To print article, click Print on your browser's File menu. Go back Posted 12/21/2000 Related site See how your favorite analysts stack up at Validea.	sponsored by: The Speculator Lessons for a lifetime -- with a side of crow A few distasteful missteps in 2000 haven’t diminished our appetite for eclectic strategy. And now is no time to give up on growth stocks. By Victor Niederhoffer and Laurel Kenner When we started writing for MSN MoneyCentral in April, our goal was to give readers meals for a lifetime rather than meals for a day. We drew on checker maxims, racetrack betting techniques, ecology, Gestalt psychology, baseball, the economic theory of choice, cane theory and the study of how knowledge is diffused in our effort to provide a rudder for navigating a perfect storm and surviving rogue waves. Eventually, we decided to serve lunch for the day as well, after our editor pointed out that columnists are expected to help readers make money by telling them what stocks to buy right now. We'll get to our stock-picking performance later. But first, while we'd like to believe that the dozen or so systems we have unloaded on our readers have been of some value, we note that many of them have caused considerable umbrage. For example, our foray into the realms of predictive charting elicited one diatribe after another, the general drift being that we were uneducated, lazy ignoramuses who should be pantsed. Our reports on the value of buying money-losing companies were greeted with equally withering reader critiques about our irresponsible failure to adjust for risks and market cycles, to say nothing of our ignoring the wisdom of the fundamentalists. A cheer for us -- and a crow Under the circumstances, we didn't know whether to quit or cry. Instead, we looked up our performance on Validea, which ranks all analysts, experts, soothsayers and pundits. And unexpectedly, we were somewhat cheered. According to Validea, our picks have earned four out of a possible five light bulbs with an average three-month gain of 10.5%. (We haven't been at this long enough to get a one-year ranking.) Our best pick to date, according to Validea, was Interwoven (IWOV, news, msgs), a triple in the six months after our May 8 recommendation. Interwoven was one of our Down 35 stocks, a group that fell from above $200 a share to below $100 in March and April in what turned out to be the first phase of this year's Nasdaq ($COMPX) crash. Drawing on Vic's LoBagola Theory, we hypothesized that these marauding elephants would come back along the same path they traveled in their rampage. Many did so, only to turn tail and trample the villages repeatedly in subsequent months. Alas, not all of our picks held up so beautifully as Interwoven. In that same May 8 column, we presented our Insider 20, a group that had seen buying by officers or directors in the previous few months. Among them were Federal-Mogul (FMO, news, msgs) and Finova Group (FNV, news, msgs), which both fell 80% in the six succeeding months. On the other hand, we also reported and recommended the insider picks of Carr Bettis, whom we challenged to a contest, the loser to eat crow raw, squawking and fully feathered. We will be eating the crow, because to his credit and our readers' benefit, Carr's long and short portfolio advanced about 21% through Tuesday -- far outperforming the market. A rich collection of other such bombs among our picks keeps us from exchanging high fives. A bit of Niederhoffer family history also kept us from patting each other on the back. Our ups and downs Victor is a former active manager of futures accounts. In 1996, he was the best. In 1997, he was the worst. In 1998, Vic's brother Roy, also an active manager of futures accounts, was the best. In 1999, he was the worst. We are pleased to report that Roy is at the top again this year and was featured prominently in a Barron's article this month as way ahead of the pack -- he's up about 50% this year. So, keeping in mind the law of ever-changing cycles and the real possibility that the last may be first, at least in the Niederhoffer family, we turn to some larger thoughts about the market. We have been recommending growth stocks all year, through one Nasdaq decline after another. In retrospect, we told readers to take out the canes once too often. In fact, we ourselves hobbled down to Wall Street at times that weren't even close to the depths of the panic. As of Tuesday, the Nasdaq Composite is down 38% this year, worse even than the horrifying declines of 1973 and 1974, when it lost 31% and 35%, respectively. Don't give up on growth But although some of our readers may be getting ready with the rotten tomatoes, we're not giving up on growth stocks. The environment now is infinitely better for stocks than during 1973 and 1974, when inflation quadrupled to 12% and the Federal Reserve's discount rate for banks in need of short-term loans soared from 4.5% to 8%.
