During the past year, the equity markets, as measured by the Standard & Poor’s, the Dow Jones Industrial Average and NASDAQ indices, continued to return lofty and above average historical returns. However, many investors are reviewing their portfolios and wondering if they were at the same ball game, especially those with portfolios based on the more traditional criteria of companies with a strong balance sheet, a history of solid earnings and/or a record of dividend payments — not to mention a reasonable PIE ratio.
Unfortunately, 1999 was a very unusual year, with the market rewarding a select few “haves” and disappointing the many who fell into the category of “have nots?’ For example: although the S&P 500 was up 19.5 percent in 1999, only 78 stocks were up 20 percent or more, while more than 200 stocks were down 10 percent or more. And a small group of only 10 stocks in the NASDAQ Non-Financial Index accounted for 46 percent of the movement in that index, while 66 percent of the stocks on the New York Stock Exchange were down for the year.
A more dramatic example would be to look at a composite of the three most popular indices by taking a measure of the movement of only 31 stocks. In 1999, these 31 stocks, mostly in the Technology or Telecom Sectors, were responsible for 40 percent of the gains in the OJIA, S&P, and NASDAQ indices. Only 20 stocks controlled 28 percent of the movement in the S&P alone. These stocks were: Microsoft Corp., Genera] Electric, Cisco Systems, Wal-Mart Stores, Intel Corp., Exxon Corp., Lucent Technologies, IBM, Citigroup, Inc., America Online, AT&T Corp., Merck & Co., SBC Communications, American International Group, MCI Worldcom, Oracle Corp., Home Depot, Coca-Cola, Procter & Gamble and Royal Dutch Petroleum. Furthermore, these companies represent only six sectors.
In other words, if you weren’t in these stocks, you were probably among the “have nots.” Investor success in 1999 was not based on simply being in, or even out of the market, but specifically whether one invested in the “right” sectors, or held one or more of the “high-performance” stocks for 1999.
As the first year of the 21st century unfolds, it can be expected that the financial news media will continue to have a “field day” talking about “the market” as though it was one entity. In reality, they are referring to the NASDAQ, the S&P and the DJIA indices, all of which are not the true market but are representative of only a handful of stocks, and not necessarily a broad cross-section of stocks at that.
Based on market activity in the first months of 2000, investors should be prepared for a continued “have” and “have not” market. Therefore, to be successful in such an uncertain environment, it is important that investors have a solid game plan in place in order to keep focused on their long-term goals and to maintain continuity and stability during periods of market volatility. There is an old Wall Street maxim: “It’s okay to be wrong but not okay to stay wrong.”
We would therefore like to share with you a strategy that we believe has the ability to increase one’s market staying power and, while this may not always be the “right” strategy, it should definitely help keep you from “staying wrong.” As with any investment, this strategy needs to be considered in conjunction with each individual’s specific investment objectives and personal risk levels.
• When buying a stock, always write down your reason for buying — then periodically check back to see if your reasoning still holds true.
• Determine the price potential the stock has over the next 12 months.
• Sell one-third of your stock position if the stock rises 30 percent.
• Sell another third of your stock position if the stock rises 50 percent.
• Protect profits in a stock position if the stock rises 70 percent. This strategy may include selling covered call options; buying protective put options and/or the use of stop-loss orders.
• Sell the balance of the stock position if the stock price falls back to the point where the first one-third of the position was sold.
• Establish a stop-loss point to sell or hedge a stock if it decreases in price. Whether you work with a major brokerage house, an independent financial advisor or manage your own portfolio, we recommend you develop your long-term goals and create your game plan for the future and not worry about what the news media are saying about “the market?”