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Posted 3/15/2001
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The Speculator
Questions about the wild market? We've got answers
Tune in to 'Stock Talk' as Vic and Laurel take questions on short-term panic, long-term gains and how to keep your mind on the moment rather than on the Hang Seng.
By Victor Niederhoffer and Laurel Kenner
Welcome to the first broadcast of "Stock Talk" with The Speculator! I'm your moderator, Laurel Kenner. We're getting flooded with questions from all over about this week's big swings in the market. Let's go to our first caller. Hello, sir. What's your question?
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Question: When I'm having a romantic moment with my partner, I suddenly start thinking of the market and can't stop myself from going to the monitor for quotes on the overnight S&P futures and the Hang Seng. What can I do?
Vic: This is a very common problem when the market is falling hard. I'm not a licensed practitioner in this area, so I asked my psychologist friend, Brett Steenbarger, for guidance. He said it's bad news when personal-performance issues get tied up with market performance. My father, the scholarly policeman Arthur Niederhoffer, wrote a book noting that kids become involved with gangs because they're frustrated in their efforts to be manly. Trading can also be a surrogate, according to Dr. Steenbarger. If a person can meet his need to be productive elsewhere, he may be freed to deal with the market more flexibly and less emotionally. (By the way, you can read more about what the doc has to say about market psychology in a column here.)
Q. We're in a bear market, and yet you're still making buy recommendations. Why not just go short?
Vic: All I can do is stick with my edge, which is quantitative analysis of interrelations and feedback groups in the market. The S&P futures have been down seven weeks in a row now, and the ideal time to buy the market is after a series of declines.
Shorting is like working a mine on a hillside. Most of the time it's profitable -- until the hollowed-out mountain falls on you. Likewise, shorting will work until, out of the blue, a big day like Jan. 3 comes along, or the Fed cuts interest rates. Then, the losses will kill you.
The market likes to test people. If it can goad us into giving up on our strategies at just the wrong time, it will have paid for its upkeep. It's easy to make us believe a good situation is bad or a bad one is good.
Q. I was up to $1 million in my retirement account last year. I just got my statement, and I'm down to $360,000. Should I be in stocks at all at this point?
Vic: What people should always do is sell enough of their holdings so the moves of the market don't affect their basic life-enhancing goals. They could learn a lot from the racetrack gamblers who limit their wagering to a certain percentage of their assets. A good guideline to follow is to gear your portfolio so that the average daily fluctuation is 2% or 3% of what you can afford to lose.
As for whether you should be in stocks now, I happen to believe when times are most uncertain, that's when the market is priced to give the highest return.
Q. Robert Shiller, the Yale professor who seems to have Alan Greenspan's ear, says P/Es (price-to-earnings ratios) are still much too high.
Vic: The idea that P/Es are above a historical average doesn't take into account the fact that stock ownership has increased while interest rates have been in a long-term decline.
Q. The market doesn't seem to care about increased stock ownership or the drop in interest rates, since the Nasdaq is down 60% from its high. Why should investors care?
Vic: Well, I care. In stock investing, it pays to take the long view, no matter what people happen to be saying at the moment. Over the last 200 years, the trend has been up.
We've updated the figures reported in books such as "How to Buy Stocks" by Louis Engel, "Corporate Finance" by Ross, Westerfield and Jaffe, and "Stocks for the Long Run" by Jeremy Siegel and can report that the average annual return for the S&P 500 Index from 1926 through 2000 is 13%, including dividends.
Of the 2,200 10-year comparisons possible during 1926-2000, more than 95% show an annual compounded return above 9%. The worst 10-year period was the one ending in 1974, where the return was 5%. Those able to hold on for another few years, however, would have seen a marked improvement.
As for individual stocks in a portfolio, John Lamberg, a scientist friend of ours, did a study of 40%, 50% and 60% declines in America Online (AOL, news, msgs) since its 1996 initial public offering. He concluded that AOL was "dead money" many times during its 34,500% ascent. The best way to lose out on such gains is to sell every time things look bad. The caveat, of course, is that nobody should own only one stock.
Q. As a futures trader, aren't you geared more toward the short term?
Vic: Yes, and I have to spend every waking moment of my life adjusting my positions and figuring out what the risks are. My track record is well known. I was the best for many years, and I was the worst in one year and since then I've been crawling up the stairs. I'm not entirely bereft of confidence or wherewithal. But the one thing I never did was to participate in a stock like AOL.
I buy and hold for my kids, though. And most of the people I know in their 70s and 80s who bought when they were in their 20s and 30s and held on are sitting on stocks with 500-fold gains. I fully expect that anyone who does the same now will find themselves in a similar situation.
Q. We notice you've been unusually quiet about your portfolio in recent weeks. Have you thrown in the towel?
Vic: With three exceptions, we think the stocks we've recommended for our online portfolio are good buys now, even though the portfolio is already up 11% year to date -- not far from the historical average for an entire year.
The three exceptions are KLA-Tencor (KLAC, news, msgs), OMI (OMM, news, msgs) and Nextel (NXTL, news, msgs). The last insider trades on these stocks were sells, removing one of our reasons for buying them in the first place. KLA-Tencor has risen 8.5% since we called it a buy in our Jan. 18 column, OMI is up 17% since we recommended its purchase on Jan. 30; Nextel is down 19% since we recommended it Dec. 26. We recommend the sale of all three and the redeployment of the proceeds in the 10 remaining stocks in our main portfolio or the High-Volatility portfolio we recommended last week.
The 11 remaining stocks are: Axcelis Technologies (ACLS, news, msgs), Conexant Systems (CNXT, news, msgs), Chart Industries (CTI, news, msgs), Edwards Lifesciences (EW, news, msgs), Hewlett-Packard (HWP, news, msgs), Iomega (IOM, news, msgs), Sicor (SCRI, news, msgs), Techne (TECH, news, msgs), Transmeta (TMTA, news, msgs) and Viasystems (VG, news, msgs).
The High-Volatility portfolio consists of Cygnus (CYGN, news, msgs), Good Guys (GGUY, news, msgs), Laser Vision Centers (LVCI, news, msgs), Microvision (MVIS, news, msgs) and QAD (QADI, news, msgs). We advised that it be bought in trenches over a period of five weeks.
Q. Do you think the market will be flat for a while?
Vic: It's instructive to consider in this context how the balance of power tips between investment banking firms and companies when it comes time to price initial public offerings. In good times, companies have the upper hand and can demand high prices for their shares, perhaps giving investors the opportunity for a 10% to 15% annual return.
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At times like these, where everybody's avoiding IPOs, they'd have to offer prices building in an implicit 60% or 70% annual return. That's a good estimate, to me, of how the beaten-up companies we've recommended will rise over the next five years. Anybody still holding on right now would have to be expecting that much.
Laurel: Is there anything else you'd like to opine on?
Vic: Yes. Dr. Greenspan will dust off his bullish speech soon, next time the wind changes. I don't know whether the market's decline is good for Bush's tax cut plan, but I do know that one of the best things that could happen to the market would be for the capital-gains tax to be reduced. That would make investment more attractive. Also, Greenspan should retire. He's too ossified to understand the growth economy that appeals to the young-hearted and is the linchpin of material and economic well-being for our society.
Laurel: Thanks very much, Vic. Readers, send questions for future Stock Talks to us at lkvn@hotmail.com.
At the time of publication, Victor Niederhoffer owned the following equities mentioned in this column: Axcelis, Conexant, Chart Industries, Techne and Viasystems. Laurel Kenner owned none of the equities mentioned in this column.
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.