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Pastimes : G&K Investing for Curmudgeons -- Ignore unavailable to you. Want to Upgrade?

To: Uncle Frank who wrote (706)	1/28/2000 10:35:00 PM
From: William	Respond to of 22706

Great link cuf - I went there and found this - well worth reading. Plus a reading assignment. You up to starting another new thread unQ? Robert Loest, Ph.D., CFA Portfolio Manager January 27, 2000: Risky Times. Karen Damato of The Wall Street Journal wrote an excellent piece on risk disclosure in mutual funds in Thursday's issue. Most risk disclosure language for mutual funds is boilerplate, unlike our Human Language Risk Disclosure, and people simply don't read it. There is more to it than that, however. First of all, we are never going back to a stable, mature civilization where things are predictable and improve only incrementally. This isn't a "bubble" - it's a permanent change in the nature of risk and the markets. Growth rates won't slow down again and give us a breather. They are just going to speed up. The reason for this is the nature of intellectual capital. It builds on itself geometrically, even combinatorially. This means very slow growth initially, and a long time ramping up to where things take off. But when we get there, look out. The Internet has enabled humans to begin putting knowledge to work in so many different ways that the rate of innovation and value creation is hitting the steep part of the hockey stick curve. I don't know where it ends. No one does. But it doesn't go back to where we were before 1995. Secondly, the direction of risk has changed. During an aging, slow growth, mature industrial civilization, there were virtually no super growth companies, growing at 50% - 100% per year, to make up for mistakes. So the risk was that you picked a stock that tanked, say, 50% for some reason. Mistakes like that could wreck a portfolio, because it took the other, better companies a long time to make it up. Even even the really fast growing companies like the big pharmaceuticals only grew 15% - 20% a year, for the most part. Growth rates higher than that lasted only briefly. Portfolio managers focused on what's known in tennis as a "Loser's game" - on not screwing up, and letting the other guy make the mistakes. This is what "value" investors do. That's no longer true. The risk today is that you aren't in those companies that are growing sales 50%+ per year, and earnings at 100%+. It matters much less if one of your companies gets into trouble and drops 50%, because you can make it up on another company in a day, and your fund is stuffed full of 'em. So successful portfolio managers today focus on what's known as a "Winner's game" - pushing the other player into a mistake by aggressive play. This is a fundamental change in the way we should be picking stocks. Furthermore, the reasons for 50% drops have changed. A 50% drop in the old industrial world before 1995 meant a company had screwed up big-time, and it would probably take years to recover, if ever. That's still true of the old economy companies, but not Internet stocks. Price drops of 50% or so are a routine part of the annual trading range of virtually all Internet stocks. In this group, it is not usually a reason to sell. It just goes with the territory. So, you can't apply the old rules like stop loss orders, or you will simply sell off all your best companies, and be stuck with a bunch of canal and rail stocks from the Dark Ages. If you think this is some crazy, wild, speculative leap, maybe so. Go visit our Amazon.com book store and read Complexity, by Mitchell Waldrop. Read Out of Control, by Kevin Kelly. Read At Home in the Universe, by Stuart Kauffman. Do it in that order. It won't seem crazy at all then, I guarantee it. So if you thought that if you just stuck it out, you'd get a breather and be able to get back in, or have time to figure out what the hell's happening, forget it. We're never going back, guys, and we're never slowing down. Get used to it.

To: Uncle Frank who wrote (706)	1/29/2000 3:02:00 AM
From: red jinn	Respond to of 22706

franq: i'm traveling so much i barely have time to keep up; i'm usually at least 3 days behind at best, and you can see what time i'm responding now. yes, i know it's a morningstar 5*. we were laughing about the disclosure in the office earlier this week, and i said (to myself) i know where it'll get at least a chuckle if i get the time to post, although i must say that while i know i admire your skepticism, i don't tend to post stuff i'm not sure about without putting in a disclaimer. i know i'm heading to salt lake next week and perhaps to calif the week after on a matter related to a sometime subject on the g&k thread, but i can't say more. best, red jinn