BC: LTB&H vs Trading
Some cogent comment from Bruce Brown on G&K thread
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I'm going to do a littly poxy-pooh on that theory. Taxes and trying to get that perfect timing will help eat it alive over the longer term and destroy the power of compounding. It's easy to climb on board the trading wagon after the October 1998 to October 2000 period or the 1995 to 2000 period we have just gone through and say trading is "the way to go". However, those two periods are short events. There are investors on this board that held shares of Cisco, Microsoft, Oracle, Intel and others before those time periods. What we are trying to accomplish is a portfolio of investments using criteria that is a longer term strategy in high technology investing. Maybe the lure of Silverback growing at 15 - 23% per year is not going to win you quick doubles and triples, but over time it can build a lot of wealth. As the gorillas and kings mature, we simply continue our hunting and add shares of younger promising ones like a Siebel (to use as an example) for some higher growth companies. It, too, will mature and another young company will come along.
You've got to look at the power of compounding. Whether you back to the IPO days of the gorillas we know, or use a point in time one year, two years, three years, four years, five years or more beyond their IPO's - look at the returns of Cisco, Oracle, Intel, Microsoft, Siebel, Sun, EMC, Network Appliance, i2, Qualcomm, etc... from each vantage point.
Using the closing price on the first trading day of each year, what's Cisco look like for those that bought and held using the current price of 54 1/2?
Here's the chart and it shows that one share purchased near the beginning has grown into 288 shares.
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Cisco 1990 to present = 64,627%
Cisco 1991 to present = 35,779%
Cisco 1992 to present = 11,836%
Cisco 1993 to present = 4,931%
Cisco 1994 to present = 2,954%
Cisco 1995 to present = 2,775%
Cisco 1996 to present = 1,184%
Cisco 1997 to present = 680%
Cisco 1998 to present = 463%
Cisco 1999 to present = 129%
Cisco 2000 to present = 1%+
I could have gone through many of the G&K stocks to illustrate the power of compounding that longer term holding provides over the years. Intel over the past 30 years. Oracle. Microsoft. EMC. Sun Microsystems. Obviously, one could always come up with dates and prices of these equities in the past to show some data that trading might have worked, but in general that's not our long term goal of trying to trade in and out at what might appear appropriate times.
However if you are like most of us then you need to ask yourself yourself how many years of bear markets have there been vs bull market and which one has won out over the history of the market, obviously the bull.
I posted the information before, but this is something I shared in a Fool seminar this year:
"Why you should forget timing, use a buy'n'hold strategy."
[In his classic, "How To Make Money In The Stock Market," William O'Neil, publisher of Investors Business Daily, says: "During the last 50 years, we have had 12 bull markets and 11 bear markets. But guess what? The bull markets averaged going up about 100 percent and the bear markets, on the average, declined 25 percent to 30 percent. Not only that, the typical Bull market lasted 3.75 years and the classic Bear market lingered only nine months. Every single time the market recovered and ultimately soared into new high ground." Get it?]
I don't want to offend anyone because I know we all use a variety of strategies that meet our comfort level. Yet, a solid portfolio of companies growing their earnings and revenues throughout the years will reward the patient investor. The G&K index is up 34% at the moment YTD. Boy, you can create a lot of wealth over time at that kind of return. A lot of wealth. The return on the Index was not achieved by trading this year. Even though at the end of this year via our portfolio survey that list might get altered, I would suggest we keep it in the database to see what it looks like one, two, three, four, five, six and more years from now with the stocks in it. We're trying to build a strategy and mix of investments in our portfolios that will allow us to reach our goals.
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No, I understood your point. Perhaps I just launched off to join the rest of the discussion on the board concerning the allure of trading vs. LTB&H.
Yes, there are a variety of strategies for investors to use. You seem to mention 'talent' as being an issue for execution. I imagine we could argue the use of that word, but I understand your point. We know that the chapter about CAP explains what happens when the interest rate/bond rate/taxation on business profits picture is altered. The CAP comes down because the end result will be an environment where growth is not as robust. 1999 leading into 2000 had increasing interest rates and the market moved forward nonetheless. For many investors on this board, that was the first time they had seen such an environment develop. I know that Mike, myself and others discussed this in terms of valuations at the end of 1999 which led some of us to actually raise some cash (which of course causes Uncle Sam to get his take) to simply improve our comfort level. That was reality at the time. Some of the valuations were looking rather rich in the face of the interest rate environment and the market will usually do its discounting which it did. There are plenty of other strategies available, but some of it is coin tossing and some of it isn't. There are also tax loss strategies of rolling over the lots purchased at higher points to lots purchased at lower points which is a standard method of taking advantage of what Uncle Sam gives us to offset gains. Just how much of a 'slowing of growth' from robust to less robust will be the end result of the interest rate increases? That is the question that turned on the 'after burners' of gloom and doom, pundits and fear which fueled the sell off correction and instilled panic as well as the "I'm a deer in headlights" reaction. That type of a reflection is difficult at best to gauge, but it doesn't really change the underlying elements of gorilla game criteria and portfolio membership. Which companies have the type of cash horde and pricing power to weather a 'slower growth' economic environment?
You mention Qualcomm as an example or selling others at their March highs (many of which have gone on to new highs since then). Reality is that most of us are not sitting around watching Level II quotes and tracking supply/demand for equities trying to gauge the direction the price of a stock is going to take in hopes that we 'get out at the top'. Nor are the majority pounding around at fundamental analysis trying to ascertain exactly what a good value for each equity would be at any given moment. Reality is that the majority of us did not know those were the highs at the time. We can say so in retrospect. We can talk about Qualcomm getting way ahead of itself based on the earnings, revenues, growth rate and news based momentum trading which eventually led to a correction in the stock. Many used the opportunity of the major sell offs to add additional shares at lower cost basis points when nobody else wants to buy.
Microsoft is up 36,037% and it went through 1987 discomfort, the 1990-91 gulf war and interest rate led "bear market", the 1993-1995 period, the DOJ woes and this entire year. Through those periods, there were opportunities (in retrospect) for adding shares that proved to be attractive entry points. Likewise (in retrospect) there were opportunities for other strategies during those time periods.
However, the gorilla game strategy in high technology that is aimed at the majority of us is aimed at the retail investor who is buying quality companies with their savings from their job. Here are some of the G&K members as well as a few others to see what the longer term looks like without timing.
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What will these companies and others look like over the years going forward? I believe the long-term trend line of the Nasdaq is based on 20% annual returns. Using that trend line and adjusting it for a variety of economic conditions, we could come up with a range of Nasdaq 12,000 to 16,000+ in ten years time. That's not to say the past is any indicator of the future, but there will be companies in high technology that will experience such growth going forward. Trying to time all of that to a perfect execution may or may not be the strategy of choice. If you look at all of those charts above, there was talk all along the path of resistance, support, technical analysis, fundamental analysis, upgrades, downgrades, missed earnings, surprise earnings, slowing growth, increasing growth, acquisitions, dividends and on and on and on. Yet the overwhelming evidence of long term investment in the best companies remains compelling enough to allow all of us to meet our goals. It doesn't happen overnight. It takes time.
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