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Technology Stocks : TLAB info? -- Ignore unavailable to you. Want to Upgrade?

To: Katherine Derbyshire who wrote (5664)	6/17/1999 1:58:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 7342

Katherine, you are correct in your comments about herd mentality. The problem, of course, is that one never knows in advance where the herd will move, or where the price will stabilize (consolidate). It ought to be apparent to everybody (with the exception of "analysts" like Jubak) that there is a tremendous buildout in the telecom industry, and as Dave Dickerson correctly pointed out, that implies continued eps growth in the high 30's to 40% range. But the problem with trading on your gut feel (or TA for that matter) is that you are playing a dangerous game with the taxes. For the sake of argument, let's assume that TLAB share price increases at 30% per annum for the next five years. Assuming a buy and hold strategy, you would net an after tax gain of 25.96% per annum (at a 20% LT tax rate). Now suppose instead that you traded TLAB based on whatever indicators you used. The short term tax rate of 28% reduces your after tax rate of return substantially because not only do you pay a higher tax rate, you must also pay capital gains taxes quarterly (through estimated tax payments). That extracts a huge premium because of the money it removes from the market. In fact, under these assumptions a trader would need to realize a 37.3% pre-tax annual rate of return to simply equal the returns of the after-tax buy and hold strategy. Here's the math: After five years the pretax investment increased by 271.29%. At a 20% tax rate this is reduced to a 217.03% gain. Annualized (by taking the fifth root), this becomes 25.96%. Expressed quarterly, the after-tax rate of return is 5.94%. The trading strategy requires that taxes be paid quarterly at the rate of 28%, so the pre-tax return that the trading strategy demands is 5.94%/.72 = 8.25% per quarter. Annualized (by raising to the 4th power), the required rate of return becomes 37.3%. Even if taxes were not an issue, the trader would still need to do better to equal the buy and holder because of the costs of trading, which include commissions and buying at the ask and selling at the bid. Unfortunately, these considerations are not so easily quantified, but if we assume a spread of 0.30% on a round trip (which would include commissions), and a trading frequency of only two round trips per month, the trading strategy would net 93.04% of the buy and hold. In other words, the trader would need to enhance his gross annual return by 7.48% over that of the buy and holder to be at the same point. Here's the math: The amount yielded after each round trip is 1 - .0025 = .9975. There are 24 round trips, so annualized, this becomes 94.17%. This would require a 32.24% gross rate of return (before trading costs) [30%/(.9970)^24]. TTFN, CTC