Reading the signs between the lines

[Mirage]

I was doing some reading on various stocks that had had shaky histories. There were two sides to the coin. On one side, you have the people who hung on through the roller coaster and took the dips and spikes without bailing. On the flip side, you have.. the exact same thing? Am I talking about a two faced coin? No. There's more to the story. On one side of the coin, the company is now worth 5 times what these people originally invested. On the other side, you will find a company that is still treading water, maybe on the way down, or maybe finally getting the lifeline they need. Either way, which of the two types of investors are the wiser?

This has been bugging me lately, because if you think about it, who could have predicted Enron? How about WolrdCom? These were solid stocks that went south. It could be argued that there may have been signs, but if there were, they weren't good enough for the millions of people who lost fortunes.

Getting back to the wobbly stock argument. Who is the smarter investor? The person who hold on to a stock that ends up going up? Or the person who hangs on to a stock that goes down.

Obviously the people who made money are smarter... Or maybe they are both stupid for staying in while there are other stocks doing much better. It could narrow down to luck of the draw, but if you ask me, luck of the draw is a game that belongs in Las Vegas, not New York. The stock market may seem random, but at least you can make an educated investment instead of banking completely on how well somebody shuffles cards.

What do you think?

 

[Mr_Snipes]

I haven't dealt with stocks myself, but I would have to say that you have to look more into the future and see where the company is headed before jumping ship. There are so many different variables that come into play. If I was the one who had the stocks, I would have to look at the bigger picture and not just what the stock was doing.

 

[softwarewiz]

Not having experience myself, I can just give an opinion based on what I've read and what I learned from watching my dad play the stock market.

In the long term, the stock market has historically performed better than any other investment (or so I've been told), so I guess it is still better to stick with it. IMHO, I'd say the guy who stays with the stock is the smarter guy in the long run. My dad bought a lot of stocks when they cost very little and are now worth quite a bit, even given inflation, etc. He's had some for decades, and they've sometimes taken a dive, but they usually come back up. Of course, he's always been a lucky guy in Vegas too

There's a bunch of guys where I work who day trade and although I'm not into that kind of risk, they have some pretty good ideas (and pretty good returns) from a couple of the mutual funds the company offers in their 401K plan. Sorry I can't tell you the names of the funds, but one is relatively risky, but has done incredibly well over the years (well, a few times, apparently it's taken a dive, but by the next quarter you are back to where you were before the dive and then it keeps going up for another year or so, when another thing happens and another dip that you have to recover from), so much so that one guy, who is really very conservative in everything else, has 75% of his portfolio in this one mutual fund and has really made a mint ... we're working on a piece of software together on the side, so I know he's not just feeding me a line ... you don't live like he does on what his salary is and he's not in debt.

Bottom line for me is the long-term investor I think is always going to come out on top in the stock market ... sure you might get unlucky and be forced to liquidate one year when it's down and the next year it soars, but I don't think that's generally the way things go

So, yeah, I'd say the smarter guy is the one who stays in even if an Enron type thing happens .... isn't Nortel back on the rise after taking a complete dive (in Canada I think???) .... sorry, mind a bit fuzzy on that one ....

 

[Noah]

Andrew,

Let's be careful to seperate companies that went south due to eroding financials and those who essentially disappeared due to illegal activity.

In an illegal scenario, I think people are so overwhelmed by the amount of information (or disinformation) that they don't know how to react. They decide to hold until the dust settles but by that time they've lost so much that they find themselves in a forced hold.

The same thing applies to distressed companies although one can get a clearer picture if they learn basic stock market research. Has the company rebounded before? Is the company's main product at the end of it's life? Is this cyclycal movement? Etc, etc.

Given the choice between holding and selling, most people will hold. Sell side decisions (whether they're profitable or not) are by far the hardest things to learn because they're so psychological. If I sell now, I might miss more profit. If I sell now, I will lose money and the stock *could* go back up!

The safest way to invest is to set stops in both directions and re-evaluate the company when it hits one of those stops, in my opinion.

Noah