Buy High, Sell Low

Two weeks later, I was sitting in the mahogany-paneled office of our chief executive officer, detailing my concerns as diplomatically as possible. He was surprised, attentive, sympathetic. There was no doubt in my mind he was sincere when he said he would look into it. It was a happy, exhilarating experience in my early business life.

AND SINCE?

Since then, nothing much has changed. Only the players and the prices are different. There have been many examples of superb analysts and money managers doing a good job, but from my perspective as a veteran observer, the percentage of good versus bad is disappointingly low. The "experts" are still prone to follow the herd, and just as likely to give up on their favorites too long after protracted declines. Too often, when the stocks fall so low there is little risk in instituting positions at depressed prices, the analysts are sitting on their hands. These gurus belong to what I call the "Buy High, Sell Low School of Economics."

Do you remember the negativism on IBM in 1993, the pronouncements Big Blue was through, that it was a dinosaur in the modern world? You might also remember IBM advanced some 600% or 700% over the next seven-year period.

And surely you recall the technology darlings shooting into the stratosphere during the late 1990s. The words that still echo are, "These are core holdings for investment portfolios."

Core holdings like Cisco went from $5 in 1995 to $80 in 2000 and back to $15. Corning went from $10 in 1998 to $110 in 2000 and back to $10, EMC from $5 in 1996 to $105 in 2000 and back to $15, Intel $5 to $75 to $25, and so on. The public was left high and dry, gored in their core holdings, and left limping with losses with the timid sell suggestions coming after the damage had been done.

Not only that, is there any need to mention the dotcom disasters? Even nonmarket people know about them. Hundreds of stocks in this industry went from 50 cents to $200 and back to zilch. A survivor such as Yahoo! advanced from $2 in 1997 to $240 in 2000 and now trades around $15. Well, at least it's still in business!

Not only that, the poor do-it-yourself IRA and 401(K) investors are hunkered down in their accounts, waiting for the magic words to materialize: "The market always comes back." The favorite expression of the neophytes in the market is: "I can wait. I'm in it for the long term."

ARE THERE ALTERNATIVES?

What's a poor investor to do without proper guidance? Buy mutual funds? Maybe. I am, however, too familiar with poor performance over the years in this area. Perhaps the balanced funds are the safest way to go. Those who employed the strategy of buying the Standard & Poor's 500, accepting the boring results of doing no better or worse than the general market averages, came out, on balance, best. There are competent guides out there who employ reliable strategies, which lead to superior results.

For instance, I'm sold on the wisdom of portfolio managers who diversify and spread the risk. I saw firsthand the folly of concentrating assets in one or two stocks. Early on, I prospected and developed a substantial account for a retired businessman who loved the market. He called the shots; I took the orders. He uncovered a great idea in Brunswick, the leader in bowling alleys and equipment. He bought thousands of shares, and pyramided his holdings with purchases on margin. After a time I urged him to reduce his position, take his profits, which became huge, and run. No way, he said. His ego and self-assurance and greed overwhelmed his judgment. When the boom in the shares ended, he froze and could not accept the reality of the game being over. The decline was precipitous, and because of the leverage of a margin account, he lost several hundred thousand dollars. Not only did he become demoralized, he turned to alcohol, and ended up sick and unhappy.

The buy-'em-and-forget-'em method does not have a surefire winning approach. Following this edict has created substantial fortunes; it is to your advantage to understand that such bonanzas often occur because ground-floor investors instituted positions at low prices. If you are lucky or intelligent enough to be in early, if you enjoy the ride up and then fret about your large position, you should sell enough of your stake so you can sleep well. But once you have that drop-dead money, be sure not to lose it.

YES, YOU CAN SELL

We are all subject to ignoring an important part of the investment conundrum: There is the buy side and the sell side. The sell side is as important as the buy side. Selling creates the need to reemploy the proceeds from the sale, an equally important investment decision. Remember, "Reinvest in haste, repent at leisure."

It takes a bear market to remind us of the fury of a relentless decline. So many hapless market participants moan: "What happened? How could I go through one of the greatest bull markets in history and end up with so little? What happened to those projections that promised a 10% average annual return?"

The answer is simple. Too many new investors went to the "Buy High, Sell Low School of Economics"!

Edwin Polokoff is a retired first vice president of Merrill Lynch residing in Florida.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.