The Ten Stocks for the Next Ten Years

By James B. Stewart

April 10, 2007

IS IT JUST A sign of my advancing middle age, or is more happening in less time? Have technological progress and enhanced productivity actually sped up the pace of history? I find myself pondering these questions as I look back on the past 10 years for clues to the next 10. In many ways 1997 seems like yesterday. Yet so much has happened that in some ways it already seems like distant history. Since then, the Dow Jones Industrial Average has more than doubled, and the MSCI EAFE index of overseas markets has gained more than 80%.

Yet beneath this seemingly placid surface were some of the market's most jarring swings: the collapse of Long-Term Capital Management and an Asian stock market panic in 1998; the technology boom and bust, with the Nasdaq Composite losing 78% of its value from 2000 to 2002; the post-bubble recession; the surge of easy credit and low interest rates; the real estate, oil and commodities booms. And the dizzying 400-point drop in the Dow on a single day earlier this year, which heralded the return of long-dormant volatility.

Through it all, and even as the pace of events seemed to accelerate, SmartMoney has made the case for the long-term view of investing. In a world of day traders, rapid-fire in-and-out hedge funds and instantaneous computer-driven program trading, the old-fashioned buy-and-hold approach seems almost quaint, not to mention unfashionable. And yet its virtues seem to be ever more manifest: lower costs, lower risk and, most important of all, avoiding the emotional, crisis-oriented instincts of the herd.

For our 15th-anniversary issue, we've taken what we've learned over the past decade and a half to create another 10-year portfolio. To identify our top-10 stocks this time, we also demanded a demonstrable history of sales growth. Then, as in past years, we sorted through the remaining stocks one by one, looking for common themes that were likely to play out over the next decade. In the end, we identified four themes: clean water, health, wireless technology and global growth.

Bear in mind that any portfolio that aims for above-market returns inherently carries more risk. We recommend investing in the entire portfolio, as I will.

WATER SERVICES

Fresh water is becoming an increasingly important commodity. Water-infrastructure and water-treatment companies will clean up as emerging and developed economies build and rebuild their systems.

Tetra Tech (TTEK¹)
Tetra Tech is a consulting firm specializing in water-resource management and environmental cleanups. Eighty-five percent of its revenue is water-related, though it may be best known as the company that in 2001 tested the Hart Senate Office Building in Washington for anthrax contamination. The firm seems well positioned to benefit from growing environmental awareness and spending by both government and private companies. The Environmental Protection Agency, for example, estimates that water-infrastructure repair and improvement will require $277 billion in spending over the next 15 years. And the company has said that overhauling aging sewer systems in the U.S. alone will require more than $100 billion worth of work over the next 20 years. Tetra Tech recently won sewer work in Louisville, Seattle and Toledo, and improving state budgets should keep the new work flowing.

Watts Water Technologies (WTS²)
At first glance, you might not think a company that invented a hot-water valve in the early 1900s would be a high-growth prospect for the next decade. But Watts Water Technologies, which supplies water-control, purification, safety and flow devices to the construction industry, should see strong gains in the years ahead. Though the company benefited in recent years from the robust market for residential construction and renovation, which is now in a slump, its commercial construction business continues to be strong. Watts's greatest opportunity, however, lies with large municipal, state and national water infrastructure projects, both in the U.S. and abroad. One of Watts's faster-growing areas is pollution control; it makes valves that prevent waste water from backing up into the fresh-water supply.

HEALTH

Demographics favor medical-equipment manufacturers, from dental equipment to respiratory care to imaging systems. Natural foods, too, will continue to grow as Americans adopt healthier lifestyles.

Sirona Dental Systems (SIRO³)
It may be that no one enjoys a visit to the dentist, but health- and appearance-conscious baby boomers are sure going. Dental implants are rising more than 10% a year, and the market for cosmetic dentistry is growing at a 13% clip. Thanks to new high-tech products from Sirona Dental Systems, people may find the trips increasingly pleasant and productive, and dentists are finding them increasingly profitable. Sirona designs, manufactures and sells dental chairs, treatment workstations and instruments such as the soft-tissue laser, which can make oral surgery faster and less painful. But the biggest drivers of the business, at $100,000 each, are its computer-assisted dental-design systems. Patients can get crowns made and installed in a single visit, eliminating the need for a temporary crown and a return visit. Only 7% of dental practices now feature the equipment, so there's plenty of room for growth.

