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Tuesday, February 16, 1999

An Investment Opinion
by Warren Gump

It's the Long Term That Matters

Working from home today to keep an annoying virus away from Fool HQ, I spent a good part of the day watching CNBC during market hours for the first time since converting to Foolishness last year. Unless you're striving to be a day trader (hoping to lose a substantial portion of your capital, as most do), watching this business news channel live throughout the day may not be that helpful. Much of the analysis that I saw focuses on short-term price movements, ignoring longer-term trends.

The biggest news story of the day was the anticipation surrounding Dell Computer's (Nasdaq: DELL) earnings announcement, which was scheduled to be released after the market's close. As one of the best performing stocks over the past three years, interest in any announcement from this company is high. Increasing the anticipation for this report was a 12% drop in the company's stock on Friday after an analyst issued a report suggesting that competition was stiffening as other manufacturers improved their direct sales model. (Of course, no one that I heard mentioned that the stock was still up over 22% since January 1 and multiple-fold over the past few years.)

Early in the morning the stock was up $4 1/2, and a technology analyst indicated that investors might have overreacted to the reports issued on Friday. I hope you didn't just tune into CNBC at the time of that comment and then trade on that suggestion. Later on in the day, the stock reversed course and fell $3 15/16 before rebounding somewhat near the close. If you want to buy Dell stock, you shouldn't be tempted by short-term price movements and projections. You should step up to the plate because you think the company has a superior business model that will allow the company's growth to continue at a rapid pace to justify its current price/earnings (P/E) multiple of 94x trailing earnings.

Another story that was repeated throughout the day was that the Japanese Stock Market may have hit a bottom because the Nikkei Index closed above 14,000 for the first time in "several sessions." The Finance Ministry announced plans to purchase some bonds with its trust fund, which should help reverse the recent jump in interest rates.

Learning about how the Japanese government addresses the country's problems is helpful in analyzing the future of the economy, but to suggest that a long-term bottom is in place because the market index rebounded above some "magical" number doesn't hold much water with me. I don't think it would be prudent to jump into that (or any) market because of some technical indicator.

Before considering investing in Japan, you have to think about several different issues. First, are you willing to absorb not only the stock market fluctuations, but also the currency fluctuations inherent in investing internationally? Second, do you understand the financial reports of the companies in which you're investing (every country has somewhat different accounting reporting standards)? Third, considering your outlook for Japanese companies over the next 20 or more years, do you think the stocks represent good values?

Another instance of CNBC myopia occurred when Mark Minervini of the Quantech Research Group came on the air to give his outlook for stocks. He was asked to discuss his current perspective because of his accurate forecast earlier this month that the Nasdaq 100 stocks may weaken. CNBC boasted about his willingness to make this call despite laughter from many other investors. While it is always nice to be correct, making one short-term call on market movements doesn't really impress me. (Mr. Minervini's long-term track record was not disclosed; if he shows terrific performance over five or more years I would be much more interested.)

CNBC does a great job of announcing and describing news as it occurs. While obtaining some perspective on the reasons for intraday market movements is interesting, such movements often defy explanation. Trying to understand minute-by-minute (or even day-by-day) market movements often leads to overanalysis. Enthusiasm about positive news is usually overplayed. Concern about negative turns is often exaggerated. Reacting to each bit of news as it is announced will likely lead to a less-than-stellar investment record.

Don't interpret me incorrectly. Long-term investors absolutely need to stay abreast of news on companies in which they are invested. To track this information throughout the day, however, is overkill for most people. It causes you to look at the trees rather than the forest. In fact, much of the daily news doesn't even focus on a whole tree -- it just discusses a branch or perhaps even a leaf. Instead of following intraday movements, step back and look at news and trends over a monthly, quarterly, or annual basis to evaluate your portfolio holdings. Beyond saving you a lot of time, you'll likely remain focused on long-term, rather than short-term, prospects.

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