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To: sam who wrote (11196)	12/2/1997 8:03:00 PM
From: Pancho Villa	Respond to of 45548

Sam: I agree. This is why buy and hold strategies of even randomly selected stocks usually yield better results than active trading strategies. In the long run what really moves stock prices is earnings and on average stocks are priced to yield an average annual return of around 10%. This return is however risky as the standard deviation of the return for any single year is around 20% [yes twenty percent]. The risk for the average return if you stay in for n years is inversily proportional to the square root of n. e.g., if you hold the market for 25 years your average return is 10% but the standard deviation of the average return over the 25 years is only: 20%/sqr(25)=20%/5=4% or a five fold reduction in risk. What happens when you try to actively manage a randow process with a positive drift [this is what the stock market really is. Prices vary randomly but the drift is positive @ 10%/year. It is like a drunk guy with a tendency to drift a bit more to the right than to the left but you down really know if the next step is going to be left or right] is that emotions may take over you may become impatient, become a short term trader that sells low and buys high instead of the other way around. When you realize this is happening to you it is time to index your equity investments! Regards, Pancho