Viasys Healthcare (VAS⁴)
Viasys Healthcare is a cluster of high-technology medical-equipment and diagnostic companies that focus on respiratory care and neuro diagnostics — the monitoring of the brain and nervous system. The company, which originally specialized in ventilators, went public in 2001 and has made 11 acquisitions since. Today 66% of its revenue comes from respiratory care and diagnostics, 21% from neuro care. Other specialties include artificial hip and knee joints as well as parts used in artificial hearts — all areas that should benefit from the aging of the baby boom generation. We expect Viasys to continue its acquisition strategy, concentrating on smaller companies that focus on respiratory care and neuro care. So far the company's acquisitions are paying off in greater economies of scale, especially in manufacturing and distribution, which have produced higher profit margins.

OSI Systems (OSIS⁵)
OSI Systems is a hybrid medical/defense company, with half of its revenue from medical equipment and half from scanning and inspection equipment and optical gear used by the defense and aerospace industries. Imaging is the technology that ties it all together, which means OSI should benefit from two major trends: an aging population with greater demand for medical care as well as continued defense and security spending. OSI's medical-equipment division makes everything from patient-monitoring to anesthesia systems. OSI bought the unit from General Electric (GE⁶) in 2004, after European and U.S. regulators ordered GE to sell it to resolve antitrust issues.

United Natural Foods (UNFI⁷)
Wherever you run into organic produce, chances are it got there thanks to United Natural Foods. The company is the largest national distributor of organic and natural foods, offering more than 40,000 products from 17 distribution sites nationwide. It serves the gamut of clients, from Whole Foods (WFMI⁸) and Wal-Mart (WMT⁹) to small specialty retailers, so it seems positioned to profit from growth in demand for organic products wherever it may occur. It faces no significant competition: Wild Oats, a natural foods chain that recently agreed to be acquired by Whole Foods, contracted with a rival distributor in 2002, but brought its business back to UNF three years later.

Next: Wireless Telecom & Global Growth10

WIRELESS TELECOM

As broadband-like speeds come to wireless communications, demand for ever more sophisticated handsets and the infrastructure that powers them will drive the industry's next leap forward.

Powerwave Technologies (PWAV¹¹)
Powerwave Technologies makes the amplifiers, antennas and other equipment that enable wireless phones and handheld devices to transmit and receive voice and data. Powerwave's parts are used in base stations, which are installed on towers and on top of buildings by the wireless carriers. Besides benefiting from continued growing use of cell phones and other handheld devices worldwide, the company should benefit from two important subtrends: the shift to 3G, or third-generation, phone networks and the spread of a new wireless technology known as WiMax. WiMax, a wide-area broadband technology that is rolling out in cities like Chicago and San Francisco, is an industrial-strength version of the Wi-Fi network in your home. A WiMax signal can carry up to 30 miles, and it's 20 times faster than current mobile technologies. Powerwave makes the antennas and base station hardware for WiMax, and it has only one major competitor, Andrew Corp. (ANDW¹²)

Brightpoint (CELL¹³)
Brightpoint is the middleman for the wireless industry and should be ideally positioned to profit from its continued growth. The number of worldwide cell phone users is expected to jump 58% to 4.1 billion by the end of the decade, according to Gartner Group, a research firm. Nokia (NOK¹⁴), Samsung, Motorola (MOT¹⁵) and almost every other maker hire Brightpoint to install the software that makes their phones compatible with wireless-service providers and to deliver them to retailers. Although Brightpoint is the largest U.S. distributor of cell phones, it handles only 5% of the transactions worldwide, leaving it plenty of room for expansion.

GLOBAL GROWTH

Globalization is creating new opportunities in areas as disparate as market research and global air transport. Our two picks give investors worldwide reach as the global economy grows.

Harris Interactive (HPOL¹⁶)
Best known for its Harris Poll, ubiquitous during American election campaigns since the 1950s, Harris Interactive is one of the top 15 market-research firms worldwide. It seems ideally positioned to profit from a continuing demand for proprietary data and information in nearly every field. Market research is a $26 billion industry worldwide and should grow 5% to 7% a year over the next five years, according to the European Society for Opinion and Marketing Research. Harris should grow considerably faster than that, thanks in large part to the Internet. The firm was among the first to recognize the potential for the Web to revolutionize information gathering and polling, launching its first online research panel in 1997. Today 57% of its research is Internet-based, and it has a bank of 6 million registered participants available for studies.

