Re: Investing

From: <michael.e.kurela@us.pwcglobal.com>
Subject: Re: Investing
Date: Tue, 18 Aug 1998 14:24:12 -0400
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Randy (& Readers)

>Date: Sat, 15 Aug 1998 22:02:26 -0400
>From: Randy Barnes <rbarnes@mindspring.com>
>Subject: Re: Asset Allocation , part 3: it's a TIME thing

>You can beat the market by investing in a handfull of the top companies
>that will still be around 10 years from now. Avoid companies that the
>average person has never heard of. The names in our account include
>Dell, AOL, Home Depot, Safeway etc.. Buy big companies that are really
>live and kicking.

Fortunately there are as many different methods of investing as there
are investment opportunities.  I found myself disagreeing with both you
and Steven Foulks.  I do not purchase Blue Chips, nor do I purchase
top companies and hold them for long periods of time.  I also do not
believe in the notion that the market is purely efficient.  Do you realize
that there are many people who bought into a two-bit company years
ago called Microsoft who have since not regretted their investment ?

Market efficiency is a phenomenon that seems to hold at the macro
level.  This includes all activity over infinitely long periods of time
(more
specifically, a total economic cycle), across all participants in the
market
(traders, consumers, news media, foreign countries, exchange rates, etc.),
and among all economic systems that have first round, second round, or
tertiary influence.  For the individual investor, the market is *far* from
efficient.  Case in point - you can open a margin account and trade
securities during the normal market hours.  You could, alternatively,
establish a Level II margin account (NASDAQ), enabling you to trade
on the fringe (before/after market open) of those hours.  As a daytrader, I
have seen more colleagues earn abnormal gains during pre-market trading
than proponents of "market efficiency" would have you believe.



>> strategy.  I never look at annual reports, investment news letters, etc.
>> Rather than wasting hours analyzing knee deep out dated investment crap,
I
>> enjoy life.  My returns have been better that the market, because I
>> generally chose blue chip stocks, not because I "time" the market, or
know
>> how to pick winners.  I buy stocks when I have money and would only sell
>> stocks if I needed money.  If I spend an hour a month thinking about my
>> investments, that would be an unusual event.

>> [snip]
>> Steven M. Foulks, CPA, CFP, PhD
>> <http://www-instruct.nmu.edu/business/sfoulks/>


>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.  The average person CAN do this. This is not as risky over a 10
>year time frame as owning a bunch of stock funds.  The efficient market
>will make your little account of top companies outperform the overall
>market by some amount, which will translate into a more comfortable stay
>in the nursing home. Marketing and management costs will not be a drag
>on an account like this.

I have to disagree with you.  BOTH of you.  The majority of my securities
are never held for more than a week.  Most of them are held for only
a few hours.  By using my trading methodology, I turned $6k into $23k
in under a month.  It's a simple one, too, that limits your exposure to
broad market, macroeconomic, and microeconomic effects.  After
all, the idea *is* to buy low, sell high.

I *do* read annual reports, newsletters, and whatever else I can get my
hands on.  There is a wealth of information buried in annual reports
that financial analysis can pull out.  Especially for you investors who are
in it for the long-term !  For example, how is your target security faring
against
its competitors with regard to revenues, expenditures, R&D ?  Is it plowing
earnings back into solid capital investment or pissing too much away to
shareholders ?  Is it making poor M&A decisions (i.e., acquiring a business
unit in which it has no core competency or is not a component of
vertical/horizontal
integration) ?



>Another way to beat the market is follow a simple strategy, and let your
>portfolio autopilot for a long time period. My favorite is what I call
>the Fab 4, actually a version of the Foolish four, called "RP", whatever
>this means. Currently the 4 stocks are IP, GM, CAT, CHV. This is the
>surest, safest, easiest way to a million that I've ever seen. Check the
>numbers on this. The last 37 years are proof enough for me.
>http://www.fool.com/DDow/1998/DDow980213.htm

I would no more allow my portfolio to autopilot any more than I would
allow my career to autopilot.  The problem with most investors is that
they do not understand the market microstructure.  Why do experts like
to brainwash those who are less sophisticated with notions that the
market is efficient ?  I imagine because it is easy to grasp, has an
element
of truth, and is the foundation for many laws governing the market.  After
all, who wants to believe that others are making a profit on information
not readily available to everyone the broad market ?  Investing your
hard-earned money into stocks or mutual funds and not thinking
about it for more than an hour a month is BAD !  You *always* have to
look for opportunities and do not make the mistake of investing all
of your wealth into a single investment type.  Diversification outside
of the stock market is preferable.  Buy some land or apartment units.

It's not difficult to research and locate opportunities for abnormal
gains on a daily basis.  I typically utilize both long positions and short
positions.  The important thing is to do your research, understand how
the market operates mechanically, be able to execute trades quickly,
and in a high volume of shares.  My stock trades are done on highly
volatile securities, preferably those with frequent $0.25 intraday price
volatility or more.  Purchasing 100 shares is practically worthless,
considering
you can purchase 10,000 shares and earn $1k if the price moves
only 10 cents up or down; depending, of course, whether you are
holding a short or long position.

It's also a matter of utilizing common sense.  Last fall there was a
security,
Biospherics Inc. (BINC), that I was selling short around 7 7/16 and buying
to cover around 7 1/4 during the first and second weeks of September.  As
soon as I would cover my short I would take a long position and ride it
back as close to 8 as I could.  You can see by the 2-year chart
http://www.bigcharts.com/quickchart/quickchart.asp?sid=0&o_symb=binc&symb=b
inc&time=9
that this security was volatile and had a large volume of trading activity
during certain periods.  Efficient ?  Or an abnormal opportunity ?

Another example is a bank stock, Essex Bancorp (ESX), that ran up
over $8 per share from around it's average of $2 per share.  The
CEO in an interview could not explain the run up in price, nor could the
market.  I was  able to sell 3,000 shares short at $5 per share and cover
at $2 1/4.  My gain on that transaction was slightly less than $8,200
after fees with a holding period of less than two weeks.

Those are just two examples of many.


>Thanks again for your insight and extremely valuable information.  I
>hope that a few lurkers on this list see the light and realize just how
>easy building wealth really is. Buy the market in the S&P index, or just
>a small group of the best BIG companies, and let time do it's thing.

>- - Randy Barnes,
>Regular Guy

>PS, If you think you not average enough to beat the market then ride
>over to the library and read  What Works on Wall Street, by James
>O'Shaughnessy. His new one (title unknown)is a top seller right now and
>is probably a good choice too. Having read/skimmed this you'll be far
>above average and have better knowledge than anyone that ever attempts
>to "sell" you investments.

True, it's not difficult to build wealth.  The important thing is to find a
method with which you are comfortable and will permit you to have little
trouble sleeping at night.  I also recommend enhancing your (the readers)
education in finance and the market microstructure at a reputable business
school (Carnegie Mellon Univ (http://www.gsia.cmu.edu),
Wharton(www.wharton.edu),
 etc.) where you have access to the world's top researchers.  The *worst*
mistake anyone can make is to not invest at all.


- --mk


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