postulating another method of investing with specific application to the semi-equip group. The scenario presented assumes the beginning of the rapid run-up period of group prices can be accurately located - probably very difficult to do. However, the scenario was very conservative in the amount of money given to the tax man, and the fact that a reasonably prudent investor could not do better than investing in the "average" of the group by using darts. |