Atlas Air Worldwide (AAWW¹⁷)
Atlas Air Worldwide offers an unusual opportunity to profit from growing global trade, a trend we expect to intensify in the coming decade. The company, which has a fleet of 35 Boeing 747s, leases its planes, complete with crew, maintenance and insurance, to shippers, a business that's growing at 17% a year. To accommodate rising demand, the company ordered 12 additional 747s in 2006 and has options for 14 more. That seems a prescient move now that continuing setbacks for Airbus's superjumbo A380 are making it harder for competitors to expand their fleets in the high-capacity, long-haul markets that are Atlas's specialty. What's more, Atlas can now fly more cargo in and out of Asia; the U.S. Department of Transportation recently awarded the carrier four more routes into China, bringing the total to 16.

A must read about Stock Bashers (unknown author)

How to recognize Stock bashers on Message boards, newsgroups and in chat rooms. its too long but you got to read it.

LEARNING is a process and an evolution. Learning is not all fluff. Learning is a process of awareness and unfolding development; one must be willing to work at it though.

A year ago when I asked broker friends of mine if the internet message boards will have any affect on a stock. They ALL laughed at me and said those idiots having an affect on a stock!

A truth: IT IS EASIER TO SCARE PEOPLE INTO SELLING THAN IT IS TO INFORM PEOPLE INTO BUYING A STOCK.

Well I asked those same friends this last week, and the answer from all YES! message boards and ""shorts" (some) can manipulate with lies, and deceit.

Now think about that, you have elderly that invest and find their way to the message boards only to see false posts about "SEC Violations" and "Class action suits" or you have a Yuppie with a kid to put in college going to these message boards only to see posts by 15-20 (probably 5 or 6 under alias) "pack of shorts" posting the same false stuff about SEC Violations or lawsuits or "there's bad news coming out" ....what do you think they will do ?

It's easier to sell the stock and put the money into the bank for nervous people like the elderly and the Yuppie who needs college funds. THAT'S WHO THE PACK OF SHORTS PRAY ON AND DEPEND ON. They bet on a stock to go down-not up! Understand? And they have just as much money and risk as you. But they have the edge of fear, lies, falsehoods to post and pray on the nervous. Longs don't have that.

Lesson 1: Remember, BASHERS NEVER BASH A BAD STOCK. Watch the board for stocks with no potential. They never have any bashers. Bashers only go after stocks that are going upwards or have excellent potential to go up. Bashers get left behind, so they want to bring the price down.

Lesson 2: BASHERS ALWAYS BRING UP OLD NEWS THAT YOU HAVE HEARD MANY TIMES. New startup companies always have a few bits of bad news. The basher will post this over and over again. The stupid basher will try to make the old news a bit fresher to try to fool you.

Lesson 3: BASHERS POST MANY TIMES A DAY. They try to wear you out. They comment on everything, every other post, and can answer every question. THEY KNOW IT ALL! There is no positive comment they won't bash. They try to control the board. True longs may have to address the bashers or they will appear to the newbies as being the people with all the information.

Lesson 4: BASHERS WILL LIE TO YOUR FACE. Never trust a basher. The truth on startup companies is that many mistakes are made and losses happen. The basher will try to make you believe all startup companies make a profit, release financials every quarter and all aspects of the business run smoothly. THIS IS NOT TRUE. THE BASHERS LIE TO YOU. Startup companies can go years without profits, financials and good business, this is the nature of the beast.

Lesson 5: The bashers know YOU CAN'T VERIFY THEIR STATEMENTS. That's why they make the statements they do.

Lesson 6: The bashers PLAY ON YOUR LACK OF KNOWLEDGE. They can lie about information and you couldn't know the difference (unless you have done your assessment of the company and know the truth and facts).

