OT: By stated decorum on the thread header, I need to label this as OT. However, my intent is somewhat related as to the overall market direction of various segments within technology as time unfolds over the years. That might be on or off topic, but I will label it OT in compliance with the board. I'm here to observe and do not want to disrupt the flow of information on this board.
I wrote:
"That's the way I've played the game for the past two decades and most likely will be the way I play the game for the next two decades."
Kymar wrote:
If the market and the world cooperate, your way of "playing the game" may work just as well looking out to 2020 as it has from 1980 to 2000. If 2000 to 2020 are an average couple of decades, then the style may, at least, give returns well in excess of other investment approaches (or trading styles), but will remain unlikely to duplicate or even come close to duplicating the returns generated by timely investment in leading growth stocks during an extraordinary period such as the one in question.
Quite understood. I wasn't trying to imply that the forward two decades were going to mirror the previous two decades at all. I'm not expecting that. I was simply stating that the power of compounding worked quite well in the past two decades and there are plenty of examples in individual companies of it working through other decades in the previous century as well when one was invested in the 'right' companies. Were there lulls and points of negative return? Yes. I count on that at times. It all depends on the goals of each individual investor. Would a goal of 9 - 14% annual returns be too aggressive? How about 15 - 20%? Too many try to shoot much higher than these, but I'm too realistic and understand well what a lifetime of more historic returns can provide a life long investor. I began investing in the 70's when bank CD's were paying double digit returns, yet I chose equities over that scenario and it turned out to be the right strategy. At this point in time and the positive result of compounding in my portfolio, if I could land a double digit bank CD - believe me, I would now take it. However, since I don't want to put my money in Russian or Polish or Czech banks to boost my yield, I will have to seek possible double digit returns in the equity markets.
I also didn't intend that my compounding views were meant to only reflect technology equities. One can only dream about companies like Wal-Mart and Home Depot. At least I can only dream as they are both investments I never held, but I'm well aware of the returns they have provided. Even if we take the century darlings like Coke, General Electric, Disney, etc... we can see what the power of compounding throughout the century provided. True, as investors, we don't enjoy a century of investing. However, I will most likely have the fortune of enjoying a good 65+ years of investing with 20 of those already behind me. I would also expect, as you suggest, that my strategies and style will evolve over the next several decades just as they have over the previous two decades.
If 2000 to 2020 are below average, it might be very difficult or unlikely to get very far simply by holding onto stocks, even the gorillas, as the inevitable losses/errors in judgment which are easily overcome during a bull market tend to extend and multiply during such periods.
True. As each technology adoption life cycle presents itself and the 'broken' problems in a mass market target are addressed via a 'fix' that becomes a dominant standard, the point is that owning the company with that 'fix' is a risk averse strategy that will most likely fair better than owning companies that don't have that dominant 'fix'. It's hard to predict what the returns would be in a down or negative decade or two, but if the company continues to grow earnings throughout that time period or a good portion of it, I would still prefer to have my money in such a company as opposed to a company that is not on a such an earnings growth track. As absurd as it sounds, it's almost a form of value investing. Rather than get into that, I'll just state that it is not akin to buying beaten down stocks that may appear to be a 'value' play.
I think the grand strategy you describe is at least worth keeping in mind, and perhaps employing alongside other strategies, but I just wonder if, under the right wrong circumstances, and especially for newer, less experienced investors, it might not turn into the classic mistake of fighting the next war with the tactics that were successful in the last one.
Certainly valid points you make and that I have considered. The future will always present new 'wars' in technology. Especially the higher layers of technology. Plenty of newer investors are still focused on the PC technology adoption life cycle. Even Fleckenstein spends a great amount of time focused on the companies in it. However, that's a cycle that began in 1980. The companies that led that cycle and the enterprise cycle that grew out of it in the 90's do not the entire technology arena make. We've seen a host of companies in the Web architecture space come alive and become the leaders over the past 5 years even though plenty of focus was still on the big guys like Microsoft, Intel, Cisco, Oracle, Micron, Dell, Compaq, Apple, etc... . That's only one area. There are many others. Whether one jumps from cycle to cycle or slowly transitions and rotates into each new cycle as it comes along depends on what type of technology investor they are. I use an 'age mix' approach.
Regardless, I'm one of the few gorilla gamers who keeps a well balanced portfolio that includes things about as far away from technology as one can get. Most of the equities in that non technology portion have seen a 50 - 100% share price appreciation this year. This means that many of them have now approached multiples that I feel are not sustainable for much more appreciation based on the fundamentals. That leaves me with decisions to make that take into account longer term future performance and trying to calculate the pros and cons of holding vs. taking profits and attempting to time an entry at lower multiples. They are all investments in segments that I want for the next decade to provide portfolio balance and therein lies the dilemma. Do I ignore the current valuation stretch and continue to let the power of compounding work even though that means their share prices might come down 20 - 40% to get more on a historical 12 month estimated EPS to stock price trend? Or do I sell and take the tax hit which is money I will never see again and trust that I can enter at a price that does meet the fundamentals? Would this transaction, after taxes and timing, prove to have been worth the effort and execution? All worthy of consideration.
I never intended to say that equities were to be buy and hold forever. I was more focused on what the effects of long term compounding can provide in companies that execute well through a variety of economic climates. That's the trick - to find a portfolio that contains a variety of companies that are able to execute. The gorilla strategy is to help address the technology portion of one's portfolio. It helps investors understand why Microsoft and not Apple. Why Intel and not AMD. Why Dell and not Micron Electronics. Why Siebel and not Vantive. Why Brocade and not Vixel and on and on and on in gorilla games and royalty games. If those terms are not the best terms one would like to use, then there are others that indicate the same divisions. As new games approach in technology, using the criteria is designed to increase the odds of successful investment. Even if companies target correct niche strategy and are consulted as well as marketed in the best of all possible worlds, it doesn't mean that their technology will be accepted and 'chosen' as the dominant 'fix' for a broken problem.
I apologize for taking up the market direction discussion board with that topic. My intent was not to debate with anyone the merits and pitfalls of strategy. I'm here to read the board and garner the insight and knowledge that all of you provide about market direction. We can all agree about the disconnect which took us from the bottom in 1998 to the top in 2000. There will be more periods of disconnect in future years - in both directions.
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