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Year 2000 Lessons

���� After a professional football game the players and the coach sit down and go over the game.� They watch the films.� They discuss what worked, and what didn�t.� It�s important for them to figure out how to proceed.� They look at what needs fixing and how that is going to happen.� The team has a goal that they constantly keep in the forefront of their minds: win every game and make sure you get to the Super Bowl.� Achieving the goal isn�t easy, there is opposition, but it can be accomplished if they constantly practice what they know.� Doctors carry on the same type of review every time a patient dies under their care.� They meet to identify what worked and what didn�t, then they try to develop a strategy that will better accomplish their goal of providing the best patient care.� Investors are similar to the sport teams and doctors, they have investing goals and they strive to increase their account balance as much as possible.� But something went wrong in 2000.� Many investors lost money.� What can we learn if we do a postmortem on the year 2000?� �
���� Looking back it�s obvious many investors let their emotions get ahead of their brains.� �Irrational exuberance� was a fairly accurate description of what was happening.� Going forward: we need to keep our emotions in check and rely on logic and intellect.� Beginning in late 1999 market pundits and commentators kept saying the markets had run up significantly and were ready for a correction.� We need to listen carefully to the rumblings that go on in the financial media.� When we hear the same thing many times a day we need to carefully review what is being said.� Certain market analyst�s opinions carry a lot of weight and shouldn�t be ignored.� Abby Joseph Cohen is one of those pundits you have to listen to.� In the off chance you don�t like her, what she says, or Goldman Sachs who she works for: what she says moves the market.� She says she picked the market top correctly in March 2000.� Actually she helped cause the top when she publicly reduced the equity allocation for the firm�s clients.� A handful of notable market strategists at the largest brokerage firms publicly announced a re-allocation of their model portfolios, slightly reducing their equities holdings even ahead of Abby Joseph Cohen.� Their clients listened and so did a larger number of other investors.� So when the top strategists publicly yell �fire�, don�t be the last one to the door.� Many investors had every cent in their possession in the market, with much of it in the high tech and Internet sectors.� When the markets sold off there were no extra funds available to pay margin calls and there certainly weren�t any funds in reserve to selectively pick up bargain stocks selling at a 50-70% discount off of their highs.� In the future we need to keep some funds in reserve. �When you buy a stock you�re buying a stream of future earnings.� If the projected earnings of one company is greater than another, the one with the strongest earnings going forward will have the strongest value in a crazy market.� No matter how good the concept is or how bright the future looks, a company with no earnings and only a chance of future earnings has only a chance of surviving when the market declines and the earnings are closely scrutinized.� When looked at closely, stocks with a Price-to-Earnings ratio in the stratosphere will fall like a souffl� in an oven on a bumpy freight train.� The lesson most investors learned best from their year 2000 experience is the need to use stops to reduce losses and to hold on to gains.� Many investors would have kept most of their gains from 1999 if they had used a trailing stop placed 5-15 percent below their rising share price.� Stops, whether placed with a brokerage firm or kept track off mentally are a good way to get out of a losing position with most of your account balance left to work with in the future.� It only takes a modest 11 percent gain to recoup from a stop placed 10 percent below a stock purchase that has gone bad, but it takes a monumental 100-percent gain to recoup a 50 percent loss.� The year 2000 had many lessons to teach us and hopefully we were good student and are better equipped to push on toward our goals.

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