Lesson 7: Bashers play on your lack of patience. YOU have held a penny stock for a while. You knew it will be a big penny stock someday, but the BASHER CAN GET TO YOU BECAUSE YOU ARE TIRED OF WAITING FOR YOUR GAIN . That's when the basher is best. You are tired. You have forgotten the goal for the penny stock was to hold it for one year. The basher is bothersome, so you dump it on a bad day. Some others also dump. Then you get mad for your loss and return to let everyone know how mad you are. Then you turn into a basher as well. THE BASHER HAS WON, AND GAINED A NEW PARTNER TOO, to be able to get in at a great price.

Lesson 8: BRING THE PRICE DOWN. That is the basher's job. The truth is not important. Lies are the norm. Post continuously on the board every day. They are trying to hit the newbies visiting the board. They are trying to wear out the longs on the board. They do whatever it takes to wear the longs out.

Lesson 9: BASHERS WILL TRY TO CREATE DOUBT AND GET YOU TO RESEARCH ITEMS THAT THEY KNOW WILL LEAD TO THE CREATION OF DOUBT IN YOU AND IN OTHER STOCKHOLDERS. A typical trick of an advanced basher is to propose that there is a potential "problem" because "we" don't have the facts on a particular subject. The basher dares someone in the group to find out the answer to the question. The basher already knows the answer; the basher already knows what will be found. The power of this tactic is that the basher is now in control of the actions of the stockholders; the basher has you, the stockholder doing HIS/HER due diligence and when you, the stockholder come back to the group with a questionable finding then the basher gains credibility. What to do??? Solution??? Well, I think it's important to find answers but on your own terms. I actually pick up the phone and call the company and talk to the investor relations person or the CEO until I get a satisfactory answer. The problem here is that the advanced basher has you doing his bidding and his work; you have essentially joined his ranks. So, develop your own little Due Diligence package and answer questions by placing the information into the package and referring all new investors to read the answers to questions raised in the Investor Information package but DON'T GET INTO A CONVERSATION WITH THE BASHER REGARDING THE TOPIC. THAT IS WHERE YOU LOSE. DON'T CONVERSE WITH THE BASHER; ANSWER INDIRECTLY; DON'T USE THE BASHERS NAME; DON'T GET INTO A PERSONALITY CONTEST.

A BASHERS HANDBOOK: know the enemy who wishes to steal your money! Do not underestimate a bashers influence on a stock. The Pro's are good at what they do and what they do is profit from your losses. Below is their "hand-book" so to speak. Learn from it or donate your money to those who make an organized plan to steal your money!

BASHERS DO THE FOLLOWING:
1. Be anonymous
2. Use 10% fact. 90% suggestion. The facts will lend credibility to your suggestions.
3. Let others help you learn about the stock. Build rapport and a support base before initiating your bashing routine.
4. Enter w/ humor and reply to all who reply to you.
5. Use multiple ISP's, handles and aliases.
6. Use two (2) or more aliases to simulate a discussion.
7. Do not start with an all out slam of the stock. Build to it.
8. Identify your foes (hypesters) and the boards "guru" Use them to your advantage. Lead them do not follow their lead.
9. Only bash until the tide/momentum turns. Let doubt carry it the rest of the way.
10. Give the appearance of being open minded.
11. Be bold in your statements. People follow strength.
12. Write headlines in caps with catchy statements.
13. Pour it on as your position gains momentum. Not your personality.
14. Don't worry about being labeled a "basher". Newbies won't know your history.
15. When identified put up a brief fight, then back off. Return in an hour unless your foe is a weak in reasoning powers.
16. Your goal is to limit the momentum of the run. Not to tank the company or create a plunge in the stock; be subtle and consistent.
17. Kill the dreams of profits, not the company or the stock.
18. Use questions to create critical thinking. Statements to reinforce facts.
19. DO NOT LIE, DO NOT NAME CALL and DO NOT USE PROFANITY.
20. Encourage people to call the company. 99% won't. They'll take your word for claims made. If they do call you can always find something that is inaccurate in how they report their findings.
21. Discourage people for taking the companies word for anything. Encourage them to call the company. They won't out of laziness.
22. If the companies history/PR's are negative constantly point to that. Compile a list of this data prior to beginning your efforts.
23. If the price rises blame it on the hype or the PR, temporary mass reaction, the market, etc. Anything but the stock itself.
24. If other posters share your concerns, play on that and share theirs too.
25. Always cite low volume, even when it's not.
26. Three or four aliases can dominate a board and wear down the longs.
27. Bait the hypesters into personal debates putting their focus/efforts on you and not the stock or facts. Divert their attention from facts. Show them the facts from a "different angle."
28. Promote other stocks that would-be investors can turn to instead of the one your bashing.
30. Do not fall for challenges on the "values" of what you are doing, it's a game and you are playing it with your own rules.

