Market Talk with Piranha is currently moving to its new home at chrisperruna.com. The new site is up and running but many of the posts need editing as the images and stock charts did not transfer successfully (thanks blogger). I will post all new entries to both blogs – Thank you for your patience while I make this change!

Friday, January 06, 2006

What happens to “buy and hold” stock investors?

...I have always argued that you must cut your losing positions because they may take years to come back if they ever break even. Back in the 1930’s, RCA was the top touted stock but it took 30 years to break even from the 1932 price level. Ever hear of Enron, Worldcom, Lucent, etc… Two of these will never return a break-even investment for their holders and one may take another 5, 10, 15 or 20 years to break even (if ever). Lucent traded above $60 in late 1999 but has since traded in the $2 range. I know of a family member that went crazy buying up shares in 2002 and 2003 while it traded between $1.50 and $2.50. I know she still owns these shares to date and I told her not to do it and even sent her a free trial subscription to IBD in 2002. The stock closed at $2.77 yesterday. I know she is showing a profit but I also know she has locked up large sums of money in a dead stock that she is “hoping” will come back. She lectures me that I am a risky investor but I laugh to myself because LU may never make a watch list of mine ever again. I know she won’t read this so this is why I write about the topic.

Last night, two familiar stocks crossed my daily screens that were flying high in the late 1990’s and early 2000’s. The first stock, NVDA, was one that I owned many years ago as I was learning about video cards, photoshop and other large software programs that required cards from this company.

I was working with an architectural firm in Connecticut when I had a discussion with the principal owner about a company named Nvidia. This architect traded in the market seriously but on a casual basis in my opinion. While reading a magazine, he saw a story on Nvidia and how they were stealing market share from ATI and the other leaders at the time. Their technology was by far the best on the market and they were extremely innovative compared to the industry leaders. Based on that article and the fact that his firm just purchased computers with these chips, he immediately bought several hundred shares.

As I remember back, he loved high tech companies as did everyone and bought shares of Intel (INTC) and Cisco (CSCO) for each of his nieces and nephews on their birthdays. He would always say that they would thank him when they turned 18 and needed money for college. His quote was something like this: “If I give them $100 now, they will blow it in one shot at the mall; if I buy them shares, they may hate the gift now but will understand when college tuition is knocking on the door” and then he would say: “Intel & CSCO will never go down”. – Big mistake! This was the “buy and hold” mentality, even during the crazy 1990’s. Looking at a 5-year chart for Intel, the stock has not recovered the highs of 2001 and sits at a loss for shares purchased five years ago. Cisco is no where near its former highs of $70, $80 and $90 (it closed at $18.35 yesterday). I hate to say this but those nieces and nephews are showing losses (from the original installments of $100) that become ever bigger when you consider depreciation of the dollar and some inflation. The buying power of the $100 from 5 years ago is not the same today. If he bought them a mutual fund or invested into their education IRA’s, they may have made some nice profits.

Looking at his other stock, NVDA, he made a lot of money buying and selling because he felt NVDA was a fad, different from Intel. I don’t know if he ever sold his entire stake but if he didn’t, he would only be breaking even this week from shares purchased in May of 2002. Shares bought in early 2002 would still be showing a loss, four years later. I can’t imagine locking up my money for four whole years while a stock is sitting there doing absolutely NOTHING. On top of the stock doing nothing, he would have missed the education stocks of 2002, the builders stocks of 2002, 2003, 2004 and the final leg in 2005. He would have missed CECO, COCO, HOV, TOL, NVR, CTX, LEN, APOL, TZOO, TASR, FORD, URBN, APPL, RIMM etc. as the list goes on. No one person owned every one of these superstar stocks but the chance that he may have bought one or two of these market leaders exists.

The other stock making the screen last night (also a former MSW Index stock in late 2005) was NDS Group (NNDS). The stock closed at its highest level since June of 2001. To make an all-time high and allow some investors to break even if they are still holding from 2000, it would require the stock to gain $30 from the current $44 level.

I only provided a few short examples but you get the idea of the article. Don’t ever think for one minute that today’s leaders will be tomorrow’s leaders and that buying and holding is the ultimate answer. Turn to mutual funds if you prefer the buy and hold strategy. At least these fund managers will sell their poor performing issues and give you a “chance” by adding current day leaders.

The moral of the story: have sell rules and never hold a losing position!

Piranha

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