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Year 2000 Lessons
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After a professional football game the players and
the coach sit down and go over the game.�
They watch the films.�
They discuss what worked, and what didn�t.�
It�s important for them to figure out how to proceed.�
They look at what needs fixing and how that is going
to happen.� The team has a goal that they constantly keep in the forefront
of their minds: win every game and make sure you get to the
Super Bowl.� Achieving
the goal isn�t easy, there is opposition, but it can be accomplished
if they constantly practice what they know.�
Doctors carry on the same type of review every time
a patient dies under their care.� They meet to identify what worked and what didn�t, then they
try to develop a strategy that will better accomplish their
goal of providing the best patient care.�
Investors are similar to the sport teams and doctors,
they have investing goals and they strive to increase their
account balance as much as possible.�
But something went wrong in 2000.�
Many investors lost money.�
What can we learn if we do a postmortem on the year
2000?� �
���� Looking
back it�s obvious many investors let their emotions get ahead
of their brains.� �Irrational
exuberance� was a fairly accurate description of what was
happening.� Going
forward: we need to keep our emotions in check and rely on
logic and intellect.�
Beginning in late 1999 market pundits and commentators
kept saying the markets had run up significantly and were
ready for a correction.�
We need to listen carefully to the rumblings that
go on in the financial media.� When we hear the same
thing many times a day we need to carefully review what is
being said.� Certain
market analyst�s opinions carry a lot of weight and shouldn�t
be ignored.� Abby
Joseph Cohen is one of those pundits you have to listen to.�
In the off chance you don�t like her, what she says,
or Goldman Sachs who she works for: what she says moves the
market.� She says she picked the market top correctly in March 2000.�
Actually she helped cause the top when she publicly
reduced the equity allocation for the firm�s clients.�
A handful of notable market strategists at the largest
brokerage firms publicly announced a re-allocation of their
model portfolios, slightly reducing their equities holdings
even ahead of Abby Joseph Cohen.�
Their clients listened and so did a larger number of
other investors.� So
when the top strategists publicly yell �fire�, don�t be the
last one to the door.�
Many investors had every cent in their possession in
the market, with much of it in the high tech and Internet
sectors.� When
the markets sold off there were no extra funds available to
pay margin calls and there certainly weren�t any funds in
reserve to selectively pick up bargain stocks selling at a
50-70% discount off of their highs.�
In the future we need to keep some funds in
reserve. �When
you buy a stock you�re buying a stream of future earnings.�
If the projected earnings of one company is greater
than another, the one with the strongest earnings going forward
will have the strongest value in a crazy market.�
No matter how good the concept is or how bright the
future looks, a company with no earnings and only a chance
of future earnings has only a chance of surviving when the
market declines and the earnings are closely scrutinized.�
When looked at closely, stocks with a Price-to-Earnings
ratio in the stratosphere will fall like a souffl� in an oven
on a bumpy freight train.�
The lesson most investors learned best from their
year 2000 experience is the need to use stops to reduce losses
and to hold on to gains.�
Many investors would have kept most of their gains
from 1999 if they had used a trailing stop placed 5-15 percent
below their rising share price.� Stops, whether placed with a brokerage firm or kept track off
mentally are a good way to get out of a losing position with
most of your account balance left to work with in the future.� It only takes a modest 11 percent gain to recoup from a stop
placed 10 percent below a stock purchase that has gone bad,
but it takes a monumental 100-percent gain to recoup a 50
percent loss.� The
year 2000 had many lessons to teach us and hopefully we were
good student and are better equipped to push on toward our
goals.
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