Opportunity Investing: How to Profit When Stocks Advance, Stocks Decline, Inflation Runs Rampant, Prices Fall, Oil Prices Hit the Roof, … And Every Time in Between by Gerald Appel

 THE MYTH OF BUY
 AND HOLD

 What do the companies Radio Corporation of America (RCA), Cisco,
 General Motors (GM), Trans World Airlines (TWA), Admiral, and Pan
 American Airways (Pan Am), have in common? These are or were sig-
nificant American, for the most part New York Stock Exchange listed,
 corporations that have, in years past, risen to and then fallen from
 grace. Shares of Cisco, for example, rose from a price of 4 in 1992 to
 82 in early 2000 before falling back to 8 by the end of 2004. GM, once
 the granddaddy of all corporations and the largest employer in the
 country? Priced at 11 at the bottom of the great 1973–1974 bear mar-
ket, GM recovered to a price of 94 at the start of 2000, before declin-
ing to 31 three years later, to lower still and near bankruptcy by the
 fourth quarter of 2005. Wal-Mart, with more than 1.1 million U.S.
 employees, has—of course—supplanted GM as the nation’s leading
 private employer.
 RCA, a pioneer in home radios and radio communication during
 the 1920s, rose from a price of 11 in the mid-1920s to 114 by

September 1929 before plummeting to 3 in 1932. Admiral, a hot tele-
vision issue in the 1960s, met a similar fate—and never did recover.
 TWA and Pan Am, once investor favorites, both failed to survive
 shakeouts in the airline industry. The drug industry has generally
 been regarded as one of the more consistent investment sectors for
 investors, but this has not prevented Merck’s roller coaster ride from
 6 to 72 and down to 28. Another major M, Merrill Lynch, has seen its
 price range from 6 to 91 and then back to 26, like Merck within just
 one decade.
 Such ups and downs are not limited to individual securities. The
 NASDAQ Composite of more than 3,500 issues rose from a price
 level of approximately 230 in 1984 to 5133 in 2000, before falling to
 1108 at the bear market low in 2002. Even the more venerable
 Standard & Poor’s 500 Index has recently given up as much as 49.7%,
 declining from 1,527.46 (2000) to 768.63 (2002). 
The point of all this is simply that, regardless of what Wall Street
 and the mutual fund industry would have you believe, there are con-
siderable risks to buying and holding stocks, even for long-term
 investors, and especially for investors who may need to draw on their
 assets during periods in which the stock market is showing significant
 cyclical weakness (for example, during the 1930s, 1973–1974, and
 more recently, between 2000 and early 2005). 
Moreover, buy and hold strategies, which actually worked well
 during the 1980s and 1990s, the two strongest back–to-back decades
 in history, are not as likely to work as well in the foreseeable future.
 The economist Paul Krugman, writing in The New York Times,
 February 1, 2005, observed that whereas annual economic growth in
 the United States averaged 3.4% over the previous 75 years, it is likely
 to average only 1.9% between 2005 and 2080. Inasmuch as the
 progress of stock prices tends to reflect economic growth, investors
 who limit themselves to just the U.S. stock market may be placing
 themselves in a position from which it will be difficult to achieve the
 rates of capital growth required for expenses later in life. 

Opportunity Investing: How to Profit When Stocks Advance, Stocks Decline, Inflation Runs Rampant, Prices Fall, Oil Prices Hit the Roof, … And Every Time in Between by Gerald Appel