GRADE YOUR FAVORITE BASHER:

Advanced Basher:
Will join the message board early and actually "pump" the stock with positives; this basher is very intelligent, has the facts of the company, actually helps longs with Due Diligence and generally gets the confidence of the stockholders. Then, when the stock hits their price, the tone will change and they will start asking longs to check into this and check into that. The seeds of doubt are being planted. This basher will then start using all the tactics listed on this page to create seeds of doubt. ALWAYS LOOK AT THE PROFILE OF A PERSON YOU SUSPECT. ASK WHAT STOCKS THEY'VE "SUPPORTED" IN THE PAST AND CHECK OUT THE MESSAGE BOARD. An honest person will have a positive track record that can be followed. I strongly believe that a contrary view is needed but this person is out to steal your money and does it by deception and creates fear after gaining confidence! BEWARE, this is the most clever basher and the hardest to spot.

Grade A Basher:
Posts lots of old news, responds to all positive posts with a negative side. Never responds to being called a basher, never posts on another board. Can spend up to 80 hours a week bashing a stock.

Grade B Basher:
Very good way with words, always claims to be your "friend" taking the positive poster into confidence, never posts on another board, spends about 60 hours a week.

Grade C Basher:
Spends less time than the others but is somewhat effective and gets a C grade due to getting excited when bashers rules say not to get excited, spends about 40 hours a week.

Grade D Basher:
Needs to learn the basics about being convincing when making a negative statement. Spends a good amount of time working the stock, maybe 20 hours a week. Grade F Basher: A complete idiot, most readers are not convinced he knows anything about stocks in general. The type that says a stock "sucks", but gives no rationale, shows up every so often but no regular schedule.

WHY BASH?: MONEY (the usual reason), SPORT, ENTERTAINMENT. Some bashers are compelled to bash because they are inherently a part of the dark side of life so they must do it. It's a sad fact but never the less, a fact. It's life so you must learn how to deal with it or become a victim!

LEARN ABOUT HOW STOCK BASHERS WORK: how they are paid: (this was written by a basher) I know the following from a "friend" who needed extra money. I never answer a basher directly because I then become a basher's little money machine. IGNORE THEM FOLKS...how bashers are paid: When you REPLY to bashers you give them an opportunity to earn 5-7 bucks. The service agreement they enter into with their employer states their messages will be monitored for content, profanity, lies, etc. but Money Manager's and the like don't have the time to check all their bashers messages. Only occasional spot checks are done. Those who manage the basher will generally read the headlines to see if a basher is replying to other posters by name. That tells them the basher isn't just "posting blindly" or repeating the same message over and over since they won't pay for those. A basher will attempt to milk three to five replies per post at one to two dollars each. This way the basher spreads negative influence to as many stockholders as possible. A basher will create this discussion thread because it takes less time reading more messages than is necessary. This ultimately allows the basher more time to post and make money. In general, NEVER ENGAGE A BASHER. Make them read all the posts and think up ways to enter the discussion.

NEVER ENGAGE A STOCK BASHER; if you do so then YOU BECOME THE BASHER'S AID!

Read the news, do your own homework and make your own decisions. Get real time quotes and follow the stock for a couple of weeks. Due Diligence is key here. Know that there will be a time when the stock runs up which will be followed by the Bashers and those that missed the boat. The bashers will trash the stock by saying such things as "it's a Pump and Dump" and "the company is lying" and deceiving. There goal is to scare off newbies and potential new investors by "shaking" you out of your shares. Take the time to confirm your Due Diligence, ,trust your own judgment and believe in yourself, pick your point of return or loss and live with it. Don't listen to hype or bashers and live by the rules you have created.

When Fear And Greed Take Over

There is an old saying on Wall Street that the market is driven by just two emotions: fear and greed.Although this is an oversimplication, it can often be true. Succumbing to these emotions can have a profound and detrimental effect on investors' portfolios and the stock market.


