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Thursday, August 19, 1999

The Motley Idiot

By dkoest@webbworks.com

I was laid off from my job in January, 1998, and since that time have done some consulting work, but I am mostly retired (read: unemployed).

Since losing my job gave me access to my 401(k) money, in June of 1998, I rolled it over into a brokerage account IRA in a belief that I could do better than Putnam where the money was invested. I established a new IRA brokerage account with a discount broker, and also rolled over my existing IRA, which was with a full-service broker, into the discount brokerage account. I started out by spreading the money between a dozen of the highest ranked funds I could find. Then the July 1998 correction began, and by October 1998 my nest egg value had dropped by 11% from its original value. The European mutual funds that the Asset Allocation freaks told me to get really got whacked.

Then I discovered the Motley Fool and became an acolyte of this new religion. I dumped most of the mutual funds and invested in individual stocks. A number of the stocks I bought were value oriented with fairly low P/E ratios. Examples were U.S. Steel and Timken Bearing. As the market began to climb, it seemed to be telling me that it didn't care much for value stocks, and it especially didn't like small stocks.

The Motley Fool pushed large caps and growth stocks, and especially technology stocks, so I once again dumped a few stocks and focused my portfolio on technology stocks. Early in 1999, after listening to The Motley Fool rave on about its Rule Breaker portfolio, I made the mistake of buying some @Home, America Online, and Amazon.com. I also made the mistake of taking TMF's advice about being in the market for the long haul. So I didn't sell in early April, and I didn't sell in early May when it went back up, and I didn't sell in July when it hit another peak.

So here we are at the beginning of another nasty correction that could well be followed by poor market conditions brought about by the Y2K worries. At this time, I am about $5000 below where I was in June 1998.

So what do I think I have learned?

1. Free advice is generally worth no more than what you pay for it.

2. The Rule Breaker Portfolio should more properly be called The Speculator Portfolio. Anyone who is over 50 years old should not bet on the TMF's favorite race horses.

3. While the market may be growth stock happy, whenever P/E ratios get too far out of line, the market finds an excuse to go down. It can be a discouraging word from Greenspan, economic troubles in Timbuktu, or the Monica Blues. Any excuse will do. Once the market starts into a major correction, market forces are similar to a hurricane, and nothing is immune to these forces. The hurricane must blow itself out before the world is a safe place again. Even the highest quality issues get whacked, and bonds and bond funds get killed along with everything else. The only things that prosper (for a while) are the bear funds and gold mining stocks.

4. The brokerage houses, the mutual fund managers, the federal government, and other members of the establishment love market volatility because it causes the widows and orphans to become afraid and sell their stocks at a loss. Since there is a finite amount of money in the world, the only way there is for some people to get rich is for other people to get poor. The establishment is able with a straight face, to tell us that it is healthy for us to lose money. (Healthy for them, that is!) Even the TMF gurus tell us that it is a good and healthy thing that we have lost 50% of our money that we invested in Amazon and AOL.

5. The Motley Fool is probably right about a few things like the undesirability of full service brokers, the sensibility of index funds and Spyders, and the Foolish Four approach. The workshops are also quite worthwhile. The emphasis on beating the S&P index, is in my opinion, misplaced. It is kind of like Lake Wobegone, Minnesota, where all the children are above average. To beat the average, one must take bigger than average risks; what goes up in a hurry can also come down in a hurry, and the valleys are deeper.

6. My own sad experiences seem to indicate that if one invests in the more volatile technology sector, which has downside risks equivalent to upside potential, then timing the market, and profit taking at appropriate times must be done to avoid the situation that I find myself in, which is back somewhere close to where I started. I don't know how to time the market, but dumping stock when the market appears to turn down, especially taking seasonality and other factors into consideration would seem to be the thing to do.

7. This roller-coaster ride is not a good place for someone who gets motion sick. I think I'll just drop everything into Spyders, ignore the market, and pray a lot.


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