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No. of Recommendations: 5
"After picking a stock when it is at a low point in its "cycle" and then after it hopefully rises significantly, they sell the original shares invested to be used to invest in another company ..."

Just my opinion, but with all due respect I think that's baloney! Though I wish it were that easy and methodical.

Stocks do not have easily discerned "cycles."

I think that trying to judge these cycles is a waste of time and effort. He speaks of "an inevitable drop" in all stocks. While this is true, it's also "inevitable" that the best growth companies drop only temporarily. Often when they go on the rise again, it's very quick and an investment club, as well as most individual investors, can miss the big moves, waiting for whatever it is that finally tells them it's time to get back in.

How does anyone know that a stock has reached a "low point" in it's so-called cycle? Then how does one know when it's at it's high point? If the answer refers to technical analysis I would personally dismiss the strategy altogether for the average investor. (I won't go into the subject of TA at this point.)

You write of "original" shares vs. "remaining" shares as if there would somehow be a large number of shares above and beyond the original shares when it comes time to sell. How would this be the case? I suppose a lot would depend on how long a period of time these "cycles" take to see their day in the sun.

Any idea what the average holding period for these stocks are? Is he talking about stocks that have split several times? Is he talking about keeping his "original" dollar investment in the company or the original number of shares?

Some may have success stories over the short-term, but in the long view I believe the odds are strongly against you.

You might ask this friend to produce some specific numbers showing his club's return over at least a three to five year period. Don't forget to include commission costs as well as the tax ramifications which can erode the returns dramatically. Especially consider the tax consequences which can take a large chunk of the gains made on the repeated sale of stocks.

Be very skeptical and measure those results by comparing them to a good benchmark like the S&P 500. Fell free to compare them against my own investment group returns by reviewing our "Performance Stats" page accesible from the bottom of our home page from the link below. We are a strictly buy and hold investment club which has realized a 65.5% compounded annual rate of return in the past three years.

Peter Lynch in his books tells of selling out of a stock just because it had reached a preconceived "high." The horror story comes when he realized only a small gain when, had he held onto the company, would have grown many many times in value over the long-term.

As I am often apt to do, let me share some other points of view:

"The person who ... invests on a regular schedule is better off than the person who studies and tries to time his investments, getting into stocks when he feels confident and out when he feels queasy."
-- Peter Lynch, Beating the Street, p. 36

"The short-term focus leads to short-term guesswork shooting for short-term returns, which generally leads to lots of short-term mistakes. And two big long-term ones: You'll spend more of your life trying to beat the market with less likelihood of doing so."
-– Tom & David Gardner, You Have More Than You Think, p. 252

Ultimately, only you can make these choices and only "time" will tell.

I could add some additional thoughts, but I've probably out lived my welcome for now anyway. I do hope this is helpful.

If your friend can show the value of his methods with solid return numbers justifying the associated "costs," and IF his method is easily applied by others, then I'll be the first to say "amen." I have yet to see such easily applied strategies that make any long-term sense to the serious "investor."

Best of luck!


It is not enough to have good intelligence, the principle thing is to apply it well. – Descartes
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