You know what I consider the single funniest moment of last year? That
article that described
That, to me, best encapsulated not only '99, but the current times we live in: "Yeah, I sing and produce record albums. I star in and produce movies. I spend my days being a diva. But, you know, when I get a few spare minutes, I trade my guts out, and I'm so good at it that
wants to profile me!"
Ah, well, I guess we're all turning into traders. Which is basically why, starting today, I think I'm going to chuck it all ... and rerecord the soundtrack to
! No, just kidding about the last part. As for the first part, I thought it might be a good exercise to discuss briefly the merits of buy-and-hold investing. Why? Because when something becomes so old and musty almost to the point of being ridiculed, it's almost invariably a great contrarian play.
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Therefore, recall my
final column of '99, in which I discussed my five favorite stocks. Yes, I know there might be five better ones, but we'll use those as a starting point.
Now, let's roll back the clock to Jan. 1, 1999, and assume I had invested 20% of my equity in each of the five. Here are the opening prices for each (give or take a cent or so.):
OK, so my next plan would have been to take a long vacation to anywhere, of course, other than
Utah! I wouldn't have to research anything, read about the market or worry about
. No, sir. I'd just be blissfully out of it, while Babs had to worry about that Las Vegas gig,
her daily trading!
So, at the end of the year, let's see where I would have wound up:
Hey, not bad. On an equal weighted basis, this yields a pretty impressive 93% gain. And that's using no leverage and incurring no commissions, other than the five initial buys. And with no daily effort. Now, so we have an equal comparison to our forthcoming trader example, let's take out the capital-gains tax of 20%. This leaves us with a net after-tax gain of 74.5%. Tidy.
OK, now let's get back to our Babs Streisand example and see how she'd have to do to compete. We'll assume Barbra makes 10 trades a week and uses a discount broker. So, at 500 or so trades per year, her commissions still don't amount to much, costing her maybe 1.6% per year. Still, she starts off a bit in the hole and now has to net roughly 125% before taxes (assuming a 40% tax rate) to equal our buy-and-hold trader. Maybe that was nothing last year, but that's still a 50% hurdle to surpass year after year.
So, looking at the numbers that way, why not just buy and hold?
Well, for one thing, all of us are real smart ... in hindsight. Sure, given
rise last year, I'd have put every single penny into that stock and slept the rest of the year. But what's the magic bullet this year? Is it the five I outlined? Or a few selected winners from
Jim Seymour's list? Beats me.
But even if you're a lot smarter than I am and think you can pick this year's winners, do you have the stomach to hold them through the inevitable downturn? Yes, right, I know. What am I thinking? Most stocks
buy wouldn't go down. And if they did, you'd buy more!
OK, well never mind then. I'm sure your stomach is a lot stronger than even you give yourself credit for.
But mine isn't. I know that already. And that's why I trade. I actually feel more secure and sleep better knowing I can not only go flat in a matter of minutes, but also then go short and make money from any kind of prolonged downturn.
But, again, the luxury of both not being as smart about stocks as a Seymour, and of sleeping at night, means I have to bat about 50% better than if I just bought and held. That's something for all you traders and would-be traders to consider, because it's a darn steep hill to climb. Even if you're Barbra Streisand.
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at