Lessons From the Investing Legends

By on August 18, 2006

Originally published in February 1998:

The market continues to digest the news of Asia and the president’s image problem. Of these two concerns, the greater risk to prosperity by far is the turmoil in the Far East. Some are predicting a depression lasting several years in the region. This is very unlikely. The currencies have plummeted in most of the Asian countries which will drive up their exports and help stave off a depressionary plunge in profits. Several U.S. firms have reported weak earnings comparisons and have conveniently blamed the shortfall on the Asian crisis. This is a good opportunity for companies to write off their mistakes and have a scapegoat to boot. This will be the case for more and more companies in the next two quarters. By mid-year the effects of the devaluations should be a thing of the past. This has been discounted by the mild correction in stock prices. The next move for U.S. stocks will likely be a surprising surge to the upside spawned by a continued decline in long term interest rates.

Lessons From the Investing Legends

I recently listened to books on tape about Warren Buffett and another about investing by Peter Lynch. The most interesting ideas culled from these works for myself included Buffett’s observation that an investor should limit him or herself to “20 punches on the ticket,” or in other words, 20 stock investments in a lifetime. His feeling is that there are only a few great investment ideas available at any given time and investors who are able to ferret out the exceptional companies should stick to them in good times and bad since any attempt at market timing is futile.

One of Lynches more interesting opinions regards index fund investing. He basically states that index fund investing is for “dumb” investors. But since index funds beat the majority of professionally managed accounts over extended timeframes, the “dumb” investors become “smart” when they realize their limitations.

It takes a lot of effort and luck to beat the indexes. Even if you beat the index by one percentage point, on a $100,000 account, it amounts to a mere $1,000. It can be questioned whether the extra effort is worth it. But if the investor enjoys this pursuit and is not neglecting more important matters such as family relationships, then striving for higher investment returns could be considered a worthy use of one’s time.

Correction

In the last issue I wrote that there was one timing signal in 1997. There were actually two: a buy signal on April 1, and a sell signal on June 13.

Portfolio Activity

Keane Inc. (AMEX: KEA; 42) recently became more that 10 percent of the aggressive portfolio. To comply with the Tactical Timing System guidelines, 50 percent of the position was sold on January 20th at a price of 40 1/2. International Game Technology (NYSE: IGT; 24 13/16) was purchased on the same day at 24 1/8 to bring the aggressive portfolio to approximately 75% equities; 25% cash. IGTs future appears very bright since they control approximately 80 percent of the gaming machine market. The company is very strong financially and acceptance of the new Vision series of gaming machines is gaining momentum. Demographic trends will lend support to IGTs rate of growth over the next couple of decades.

Portfolio Updates

Callaway Golf Inc. (NYSE: ELY; 27) plunged after an anemic earnings report and a downgrade from “buy” to “accumulate” by Merrill Lynch. This company has been a disappointment since it was purchased on April 1 last year. However, there is still hope that their foray into the golf ball business will be lucrative.

Recommended Allocations

Aggressive portfolios: 75% equities, 25% cash.

Conservative portfolios: 55% equities, 45% cash.

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