The Power of Relative Strength
BURLINGTON, VT (August 19, 1999) -- How long can a stock go up? Even though Dell Computer (Nasdaq: DELL) has fallen out of most screens in the Workshop Rankings of late, the company's recent record quarter and pile of analyst upgrades brought to mind an old report by Robert Sheard. The party lives on: Dell has doubled since that column was published on May 8, 1998, and is up approximately 12,600% in 5 1/2 years.
This story is similar to a number of other perennial Workshop favorites such as Best Buy (NYSE: BBY), Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO), and America Online (NYSE: AOL). We go back to the simple theory, borne out by backtesting: Winners have a tendency to keep on winning.
From the financial press we continue to hear the same drone of ill will against this simple concept. The advice generally goes like this: The market is overvalued, so trim your positions in stocks that have made you a bundle -- you need to look for special situations where "good" stocks are selling cheap. It's also quite common to hear suggestions to take money out of stocks completely so you don't lose big when the entire market declines. I say, Phooey!
As authors such as Jeremy Siegel have pointed out, it's not just in the recent past that stocks have outperformed other assets, but since the beginning of the century. The case for buying stocks with high relative strength has also been proven by James O'Shaughnessy.
However, the big stock market declines of the century tend to stand out in people's minds. If you're a new investor, you can be blinded by these big "crashes." Similarly, when new Workshop investors are pondering investments in the stocks that our screens select, sometimes the horror stories can loom large. No one likes to see a stock drop 20% in a few days, but it will happen to some of the stocks you buy from the Workshop selections.
To keep emotions in check, you only need to study the awesome power of compounding on a market-beating strategy. If you are able to beat the market averages by a significant margin over the long run, you need not get excited about short-term setbacks and meltdowns along the way. You're only losing a fraction of what you've already made, or stand to make in the future.
Due to my recent vacation frolicking, I am behind on my usual updates to the monthly screen histories. I'll update them shortly.
Have a great weekend!