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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: solihull who wrote (41766)	4/13/2001 10:27:34 PM
From: Rick	Read Replies (2) \| Respond to of 54805

"A slow road back for gorilla stocks" "Joe Dancy, manager of the LSGI Technology Venture Fund, publisher of the LSGI Technology Market Letter members.aol.com, as well as the Lone Star Growth Investor Update members.aol.com, provides the following article. Below is his write-up. A best-selling investment book entitled The Gorilla Game advocated buying shares in giant companies with virtual monopolies, with little or no regard for the valuation of such firms. Yahoo, Cisco and Intel were a few of the "Gorillas" that delivered earnings growth for a short period of time, but the stock prices of many of these companies are off more than 50 percent from their market highs. The question now is how fast will these firms recover? Behavioral finance studies: The disposition effect Psychology professor Thomas Gilovich and financial journalist Gary Belsky analyzed behavioral finance issues and how psychology impacts the investor in their recent book Why Smart People Make Big Money Mistakes and How To Correct Them. One of the central principles of behavioral economics is that most people are "loss adverse," which means that "the pain people feel from losing $100 is much greater than the pleasure they experience from gaining the same amount." For this reason, investors many times will behave inconsistently when taking investment risks, and their investment judgment will be skewed. Those unaware of these issues make common and predictable investment mistakes. Because of the psychological "pain" caused by potential losses, many investors prefer to invest for a certain gain, however small, over a highly probable chance to obtain a much larger gain. Studies have shown that investors are too slow to sell stocks that have gone down in price or have not performed well because the investor hopes that they will "come back." The investor’s rationale is that a loss is really not a loss until the sale occurs, at which time the loss (and pain) are "final." The fact that investors are more likely to sell winners too early, and hold the losers too long, has been termed the "disposition effect" by academics. Because of this tendency to hold losers until they "come back" we would expect many investors holding losses to liquidate their positions as the valuations improved under behavioral finance principles, which would slow any market advances in the Gorilla sector. Historical precedent Personal computers drove the Nasdaq index to a peak in June 1983 as the technology excited investors with the potential of this new market. The PC was a technological and market breakthrough. Unfortunately, according to Elizabeth MacKay of Bear, Stearns and Company, once the index fell from that peak, it took two-and-a-half years to recover to those levels. According to MacKay, another historical perspective can be seen from the spike in the price of oil stocks during the energy crisis of the late 1970s. The oil composite index spiked in November 1980, and it took almost six years for that index to recover to peak levels. MacKay notes that recoveries are never as fast, or as strong, as some expect. As we move forward we would expect that that the road back will be a slow one as investors will be much more cautious when buying the mega-cap Gorilla stocks." siliconinvestor.com - Fred