Although some of our readers may be getting ready with the rotten tomatoes, we're not giving up on growth stocks. The environment now is infinitely better for stocks than during 1973 and 1974, when inflation quadrupled to 12% and the Federal Reserve's discount rate for banks in need of short-term loans soared from 4.5% to 8%.	Consider: Bond yields are near their lowest in two years, and the Fed looks ready to cut interest rates next year to avoid a recession. We cannot imagine what Machiavellian reasoning led to the failure to cut them on Tuesday, given that the Fed itself said the economy was in danger of recession. Perhaps the old chairman has some issues with the new president-elect. But back to the bullish case for stocks. The government may take a while before it permits the public to put a portion of its Social Security contributions into stocks, but the idea's time has come. It will be good for the market, for retirees and for the economy when it finally happens. A 1% or 2% return on retiree investments is good for no one except demagogues and bureaucrats with government pensions. More important, we can look forward to even greater improvements in three key areas that were the sources of growth in the 20th century: scientific knowledge, health and longevity. Add in the mainstream's understanding that free markets where private property and free speech are protected work better than command economies, collectivist schemes and authoritarian regimes. Stocks do have bad years, as this year reminded us, but the long-term drift is 10% to 12% a year upward. Studies conducted by Vic's mentor at the University of Chicago, James Lorie, show that this holds true for almost all 10-year periods going back to 1926. With the economy still growing, there is no reason to believe this ultra-long-term trend will change in 2001. Looking ahead It would be unseemly for us to pat ourselves on the back after a year like this. There are so many things we could have done better, and we have so much to apologize for. Fortuitously, we already apologized for some of them on Oct. 5, in our takeoff on Sholom Aleichem's Yom Kippur story. Rather than bragging, throwing in the towel or looking back in anguish, we feel it appropriate to maintain a forward-oriented perspective, by testing ideas and following the dictate of Sir Francis Galton to "count, count, count." Therefore, our interest sparked by the huge decline in Microsoft (MSFT, news, msgs) last Friday on volume of 163 million shares, we focused our attention on other volume events of this nature. We looked at all 19 occasions when the daily volume in an individual stock priced above $1 exceeded 110 million shares. Fifteen of them occurred in conjunction with a decline in the stock that day. We then looked to see what had happened to those stocks 13 weeks later. We're pleased to report that eight of 11 showed a rise. The average move, taking gainers and losers into account, was up 16%. On the other hand, the subsequent moves of the four stocks that rose on big volume days were quite negative. Three of the four fell, with an average decline 13 weeks later of 17%. The alert reader might wish to keep abreast of these huge volume days for possible long-term holdings. Naughty years At the start of the year, we noted that stocks tended to perform poorly in years ending in zero. We looked at the annual percentage changes in the Dow Jones Industrial Average and a 10-stock predecessor going back to 1890 and found seven declines and four rises – a 64% chance of falling. In non-naughty years, there is a 68% chance of rising. Differences as large as this are a 1-in-100 shot by chance. We also wrote that of the five years in which the Dow dropped more than 30%, two were naughty years. Worst Annual Drops in the Dow: 1931: down 53% 1907: down 38% 1930: down 34% 1920: down 33% 1937: down 33%
Recent Articles • Turn a profit when the sky is falling, 12/14/00 • Why candlestick charts don't work, 12/7/00 • A swingin' Gestalt theory to rock your stocks, 11/30/00 more...	We feel comfortable in comparing these declines with the disaster that overtook the Nasdaq this year. The Nasdaq, of course, didn't come along until 1971, but has now almost entirely supplanted the Dow as the id of the market. Recall that the industrials were once considered the risky new stocks. Turns in decades, centuries -- and, as it turns out, millennia – are times of change in psychological grounding. In 1899, a wave of fin de siecle optimism, inspired by record-breaking economic activity, gave way at the end of the year to an all-out panic, the worst in stock market history. The investors of 101 years ago, according to a contemporary account in The Wall Street Journal, sold their high-flying industrial roll-ups and streetcar stocks "regardless of price," just as today's investors dumped their dot-coms, B2Bs, telecom equipment makers and chip companies to meet margin calls and avoid the possibility of even worse losses. When it was all over, The Commercial & Financial Chronicle, the Barron's of the day, wrote that at least investors were better off because that terrible decline was behind them. And we can write the same. At the time of publication, the authors owned no stocks or funds mentioned in this article. MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.