In the investing world, one often hears about the juxtaposition between value investing and growth investing, and although understanding these two strategies is fundamental to building a personal investment strategy, it is as important to understand the influence of fear and greed on the financial markets. There are countless books and various courses devoted to this topic. Here our goal is to demonstrate what happens when an investor gets overwhelmed by one or both of these emotions.

Greed's Influence
So often investors get caught up in greed ("excessive desire"). After all, most of us have a desire to acquire as much wealth as possible in the shortest amount of time.
The Internet boom of the late 1990s is a perfect example. At the time it seemed all an advisor had to do was simply pitch any investment with a ".com" at the end of it, and investors leaped at the opportunity. Buying activity in Internet-related stocks, many just start-ups, reached a fever pitch. Investors got greedy, fueling further greed and leading to securities being grossly overpriced, which created a bubble. It burst in mid-2000 and kept leading indexes depressed through 2001. For more on the dotcom bubble and other market crashes, see Greatest Market Crashes.

This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term, especially amid such a frenzy, or as the former Federal Reserve chairman, Alan Greenspan, put it, the "irrational exuberance" of the overall market. It's times like these when it is crucial to maintain an even keel and stick to the basic fundamentals of investing, such as maintaining a long-term horizon, dollar-cost averaging and avoiding getting swept up in the latest craze.

A Lesson From "The Oracle Of Omaha"
We would be remiss if we discussed the topic of not getting caught up in the latest craze without mentioning a very successful investor who stuck to his strategy and profited greatly. Warren Buffett showed us just how important and beneficial it is to stick to a plan in times like the dotcom boom. Buffett was once heavily criticized for refusing to invest in high-flying tech stocks. But once the tech bubble burst, his critics were silenced. Buffett stuck with what he was comfortable with: his long-term plan. By avoiding the dominant market emotion of the time - greed - he was able to avoid the losses felt by those hit by the bust. (Interested in what companies Warren Buffett is buying and selling? Check out Coattail Investor, a subscription product tracking some of the best investors in the world.)

Fear's Influence
Just as the market can become overwhelmed with greed, the same can happen with fear ("an unpleasant, often strong emotion, of anticipation or awareness of danger"). When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy.

Just as greed dominated the market during the dotcom boom, the same can be said of the prevalence of fear following its bust. In a bid to stem their losses, investors quickly moved out of the equity (stock) markets in search of less risky buys. Money poured into money market securities, stable value funds and principal-protected funds - all low-risk and low-return securities. In fact 2002 saw the largest amount of outflows, about US$40 billion, from the equity markets since 1988, a year after one of the worst stock market crashes in history, and a record $140 billion flowed into the bond market.

This mass exodus out of the stock market shows a complete disregard for a long-term investing plan based on fundamentals. Investors threw their plans out the window because they were scared, overrun by a fear of sustaining further losses. Granted, losing a large portion of your equity portfolio's worth is a tough pill to swallow, but even harder to digest is the thought that the new instruments that initially received the inflows have very little chance of ever rebuilding that wealth.

Just as scrapping your investment plan to hop on the latest get-rich-quick investment can tear a large hole in your portfolio, so too can getting swept up in the prevailing fear of the overall market by switching to low-risk, low-return investments.

The Importance of Comfort Level
All of this talk of fear and greed relates to the volatility inherent in the stock market. When investors lose their comfort level due to losses or market instability, they become vulnerable to these emotions, often resulting in very costly mistakes.

Avoid getting swept up in the dominant market sentiment of the day, which can be driven by a mentality of fear and/or greed, and stick to the basic fundamentals of investing. It is also important to choose a suitable asset allocation mix. For example, if you are an extremely risk averse person, you are likely to be more susceptible to being overrun by the fear dominating the market, and therefore your exposure to equity securities should not be as great as those who can tolerate more risk.
Buffett was once quoted as saying, "Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market."

Brains Don't Always Bring The Bucks

August 15, 2007 | By Brian Bloch

It is not uncommon for intelligent, competent people who have been successful in business or an academic environment to try their hands at trading on the markets. In essence, because they have managed to outpace the competition in the business or university sector, they think they can do the same with investments. However, while this logic may be appealing, it does not always pay off and many of these individuals lose money for a variety of reasons.


