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Re: Where have all the investors gone?

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By babyfrog
June 24, 2004

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Where have all the investors gone?

We're still here. The fact is, long-term investing is boring. The 'action' takes place when an investor looks to buy, and then again when an investor looks to sell a company. In between, an investor is usually best served by doing nothing, aside from perhaps monitoring his or her holdings to determine whether or not those companies still deserve to be there. Here is an excellent, recent article by Bill Mann about the benefits of "benign neglect" of investing.

Personally, I take a hard look once a month for new investment options. Why once a month? Well, I get paid once a month, so I only get new investable money once a month. Also, I undertake a portfolio review once a quarter to look through my holdings to see if the companies I own are still worth owning. Why once a quarter? Well, financial statements are released quarterly, so much of the material information is really released in those quarterly reports. Mid-quarter updates? News releases? Well, they're all very nice, but by the time I get the news, the stock has already reacted. And often, if it's bad news, it often appears as though the market's initial reaction is to quickly over-sell then bounce back a bit, making it usually better to not sell right away, anyway.

Right now, General Electric is on my "should I sell this turkey?" list, where it will likely remain until the end of the year. If it raises its dividend another token penny, I will sell, as that is a signal that the company really expects slower growth than it is publicly announcing. If it returns to faster dividend growth rates and those dividend growth rates look sustainable, I will hold. If it returns to faster dividend growth rates but the dividends do not look sustainable, I will sell. I've been saying something similar to this since about the last paltry dividend hike, and it's really not new information. Why bore this community with the same statements again and again and again?

Over the past year, my personally managed, after-tax portfolio beat the S&P 500, and I did so with a portfolio beta of 0.84, which is below the S&P500 beta of 1. I have yet to sell a single stock in that portfolio, and I invest dividends in future purchases. The oldest holding in my portfolio is my 401(k)/ESOP holding of my employer, Procter & Gamble, which I purchased/received as early as mid-1998. Until 2003, I held some mutual funds that I had purchased as early as 1994 (I think), but I sold those turkeys to put a down payment on my house, as well as to completely rid myself from my idiot former broker. Given that I turned eighteen in late 1993, there is very little I could have personally owned before 1994, so forgive my 10 year "long term" looking-backwards horizon.

My most recent purchase, Fair Isaac (FIC) is sitting on a 4% loss in under a month - no big deal, really, as that is well within an individual security's expected fluctuation. I bought PLFE (Presidential Life) in December, 2003 for below it's book value, only to watch it go nowhere for a few months (and even fall a bit through March), only to now be sitting on a 25% (or so) gain. Had I panicked and sold when the shares were down or had gone nowhere, I would have missed out on a nice return. As it is right now, I wouldn't necessarily buy more, but there is nothing compelling me to sell right now.

"Doing nothing" after buying companies that appear to be solid and fairly or undervalued has been a winning strategy for me, and I see no reason to change now. Don't get me wrong - I look at my holdings and evaluate them to assure they remain solid, but in the absence of a compelling better use for my money (after taxes, commissions, and fees) or a compelling, financially-based reason why my holdings look to be at excessive risk for my expected reward, why should I sell?

My strategy is boring. Research monthly. Buy when the research indicates a decent opportunity. Review quarterly. Sell when I have a better use for the cash or when a company appears realistically unable to provide long run future returns on par with my expectations. It doesn't necessarily make for good conversation, but thus far, I cannot complain about the results.

If you have 300k, a 30% return is 90k a year. That is a lot of money. It would get bigger and bigger, and it would be only rational to be actively involved on these boards. After that year it would be 390k

If you have 300K and can invest in such a way as to net 30% in a year consistently, you will soon be the richest person on the planet. In 40 years, that 300K would grow to be over 10 Billion dollars. In 50 years, that 300K would grow to be almost 150 Billion dollars. Additionally, if you could get a consistent 30% net, you would be foolish (small f) to not leverage yourself to the hilt to compound even the borrowed money at 30% per year. My personal goal is a pre-tax 12% compound return rate, which would be enough to have historically beat the market over time, and as such, is not usually viewed as an achievable goal. It is close enough to achievable to be a realistic stretch goal, though, and as such, it does help me focus.

I am left thinking that really it is coming down to luck, and eventually everyone realizes this.


I personally believe that quite the opposite is true. I do not believe that the market is efficient in the short term, though I do believe that stocks do eventually find the 'fair value' of the underlying companies. I have seen and personally profited from too many occasions where the market has miss-priced a company on the downside in the short term to believe that it is pure luck. I have also seen too many examples to the contrary, like Cisco. That company was dramatically overvalued and stayed that way for far too long, before crashing in spectacular fashion. Since I do not believe that the market is efficient in the short run, I believe that I have a chance of beating the market in the long run, by avoiding clearly overpriced companies, buying clearly under-priced companies when the opportunity arises, and owning a core portfolio of fairly valued companies.

It's boring, it's slow, but thus far, it is working.

The investors are still here; we're just watching the grass grow and not feeling the need to constantly talk about it.

-Chuck


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