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Technology Stocks : Dell Technologies Inc.

DELL 127.22

+3.8%

Nov 24 3:59 PM EST

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To: Dr. David Gleitman who wrote (65693)	9/16/1998 1:30:00 PM
From: Chuzzlewit	Read Replies (2) of 176387

David, I know you didn't direct your question to me, but let me give you one very compelling reason to avoid TA. By its very nature TA is a trading strategy -- short term. But the inherent inferiority of that approach is easy to demonstrate. Lets make the assumption that on a buy and hold basis over a period of five years you earn 20% per annum pre-tax. Assuming you are a US citizen subject to capital gains taxes that works out to an after-tax gain of just under 17.3% per annum. But a trading approach using the same 20% gain works out to a 14.4% annual gain (using the 28% short-term capital gains rate). In order to just equal the buy and hold rate the trader would have to earn a little over 24% pre-tax! That's a whopping 4% premium over the buy and holder. And that premium increases with both the length of time and the base rate. At 20% over 10 years the pre-tax return for buy and hold rises to 18.1%, so the comparable pre-tax required rate for traders increases to 25.1%! If the base rate went to 30% the trader would have to net nearly 37% pre tax (a 7% premium). All of this just to do as well as the buy and hold strategy. And this analysis neglects transaction fees. There are two reasons for the inferiority of a trading strategy. First, there is a tax differential (28% vs. 18%); second, traders must pay estimated taxes in the year in which the gains are made. In other words, a buy and holder in effect receives an interest-free non-recourse loan from the government. Now there is a second reason to avoid TA. It doesn't work. There's lots of empirical evidence to back this claim up. I think the best person to ask about all of that evidence is jimleon. The best layman's discussion of this stuff is found in a book I've been recommending everyone on this thread read -- Burton Malkiel's A Random Walk Down Wall Street. This book is virtually required reading in every MBA program in the country. The book is cheap (lists for around $19 in paperback), and is probably the best summary of serious stock market research I've seen. TTFN, CTC

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