<FOOLISH FOUR PORTFOLIO>

Profit-Taking
and Overcoming Fear and Greed

by Ann Coleman (TMF AnnC)

Reston, VA (May 4, 1999) -- "Stocks fell back today from Friday's lofty height in a wave of profit-taking on Wall Street." Or something like that. It's fear and greed time again.

The evil twins of investing may be whispering in your ear, too. They've been perched on my shoulder for a long time now. I expect everyone is susceptible to one degree or another, but we don't have to give in.

Even though I haven't been doing this for all that long (full disclosure: Fool since 1994, Fool employee since 1995), the e-mail I receive follows a very predictable pattern. When the market is dramatically down, most of the comments I see expect it to go lower. When the market is dramatically up, the tenor of the comments is: "should I sell now and 'take my profits?'" In other words, whether the market is jumping or falling, fear of the market dropping is the dominant theme.

The real problem is that it is so very easy to see what one should have done. "If I had just sold last July when the market was so obviously overvalued, then bought back in last October, I could have doubled my performance for the year."

Example: The buy and hold investor

$10,000 invested in Spiders at the beginning of 1998 would have grown to over $12,100 (up 21%) by the middle of July. Left alone, that investment shrank back to right about where it started the year by mid-October, at which point it took off and grew to around $12,600 (up 26%) in three months. Ms. Buyandhold ends the year with a 26% gain (excluding dividends).

That's a good year by most standards.

Example 2: The Psychic Investor

The psychic investor invests $10,000 on January 2, 1998, and sells in mid July. She sits on her $12,100 until mid October, when the call comes: GET BACK IN THE MARKET. She then invests all $12,100 in Spiders, and by the end of the year her account has grown 26%, but that is 26% on top of the initial growth. Ms. Seesall-Knowsall ends the year at $15,000, a 54% gain.

Last year's market was Cliffs Notes version of what happens over longer periods all the time. This kind of thing is so obvious in retrospect that I think it has driven a fair percentage of investors nuts! The annoying thing is, I know better, yet I am still susceptible to such thinking.

It's exactly like thinking, "I should have picked # 7 in the fourth race." Until you develop psychic abilities, the chances of you calling market tops and market bottoms accurately enough to beat a buy-and-hold strategy over the long term are very slim. I really pity the folks who manage to do it right the first time. How long (and how many dollars will be lost) before they realize that it was a fluke, not their market-timing genius?

Yes, some people called the July market top, and they aren't likely to let any of us forget it. A lot of them had been calling that top for two years, though. I'm not sure exactly which one you were supposed to listen to. The trick is not to just call the tops, of course, but to also call the bottoms. And to do it consistently every time, because if you don't, you're toast.

I seem to remember, back in October, that most of the bears were saying that the market was still overvalued and were warning of another 10% to 20% fall before the correction was over. If you had waited until November to buy back, the market was already back to its July high, and if you waited until December, it had surpassed it.

Of course, you wouldn't want to buy in at that point, because you would have lost money -- and who wants to admit that -- so you wait for it to fall again. Now it's up another 10%, and Spiders haven't even been doing that well this year. But they are way ahead of last July's highs.

How long do you wait?

The problem is that even when you make one right move, the next one is no easier. An awful lot of people who sold last year when the market was up (or down, for that matter) are still waiting to get back in and afraid to buy because it's "too high" now. The buy-and-hold investor, meanwhile, is up 38% since he started at the beginning of 1998.

Interesting factoid: From January 2, 1998, to today, the Standard & Poor's 500 Index and the Dow are up almost exactly the same amount. Remember last year? The Death of the Dow? I guess rumors of that death were a bit exaggerated.

Market timing is far more likely to make you a nervous wreck than a millionaire.

Fool on and prosper!

Today's Stock Lists | 1999 Dow Returns

05/04/99 Close

Stock Change Last -------------------- CAT + 1/4 65.44 JPM -3 7/8 133.50 MMM + 1/16 93.94 IP + 7/16 55.81

Day Month Year History FOOL-4 -0.34% 2.64% 32.35% 34.32% DJIA -1.17% 0.90% 18.95% 18.48% S&P 500 -1.67% -0.24% 8.68% 8.94% NASDAQ -1.99% -2.27% 13.34% 14.89% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 65.44 51.90% 12/24/98 22 Int'l Paper 43.55 55.81 28.16% 12/24/98 14 3M 73.57 93.94 27.68% 12/24/98 9 JP Morgan 105.51 133.50 26.53% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1570.50 $536.50 12/24/98 14 3M 1030.00 1315.13 $285.13 12/24/98 22 Int'l Paper 958.12 1227.88 $269.76 12/24/98 9 JP Morgan 949.62 1201.50 $251.88 Dividends Received $29.45 Cash $28.26 TOTAL $5372.71 </FOOLISH FOUR PORTFOLIO>