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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, July 28, 2002
PSSST! Can we talk?
I have a small observation to make. That is, investors overreact
at both ends of the stock market conundrum.
First, they throw money at any stock that moves, at any price,
at the height of the bull market frenzy. Second, they quickly jump
ship in favour of lifeboats during the depths of the bear market
turmoil.
Let me illustrate with a sampling of US stocks from the bull market
era. They demonstrate the top prices that were paid in the last
three years versus what investors paid last week.
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Some selections
from the bull market era: |
 |
| Stock
Name |
Top
Price |
Recent
Price |
| AOL |
90 |
12 |
| Amazon |
105 |
16 |
| CMGI |
160 |
1 |
| Double
Click |
130 |
5 |
| Global
Crossing |
60 |
1 |
| JDS
Uniphase |
150 |
4 |
| Lucent |
62 |
3 |
| Macromedia |
120 |
8 |
| Palm
|
95 |
2 |
| Priceline |
160 |
3 |
| Quest |
65 |
3 |
| Yahoo |
245 |
14 |
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A purchase of 100 shares in each of these companies, at their top
price, would have cost about US $144,200. Sadly, that portfolio
would have been worth about US $7,200 last week, before accounting
for commissions. Unfortunately, however, this was a real portfolio.
Investors continue to be dragged through the roughest bear in history.
It began in March 2000 and it’s been really coming to life
in the last four weeks of trading.
We’ve had long bear markets in the past. One started in August
1987 and lasted nearly 2 years. Another started in January 1973
and lasted 7 1/2 years.
I maintain that stock market sentiment will turn up in earnest
when companies stop reducing their work force. Only then can businesses
make definitive plans for sustained capital expenditures.
I also maintain that stock markets are less risky today than in
March 2000. We have much positive economic data. However, we are
drowned by the daily dose of negative sentiments.
Fears are rampant. Investors are confused. The Dow swings 300 to
400 points during the same day; sometimes more than once. Worse
yet, investors discount the good news and magnify the bad news.
One piece of good news that investors know about is that successful
companies have a game plan and stick to it.
Now, I know that it's hard to stick to a game plan during times
like the present. But you see, investing does not have to be complicated.
Investors can do exactly the same thing as the successful companies.
As they say in baseball, “keep the eyes on the ball”.
The game plan is a must.
So, what could be part of the investor’s game plan? Some
things come to mind:
- Stop reacting to every daily market sneeze and hiccup.
- Avoid making hasty decisions.
- If stocks have that risky feeling, prune them gradually.
- If stocks have the bargain bin feeling, buy them gradually.
Sometimes within the next five years, I’ll write about the
flip side of the above chart. When we’ll be feeling better
about the prospects for buying stocks. By then, it may be time to
sell.
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