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Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: michael modeme who wrote (56941)	11/9/1998 2:56:00 PM
From: Chuzzlewit	Respond to of 61433

Michael, I agree that a modified buy and hold strategy is optimal for investing. However, if you receive a significant premium over market price for your holdings, there is a wide spectrum of alternative investments that have a high probability of achieving growth as high or higher than that expected for ASND. So if ASND received a buy-out offer at a significant premium to market I think it would be foolish to oppose such a merger. A few months ago I demonstrated in a stock market talk just how large the advantage was for a buy and hold strategy over a trading strategy neglecting transaction costs. The reason is this -- when you trade you must pay taxes as you go, so a certain percentage of your investment profit is peeled off at every trade. You might find the following example interesting. Suppose we are analyze an optimal investment strategy on a stock growing at 35% per annum. After a 5 year hold the after tax profit will be about 251%, or about 28.5% per annum (assuming a 28% tax rate -- no advantage given for long-term capital gains in this example). By contrast, a trading strategy would yield an after tax rate of only 25.2%. In order to achieve an equivalent after tax rate of return the trader would need to realize better than a 39.6% pretax rate of return on his investments. The reason for this disparity is straight forward. If the tax is viewed as a deferred liability, then it is essentially an interest free, non-recourse loan. Applying real life differences makes the gap even larger: a lower long-term capital gains tax rate and transaction costs. For example, using an 18% LTCG tax rate increases the after tax rate of return to 31%. The trader would need to generate 43% pre-tax just to stay even. That number increases as you impose transaction costs. It reminds of the Red Queen who pointed out to Alice just how fast you needed to run to stay in the same place. TTFN, CTC