From: eric@tfs.com (Eric Smith)
Newsgroups: misc.invest
Subject: Re: Cray Computer: When to bail out?
Date: 26 Jul 92 00:21:03 GMT
Distribution: usa
Organization: TFS

In article <1992Jul25.165916.4366@murdoch.acc.Virginia.EDU> kst@uvacs.cs.Virginia.EDU (Kevin Treu) writes:
>I got into Cray Computer at 4 1/8 several months ago.  I have become convinced
>that playing around with individual stocks without great expertise is a
>mistake, and want to get out of the practice as soon as possible.  Now 
>Cray Computer is down to 2 3/8.  I'm interested in some net-advice regarding
>this specific stock.  Do I remain patient, confident that at some point it
>will be rewarded?  And if not, how do I know when it is time to cut my
>losses?  Thanks in advance for any advice.
>
>As far as the stock market goes, it's mutual funds only for us from now on...
>
>
>-- 
>Kevin Treu                  University of Virginia
>kst@cs.virginia.edu         Department of Computer Science
>
>Go PIRATES, PENGUINS, PALADINS, HOOS and HORNETS!


You might lose even more with mutual funds than with picking your own
stocks.  The best way to come out ahead picking your own stocks is to
pick them for sound long-term reasons and then just keep them for years
without even caring how they do.  Instead of thinking of the stock as
going up and down, think of the value of the dollar going up and down
relative to your stock, while your stock stays the same.

If the company does have bad news or go broke, it will probably be too
late to get out then.  So pick a few different stocks to be safe, and
make sure you really know why they are good long-term prospects and that
you aren't going to change your mind just because of some temporary bad
news.

I think Microsoft is interesting for the next decade.  Right now it
is trading at about 73, and I think there is a 50% chance that it is
near its bottom for the next 20 years.  I also think it is likely to
double in price every 3 years on average for the forseeable future.
If I buy it, and it goes down to 50, I won't even bother to curse my
bad luck, but will just keep holding it till it goes up to 2000,
adjusted for splits.

I'm not so sure about companies like Cray Computer.  They seem just
as likely to go broke as to do well, but if they do do well, they
might do extremely well.  Your best bet might be to just hold your
stock for another decade and see if it's still worth anything.  If
it is still worth anything then, it might be worth many times what
it's worth now, if you get lucky.

Mutual funds are not a very good long term investment because their
overhead takes a lot out of the stock price gains.  Just keeping
individual stock certificates is a lot more efficient.

But if you want short term investments, just a couple of years or
less, you shouldn't be in the stock market at all.  Random price
movements are a bigger factor in one year than the value of the
stock.  You would be almost as well off just taking your money to
Las Vegas and betting it on craps.

The long term gain from picking good stocks is like the house edge
on craps.  The casinos always win over the long run, but sometimes
they have very bad days, just like you will have some very bad
years as a stock market investor.  But the casino managers know
every bad day will be eventually followed by some very good days,
so they have plenty of patience.  In the stock market you need
longer term patience, counting on some good years to eventually
follow the bad years.

One mistake a lot of beginners make is that when their stock goes
down they wait for it to go back up so they can make a small
profit.  That is a bad mistake, because if their initial reasons
for buying the stock were sound, it should eventually go way up,
regardless of how far down it went in the meantime, unless something
really unlucky happened to the company.  But in that case it might
not recover at all.  But in that case you should still have several
other stocks whose total gains will outweigh that one loss.

A lot of investors try to time the market.  For example, if I think
Microsoft might go down to 50 sometime in the next year, why don't
I wait till then to buy it?  The reason I don't want to time it is
that the probability that it will actually go down to 50 is actually
quite low, and the most likely outcome is that I will be sitting on
my cash for several years till Microsoft is 200, and then give up
and find something else to do with my cash.

So my advice is to find several companies with good long term
prospects, such that any temporary bad news is almost sure to be
temporary, and decide how much each is worth, and buy them for those
prices, and hold them many years without worrying if some of them
go down to a fraction of their original price for a few years.