<COMMUNITY>
Post of the Day
August 13, 1999

From our
AmeriTrade Holding Folder

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Subject:

LTBH and Fundamentals

Author: idxbuster

I fear that this post will generate a serious backlash, but I can hold back no longer. I'm driven by the recent ad nauseam orgy of sanctimoniuos breast beating, on this board, by those who appear to claim god-like membership in the morally superior echelons of the "long-term buy and hold" and "fundamental" investor.

I recognize the general wisdom in these two investment strategies and am very grateful to TMF for providing the free education that, in part, helped me understand their benefit. But come on, let's not take them into the realm of the ridiculous!

Let's take a straight-on look at these two golden idols and ATMD:

"So am I saying that the price won't recover? Of course not; I can only guess. I'm just saying that AMTD's price is not being driven by anything like 'fundamentals'"

FUNDAMENTALS:

When the stock price peaked at $62 3/4 earlier this year, AMTD was trading at over 400 times earnings. For this to be a "fair" price, the expected annual growth rate would have to be on the order of 400%! Even the most wildly optimistic of analysts are predicting growth of just slightly over 100% in EPS, for AMTD in fiscal 2000, and the consensus growth estimate is closer to 30%.

Even at the current "depressed" price of around $22, AMTD is still trading at 144 times earnings, with a resulting PEG ratio of 1.4 to 5.0, depending on which analyst you believe.

Sure no analyst has a crystal ball. Sure the on-line brokerage industry is expanding like crazy. Sure AMTD is positioned to pick up a big piece of this business. But all this and more has already been built into the stock price. That's the "fundamental" truth.

So am I saying that the price won't recover? Of course not; I can only guess. I'm just saying that AMTD's price is not being driven by anything like "fundamentals". It's a pure gamble based on 1) the long-term, highly uncertain future of a very young industry and 2) short-term price swings driven by the speculation of other investors.

So, please, let's stop claiming that the stock has "good fundamentals" or picking apart daily news reports on earnings and mergers. You're either betting on the long-term superiority of the AMTD model or playing short-term profit-taking games. Either way, the current financial "fundamentals" are largely irrelevant.

LONG-TERM BUY AND HOLD

Trying to time the market is a zero-sum game and when one factors in costs of trading, the expected result is negative. Agreed. Over the long run, this is clearly true. To understand this fact is to be a wiser investor.

But I think it's absurd to take this argument so far that one never takes profits! When a stock goes up over 1000% and is selling at over 400 times earnings and a PEG ratio as high as 8, SELL!!!!

If you believe that the stock has more upside potential, leave yourself partially invested, maybe even to the level of your original investment, but for heck's sake, take the profit! There is a nation of LTBHers out there who won't see this kind of profit in many years of investing.

The bottom line - don't let good fortune cloud your judgement. Shouldn't we evaluate stocks for their potential from this day forward? Doesn't it go without saying that a stock which has appreciated 1000% in 6 months has less upside than it did 6 months ago? Wouldn't this argue for a reduced position to the one taken 6 months ago? Doesn't this argue for taking profits and reducing the position to at or below the the original position?

Since I've already gotten more preachy than I meant to and have opened myself up to criticism for being sanctimonious myself, I'll revert to that most preachy of all communication devices, the parable:

"AMTD is a great company with a great future, but it's not obviously under-rated. And having lost a lot of money by failing to sell AMTD earlier this year, I take little consolation that this was a 'paper' loss."

When I was a kid, my Dad used to take me to the horse racing track. These were cherished outings for me. Amid all the fun, he taught me two great lessons: 1) It's tough to make money betting on the favorite and; 2) $1 in "winnings" is worth the same amount as the $1 you stuffed in your pocket before leaving for the track.

He encouraged me to pour over the stats in the racing form and to be an educated gambler, but to always remember, first and foremost, that the goal was not to pick the best horse, but to pick the horse who's chances were the most under-rated based on currently displayed payout odds. Long-term, this is always the best strategy.

He also made me tell him ahead of time how much of my money I was willing to lose. If I said, say, $20 and won $10 on the first race, then he wouldn't let me leave with anything less than $10 in winnings. To bet these winnings would be a violation of my original position. The "let it ride" mentality is the friend of betting establishments everywhere, he explained.

Of course the stock market is more complicated than paramutual betting, but many of the building blocks are the same. AMTD is a great company with a great future, but it's not obviously under-rated. And having lost a lot of money by failing to sell AMTD earlier this year, I take little consolation that this was a "paper" loss. Money is money, whether brought to the table or won.

Disclaimer: Our investment club bouhgt ATMD at less than $3/share and has profited hugely. I have begged the other members at every meeting since the price hit $40 to sell and re-adjust our position to it's original level. I even told them my little parable about Dad and the horse track. The result - I've been soundly voted down on almost every occasion and we maintain close to our original holdings.