Fear and Loathing on Wall Street

By on September 30, 2006

Originally published in November 1998:

INDEXES ON 10/30/98

DJIA 8,592.10

S&P 500 1,098.67

NASDAQ 1,771.39

Editorial

The early part of the last month could be characterized as “Fear and Loathing on Wall Street.” However, the panic was vanquished by a simple act of kindness by a benevolent individual of great power known as the Chairman of the Federal Reserve. The second 25 basis point easing really rescued the market. Greenspan still commands significant clout to counteract the ill effects of overspeculation and borrowing that always occur in boom periods. He has about 20 moves left in his arsenal, but may only need a couple more to forestall the killer bear. So where do we go from here? My prediction is the market will remain in a trading range for the next 2 months with a bottom of 8,000, give or take 200 points, and a top-end of 8,700. The break-out will most likely occur to the upside in January of next year.

The Tactical Timing System was extremely active last month. Three signals were generated in October, which is unprecedented. Volatility has increased substantially resulting in the increased activity. The turnaround in the portfolio’s performance has been astounding. The aggressive and conservative portfolios were in the dumps on October 9th with year to date losses of 4.5% and 5.5% respectively, but 3 weeks later whipsawed to respective gains of 16.7% and 10.7%. The aggressive portfolio is now beating the abnormally strong S&P 500 for the year.

Datek is Good!

Datek Online has been used for the aggressive portfolio since the account was transferred in early October. I must admit that I’m extremely pleased with the service of this deep discount broker. I’ve had great fills and their website is easy to use. The $10 commissions are hard to beat. Another plus is the very low interest (7 1/4%) they charge on margin balances. By the way, I’m not getting anything from Datek for writing this. I’m just a very happy customer.

Low Priced Stocks a Bargain?

Some of the most foolhardy logic I’ve run into when discussing the stock market with neophytes is their penchant for lower priced stocks. They see a stock selling for less than one dollar a share and justify buying it with the reasoning “how much can I lose when the price is so low.” The sad part is that these stocks can, and often do go to zero, and do it a lot easier than a stock selling for over a measly dollar. Another justification made for bidding on low priced stocks is that the investor can buy a lot more shares for their money. This again is a deduction arrived at by faulty reasoning. The number of shares owned is of absolutely no consequence since gains and losses are based on percentage changes in the share price. Unless you’re trying the purchase shares in the original Berkshire Hathaway (recent price $64,500 per share!), there really aren’t any stocks priced out of the reach of even the smallest investor. Another reason given by beginners for buying low priced stocks is that they can buy round lots, that is, blocks of 100, 200, 1,000 shares, etcetera. In the past there was a small advantage in doing this since the floor specialist would give higher priority to round lot orders when matching buyers and sellers. Any advantage gained these days is not worth basing a decision on since the markets are much more liquid today. About the only difference you’ll experience when concentrating on low priced stocks is that your chance of losing money is much greater than with higher priced stocks. Companies with lower priced shares are generally newer companies on the fringe with very short track records, questionable products/services and meager financial resources. The promoters of such companies prey on the ignorance and gullibility of inexperienced investors and intentionally give their stocks a low initial price to attract these investors. Savvy investors stay away from companies with weak financial strength, poor prospects and dubious products or services. There have been studies showing that larger percentage gains can be had with lower priced stocks, but this is more due to the lower total capitalization (number of shares X price per share) that low priced stocks command. A stock with a market capitalization of $50 million as opposed to one with $50 billion will be more volatile on the upside as well as the downside. When determining whether to purchase a stock or not, its best to leave the consideration of price per share to the beginners. This really has no basis in a thoughtful, disciplined investment plan.

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