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Friday, February 5, 1999

An Investment Opinion
by Warren Gump

Another Great Stock Will Always Be Available

Yesterday, I was grumbling to my coworkers here at the Fool about how a couple of stocks that I had been drooling over surged before I had a chance to pick up shares. Although these two stocks have jumped appreciably, several other companies have made it onto my radar as potential investments. One of the wonderful things about our stock market is that good investment candidates are always available.

As I mentioned in a Fool on the Hill column a couple of weeks ago, I am trying to reduce my trading tendency by restricting the frequency at which I make stock purchases. This strategy is forcing me to stockpile investment candidates so that I can compare them with one another to choose the most promising long-term prospects. Purchasing the best companies I can find will give me an opportunity to hold onto them for a long time and let their earnings (and value) compound without the onerous burden of capital gains taxes.

Seventeen stocks have already made it onto my watch list after a little more than a month. I certainly will not buy all of these companies, but it is amazing how quickly qualified prospects pile up. Over the next few weeks, I will have to be buckle down and ferret out the stocks that offer the greatest likelihood of increasing value in the decades ahead.

Two of the companies that I'm most interested in, Safeguard Scientifics (NYSE: SFE) and Timberland (NYSE: TBL), have jumped pretty dramatically since the beginning of the year. Year to date, Safeguard stock is up around 50%, while Timberland has increased a not-too-shabby 25% (remember, these are returns over just five weeks). These companies are not necessarily overpriced because of the huge jumps; that evaluation must be made in the eyes of the beholder based on expectations about future prospects. Nonetheless, it can be stated irrefutably that the two stocks are more expensive than they were just a short time ago.

My initial emotional response to having missed out on the short-term gains is frustration. I found these companies trading at what appeared to be great values, yet I didn't make the investment because of a self-imposed trading restriction. On the face of it, I am losing out because of this recently imposed strategy.

Looking a little deeper, however, I still may be benefiting over the long run. For one thing, I have more time to investigate these companies and better understand their business models. Being attracted to a company after developing a full understanding of its prospects will lead to an increased willingness to stick with it through the ups and downs that are a regular occurrence in the stock market.

While I have missed out on the short-term gains in Safeguard and Timberland, I have also avoided short-term losses that have occurred in two other stocks on my watch list, Whole Foods Markets (Nasdaq: WFMI) and Network Associates (Nasdaq: NETA). These two stocks have already fallen 37% and 31% this year, respectively, on concern about their near-term prospects. That little trading restriction that I was grumbling about a few paragraphs ago saved my hide in these two companies (at least in the short-term).

Before whining about the winners you miss out on because of the time required by your investing guidelines, be sure to remember how that strategy has impacted your performance from both a positive and negative perspective. Combining the year to date performance of the four stocks mentioned above, I have missed out on about a 2% gain. Not great, but certainly not as bad as missing out on the 50% gain in Safeguard that my mind was focused upon before thinking logically about the situation.

Many people are smitten with "hot tips" because of the dramatic movements experienced lately in the markets. The Nasdaq Composite Index has surged around 50% since last fall's stumble, and many individual stocks have increased several hundred percent. Investors who historically avoided listening to a frantic call from a broker or a "must act now" posting on a message board might be tempted to act. Heck, last time Fast Eddie gave you a great tip, it jumped 75% in two weeks.

Don't fall for it. Remember the losers that you've avoided by not pursuing hot tips before pursuing the next one you hear about. Most likely, your intuitive sense to avoid tips has kept you out of many stocks that have fallen significantly. Be sure to include the "opportunity profit" from staying out of these losers as well as the "opportunity costs" from not putting money into winners. You'll find that over time, you're better off being patient and doing your research.

Just because you rationally know that avoiding hot tips is beneficial to your financial well-being, you're likely to still be irritated when you miss a big gain. That's human nature. Remember, however, that stock prices change daily. As some prices move closer to or above what you deem to be a reasonable valuation level, others move down. I have a list of 17 stocks developed just over the past month that demonstrates that fact. As a long-term investor, you will be rewarded for patience and research. Good long-term investments are always available in the stock market.

Call Your Boss a Fool.

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