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Buy On The Upside
Chapter 4: Alice in Wonderland
Alice confronted the strange world she found on the other side of the
looking glass with amazing equanimity. It is imperative that you as an
investor confront the reality you see, not how you think things ought
to be or how others tell you they are.
For example, not all owners of Wal-Mart (WMT) stock are rich even though
the stock increased over nine hundredfold from 1972 to 2002. Table 1 shows
the very different outcomes for five WMT investors after they each invested
$1,000.
Investor number 1 bought 15515.18 shares in 1972, held the shares and
their market value on April 12, 2002, was $949,995. This is a buy-and-hold
success story! Investor number 2 bought the same number of shares as investor
number 1, but sold them after a tenfold increase in less than ten years.
Investor number 3 bought shares in 1992, held them through a flat price
pattern, and sold in 1997 with a tiny gain. Investor number 4 successfully
timed the purchase and sale to get a sixfold return in less than two years.
The last investor bought near the 1999 peak price and as of April 20,
2002, was losing money. The message here is that “buy and hold”
is successful, depending on when you buy and how long you hold. The committed
investor makes careful decisions based on detailed knowledge about both
when to buy and how long to hold.
Similarly, the committed investor tracks each stock in her portfolio
and avoids becoming wedded to any single stock. Three stocks, AOL, BS,
and CL, present vastly different patterns over a time when the general
market peaked and then declined. Obviously, for the period chosen, an
investor in each of the stocks fared wildly differently. Just as obviously,
riding BS down through a period of market increase did not produce the
kind of “historic return” often touted for equities. Thus,
being married to any stock on general principle is a bad thing.
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in this chapter:
Buy and Hold
Dividend Reinvestment
Setting Up Your Dividend Reinvestment Account
Dollar-cost Averaging
Diversification
Problems with Mutual Funds
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TOC Chapter
1 Chapter 2 Chapter
3 Chapter 5 Chapter
6 Chapter 7
Posted May 16, 2008.
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