A Common Beginning and a Good Start
The German expert Jochen Steffens explains how this can happen (Investor's Daily, November 2004). In an example, Steffens describes a new "intelligent" investor named John. John is advised by a friend to put some of his money into the stock market. He does so and buys a very promising stock. In one month, he turns $30,000 into $35,000. All he had to do was phone in and place an order. John now believes he is on to a good thing. There are few other areas where you can make such good money with so little effort.

The problem is that John now thinks he can carry on doing this. His reasoning: "I am more intelligent than most people. I have proved that throughout my life. I can now use my knowledge and intelligence in the stock market to gain an advantage over all those other idiots out there who think they know what they are doing, but don't." This, says Steffens, is a fatal mistake.

Intelligence and education often guarantee success in academic professions and sometimes in business, but the world of investment is driven very differently. (To learn how to start investing for yourself, see our Investing 101, Stock Basics and Basic Financial Concepts tutorials.)

Things Start to Sour
John then buys another stock, but this time it does not go up, but down. John is very surprised. He researched extremely carefully on the internet and found all sorts of evidence to suggest that this particular share could only go up. But it didn't. John now makes the next fatal error. He believes that "all those idiots who are selling this stock just don't realize how much it's going to be worth over time! It's really a great buy, but only truly intelligent people can see this."

Unfortunately, all those "idiots" continue to sell and sell. The stock is now worth 60% of what John paid and he is faced with a nasty dilemma. He could accept that he is one of the idiots after all and sell. But this is difficult - John is keen to preserve his own self image as an astute judge of the market, companies and other investors.

Human (market) psychology being what it is, John looks for another reason why things went wrong. It could be Ben Bernanke, events in China, the weather or even the phase of the moon. Anything but the fact that John simply made a mistake, or a series of them. (To learn more, read How Investors Often Cause The Market's Problems.)

From Bad to Worse
Something else is very clear to John: the share has dropped so much, that it can't fall any farther. Therefore, John reasons that it's best to wait until his shares climb back to his purchasing price of $30,000. This is the next in this not-so-funny comedy of errors, because the stock continues to fall, eventually grinding to a halt at $15,000.

John now waits for that inevitable meteoric rise that will salvage not only his savings, but also his sense of self-esteem. However, the rise never comes, and the stock languishes between $15,000 and $17,000 for a year. Finally, our intrepid investor realizes it's game over and sells.

The Cycle Begins Again
Then, the truly inevitable happens. The company is taken over, restructured and streamlined with great skill and precision, the products remarketed and the stock starts to rise and rise. Our hero goes though stress and misery once again.

Now he realizes there is only one thing that he can rely on - cash is king. At least until our hero starts to get very frustrated when his friends, who are definitely not as intelligent as he is, tell him how much their portfolios are making.

The Market Takes from Everyone
Steffens' story of "Intelligent John" is largely a psychological one. John was subject to a series of emotions and their consequences, all of which are very common in the investment sector. John's "sure thing" plunged downward and he felt humiliated. In order to maintain his self image, he kept the stock way too long, hoping that all would be well in the end. Even worse, says Steffens, "he wanted to show the stock market who was boss".

However, the stock market does not care who it takes money from. Whether it be a construction worker, professor, doctor, politician, economist - or our poor intelligent John - is irrelevant. The illusion of control, self-overestimation and the classics of greed and fear are poison in the markets. The most intelligent and educated people are anything but immune to such "psychotraps". (To learn more about the psychology of investing, see Master Your Trading Mindtraps, When Fear And Greed Take Over and Mad Money ... Mad Market?)

As German behavioral finance expert Joachim Goldberg points out, "If people win a few times on the market, often with small amounts, they think: 'Now I know how it works,'" ("Strong Emotions Hamper Trading", Handelsblatt, October 2005). As a result, they start putting more and more into the market until things go horribly wrong.



Conclusion
When things take a turn for the worse, investors tend to make a classic series of mistakes: hanging onto stocks that are losers, selling far too late, then moving too much into cash. As Goldberg confirms, "the most common errors are to act too suddenly on important trades, not to realize losses in time or to take profits too early."

Heinz Werner Rapp of Feri Wealth management in Germany adds that in 2000, as in other euphoric booms, the most obvious behavioral problem is that "people blind themselves to anything they don't want to hear" (Handelsblatt, October 2005). They refuse to believe or act on the simple truth proclaimed by independent experts. As such, as smart as they may be, they are destined for failure.

