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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (3882)	4/19/1998 6:57:00 PM
From: James Clarke	Read Replies (2) \| Respond to of 78462

Paul, thanks for the thoughtful post - it made me think - but the analogy has a fatal flaw. Rolling dice is purely random. The odds of a seven are exactly the same whether the last five rolls were sevens or if there hasn't been a seven in forty rolls. But in the market, if you are thinking in the long term, the "odds" are related to price moves. After 40 rolls without a seven (i.e. the market trading at 27 times earnings), a "seven" (interest rates increase, Clinton gets impeached, or any number of other things that could happen) has devastating consequences. After five straight sevens (check out where stocks traded in the 1970s), the market trades at 10 times earnings, and one more seven doesn't really hurt you. That's the way the game is played at this table. Which means cashing out when you're happy has to be an option. To refine that analysis a little more, in Vegas, the behavior of the other betters is irrelevant. The odds of a seven are the same. You are essentially still playing against the house and against the dice whether there is one other guy at the table or ten guys betting $1000 a roll. But in stocks, the behavior of other investors is critically important. Because you are "betting" on THEIR behavior, even if you buy a stock that is reasonably valued. You are certainly betting on other bettors behavior if you buy an internet stock today. And at the table, what is a seven is pretty clear. Its either a seven or it isn't. When you play the stock market game, the question "what is a seven?" changes with the multiple. Cendant traded at 50 times earnings and announced horrible news and got cut in half. Harnischfeger traded at 10 times earnings and announced horrible news last week and the stock dropped about 5%. Just some food for thought.