Re: Asset Allocation , part 3: it's a TIME thing

From: "Steve Foulks" <steve_foulks@up.bresnan.net>
Subject: Re: Asset Allocation , part 3: it's a TIME thing
Date: Wed, 19 Aug 1998 11:17:47 -0400

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Randy Barnes said:

>First you say the average person cannot beat the market, then you say you
do. Are you not average? ;-)

I would say that as a stock picker I am certainly average (after all I spend
little time at it) and my above average return is due a lot to luck.  When I
started my PhD program in 1990, I decided to move my Keogh plan assets from
mutual funds to individual stocks.  I had a feeling (hunch) that computers
were going a big market world wide in the future.  I thought of 4 stocks -
Intel, Microsoft, Motorola, Apple.  Since I was using Wintel machines ( my
first supplied by my employer)  and I really enjoyed the advantage that my
computer gave me, I split my money equally between Intel and Microsoft.
Those two investments have made my returns "above average".  Was it superior
picking skills - no, it was luck.  My employer could have bought me a Mac
and I probably would have went with Apple / Motorola.

>Really, I am pleased that someone gets it. Your point about hold forever is
the key. Your strategy IS THE strategy for beating the market.

I wish I could say that I developed my strategy because I was born with
infinite investment wisdom, but in fact I probably made the same mistakes
that every other investor has made.  I used fundamental and technical
analysis, and when I first started investing, I invested on "hot tips" from
my broker.  The key for me was going to The University of Chicago and
getting my MBA with a concentration accounting/finance and learning about
empirical testing of investment methods.  Prior to the 1960's investment
strategies were based upon "arm chair" philosophizing (i.e., if the head a
Wall Street brokerage firm's research staff said you should chart stock
price movements and analyze them in a certain way you would make money, then
the average investor would say this guy must know what he is talking about,
so they would buy his advice, etc.)  In the 1960's with the advent of high
powered computers and stock price data tapes academics began to analyze
these arm chair philosophers' techniques and found that when you applied all
of the various strategies that you investment returns were no better than
throwing 30 or darts at the WSJ stock listings and buying and holding those
stocks.  In fact this method gave superior returns because you avoid
transaction costs (brokerage fees, time wasted on stock research which could
be spent earning more wages, etc.).  It was at this time that I quit giving
money to brokers, quit listening to them and starting keeping money for
myself.

Something else happened early on in my investment career that made me change
my investment strategy.  I worked for a big CPA firm as a specialist in the
brokerage industry.  One of our clients was a trust set up a wealthy
individual to sponsor medical research.   It was at this time that the IRS
imposed a tax on certain tax exempt trusts.    One of the things that we had
to do was establish a basis for all stock owned by the trust to calculate
any gains or losses, should they sell the stock.  The trust's philosophy was
to  buy and hold stock in top quality companies.  Some of these stocks had a
cost basis of 10 cents a share, but were worth $60 to a $100 a share when I
did my work.  I thought to myself, why am I buying these "fly by night"
stocks on the recommendation of a broker, Barron's, etc.?  Since that time I
have only bought stock in real quality companies.  They don't go up 1000% a
year, but over the long haul, they make you wealthy.

Most investors are encouraged to be greedy by their brokers.    They want to
buy those stocks that give 1000% annual returns (I would like to also).   I
have learned that only occurs by chance and chasing that dream enriches
others at your expense.   I hope others will seriously think like you and I
do and begin to keep their own money and profits rather than giving it to
others!






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