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Individual Stocks/Stock Options from ROTH IRA account


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I've been away from this discussion for a while, but I think the stuff on short-term trading is non-sense. Think of what could have been accomplished if all of the time and effort wasted in trying to predict the market (and, coincidentally, the effort trying to tamper with the market) were directed towards more productive affairs. I also disagree that one investment style won't work all the time. That statement may apply to models of investing (there is a company that usually makes 80% a year based on very short-term models involving mergers...during very short time-frames, and in specific conditions, the market may act similarly to equilibrium...but the market is <I>never</I> really in equilibrium).

John,

Some investment styles will work no matter when you use them -- which are the investment styles that have been used by Fisher and Graham. The reason they work with such exceptional percentage (say 90%) over the long run is that they rely on detailed fundamental analysis that most people simply cannot or are unwilling to do. Thus, they discover inefficiencies, where a companies future growth hasn't been completely discounted, or where it could be purchased with a margin of safety (due to an undervaluation).

This is also a very strong argument against the hogwash known as "efficient market theory". If "efficient market theory" was true, then there wouldn't be large variations in the returns generated by stocks -- they would all be relatively even. Furthermore, the existence of arbitrage completely demolishes EMT.

I agree with your advice on index funds. They are a great way to invest for someone who wants to put in the minimum effort (because you don't have to worry about changing managers). However, the reason they're profitable is because of "efficient market theory", as Bogle asserts.

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dh003i:

I don't mean to be difficult, but could you clarify what you mean by:

1) a company that usually makes 80% a year:

A) 80% investment return?

B) What is usually, 2 out of 3?

C) What company is this? Can you provide a link to corroborate?

2) they work with such an excellent percentage (say 90%)

A) They make money 90% of the time?

B) What type of return?

C) Again, would you be kind enough to document your assertions?

3) I also disagree that one investment style won't work all the time.

A) Even in the two extraordinary examples you gave you qualify them with "usually" and "90%"

B) Why then do you recommend other styles of investment?

...but then again, What Do I Know?

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WDIK,

No problem, I wasn't being very clear. First, let me say that 90% was probably an over-statement...that's just the rough guess Fisher estimated one's accuracy would be in picking out exceptional growth companies using his methods. Some examples to verify this from Fisher's investment history include Texas Instruments, which he bought before it went public and Motorola, along with Food Machinery. He bought these companies very early on, and thus experienced enormous gains (percent gains breaking into the thousands per decade) as they became giants. A company that meets and continues to meet the 15 points Fisher laid out in Common Stocks and Uncommon Profits will never be a loser. That's the success that can be had using Fisher's methods.

The validity of Fisher's approach can be seen by considering his attitude towards selling:

"If the job has been correctly done when a common stock is purchased, the time to sell it is -- almost never."

As for Graham's methods, Warren Buffet's essay, The Superinvestors of Graham and Doddesville shows how that method is a sure-thing to work over the long-term. The "dog" (Ruane) of the group of investors that Buffet referred to averaged 17% a year. Interestingly, John Maynard Keynes is listed, and had exceptional results as well, which goes to show that even the biggest idiot and most evil immoral man (aside from Hitler, Stalin, and FDR) of this century can have success using Graham's methods. can have. Keynes, if you don't know, was responsible for most of the misery and government-intervention in the free market over the last century. But, he proved able at following Graham's approach to investing.

As for the company that makes 80% a year, you can refer to Gene Callahan's lecture at the seminar on boom, bust, and the future at the Mises Institute: Financial Economics for Real People. It's only available in audio format, so it will take you 26 minutes to listen to it. A really great lecture. That site, Mises.org audio has a whole bunch of great lectures on it, but that's the only one explicitly about investing (though many deal with correct explanations of the business cycle).

PS: I do not advocate other forms of investing than Fisher's and Graham's disciplined fundamentals appraoches (understanding the quality of the company, it's financials, and how under- or over-valued it's stock is selling) for individual investors. The approach that Callahan lectured on is not something you can do at home. It requires programmers and constant monitoring to modify their market-models of what's going on. For the individual investor, especially the investor who does not dedicate 40 hours a week to it, the efforts and constant attention required to engage in anything other than long-term buy&hold is prohibitive. Furthermore, it's largely a waste of time for the individual investor; better results can be had using long-term approaches.

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Wdik, you have asked good questions about a message posted by dh003i, who appears to relay what he has read about investing. He has never been very clear about his credentials for making the sweeping statements about what works best.

His 90%, 80%, "never be a loser", and "all the time" statements are typical of the mythology of investing that makes stories are Buffet, Lynch and Graham interesting. Vague claims that rarely survive serious scrutiny. Using Warren Buffet to vouch for a particular approach is ironic since Buffet has often made statements to the contrary and has performance problems of his own.

In publishing you need a good story to tell and many of the examples in these works are "spin", told from the advantage of hindsight, and embellished to make a good read. The victories are not documented by some detached academic study, but usually self-proclaimed.

An arms reach away is a bookcase full of award winning tombs on various styles of investing. I've read them, they are interesting. But I don't find them terrible useful in day to day decision making.

A couple of decades of investing experience and the activities of a dozen associates that have been as deeply involved has given me a fairly solid base. When I say that no one single style of investing works all the time, I mean two things. First, that different styles of investing (momentum, fundamental, SDMA charting, small cap, large cap, growth, dividend and income, etc.) may be superior for a various 3 to 8 year period. Second, that the most advantageous style of investing jumps around enough that during some period of time in the last century it can be demonstrated to be superior. The pursuit of a single strategy that is best is a waste of time. You don't need the best, just an effective strategy that produces reasonable results. {It may be exciting to pick the winning horse. But, finding a horse in each race that will show will produce a very effective stream of wins.}

The investment world has had a continous flow of "hot" investment approaches that history shows us are just flash in the pan. The Nifty Fifty, Dogs of the Dow, momentum trading, international swing, interest rate swing theory, are just a few that garnered the support of multiple authors. The half life of an investment theory is less than 2 years. At the end of two years, less than 50% of the public still believes the theory because fickle markets have turned against the formulae. A wounded approach sometimes gets a second life via a "revised model", which then suffers the same fate.

The sad truth is that by the time you read the new hot theory, the window for action has often already started to close. The problem with developing a theory and publishing is that markets react. Folks want to move to the best opportunities, and this migration of money is the first factor that weakens the opportunity. Once everyone recognizes an approach, the advantage it offers becomes diluted.

You need to guard against anyone talking about sure-things, guarentees, never a loser, or success rates over 55%. This is Pied Piper talk, not experience investing. I don't know a single person with more than 20 years of investing that thinks one style always work. That is just nonsense.

On some previous threads dh003i has put up a number of completely rediculous posts, making claims and assertions that have no factual basis. As one of the moderators, I have deleted some of his posts, closed some message threads, and caution him to not post beyond his expertise. Subsequently, his posts improved and were often factually accurate and including useful material. The last couple of posts here combine useful references and foolish claims.

Because this message thread has begun to go in circles, getting more off topic, I will be closing this message thread for new posts. Any reader can start a new thread and hopefully the responses will stay on point and live up to the standards of this website.

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