In 2000, the fundamentals of the new economy shares were hideously out of line with their stock market evaluations. Investors watched their stocks climb to dizzying heights and deluded themselves that the world had changed and that the party would go on forever. But the new economy was not so new after all - the cold realities of the old economy prevailed in the end, and they always do - even for the smartest investors.


By Brian Bloch

Knowing when to sell

SMARTSHARE

Vinod K Sharma / New Delhi July 21, 2007

As attentive investors, we tend to look for opportunities to buy. Rarely would we think of what to sell.

While selling what you don’t have is a rare art that is not in vogue these days, keeping the mind open to possibilities of selling what you have is something that every investor should strive for.

Until you sell, the capital appreciation is only on paper and, therefore, likely to vanish if prices start tumbling. Conversely, your paper profits can continue to climb to dizzy heights if you don’t sell them. The greed for more profits can continue to make you hold the stocks.

One needs to take a call as to when one should book profits.

Target is reached When the target price of your stocks has been reached, taking a selling decision is easy. This discipline of booking profits will stand you in good stead as profits will be continuously booked and there will not be any cause for complaint if the stocks tumble.

Period gets over Sometimes money is set aside to be invested in stocks for a particular period of time. Once the target period for which the amount was invested gets over, you need to convert the sum back into cash.

Temporary parking Often, the savings are diverted to stocks as a stop-gap arrangement. For instance, you need to buy a house but find the housing prices too high at the moment.

So you may want to wait for the prices to cool down and may invest the amount in stocks for the time being. So whenever in the future you feel that the house needs to be bought, don’t be greedy and over-extend the equity investment.

Need to rebalance Sometimes, because of a relentless rise in a particular stock, the weightage of that stock in your portfolio would rise substantially, making your portfolio lopsided. Prudence demands that you reduce exposure to the stock to rebalance your portfolio.

This would mean pruning exposure to your best performing stock. So I suggest you revisit the stock’s fundamentals and believe that the out-performance could continue for a while; keep holding the stock but put it on your watchlist to prune immediately when the stocks starts heading south. The bottomline here is: don’t rock a steady boat.

Fundamental weakness There could be a host of fundamental reasons why you should think of selling the stock that you have long owned. It could be the loss of market share, plunging margins, lower sales, an adverse merger ratio etc. There could be other telltale signs like insiders selling the stock. This needs to be differentiated from a deal in favour of a strategic investor or an institution.

Valuations are often touted as reasons for buying or selling. A stock, however, need not be sold only because it has a high Price Earnings (PE) ratio. Companies that have just turned around, niche players or companies that are going to grow at very high rates in the future, will tend to have higher PEs.

But if companies fail to deliver, then one would have to wield the axe.

Trailing stop-loss Once a decision has been taken to sell the stock, investors can utilise the concept of a trailing stop loss to extend the gains. A stop-loss sell order is a contingent order that will get triggered only if the stock does fall to a particular price.

For instance, the stock you have decided to sell is quoting at Rs 550. You have reason to believe that the stock will go up but you need to protect your profits. So you may place a stop-loss order for the stock at Rs 540 as trigger and Rs 535 as selling rate.

If your stop-loss is not triggered, keep moving up the price each day till the stock gets sold. A stop-loss order strategy allows you to milk the upside potential of stock as long as the trigger is not hit.

Booking of profits is not a bad idea at all. Doing this generates liquidity, which is something that will come in handy when there is an opportunity to buy.

Importance of entring a stock and when to sell

Importance of entries and the dynamic of adding to positions on a pullback. He understood the importance of the entry price, but he wanted to understand why the entry price was so critical, especially since subsequent additions to the initial position would be at higher levels than the original position. It is an interesting question that cuts to the heart of the role emotions play in risk management. Think about it. Let's say you have a small long position on a stock that has moved up in price. It begins to pull back, yet instead of selling your position, you add to it. That's fine, but why is this different than simply buying a stock that you like at any given price level? If it moves up, great! You'll buy more on any subsequent pullbacks. If it moves down, you just buy more on the pullback itself rather than stop yourself out. Understand the scenario? Why do we use more discipline on the initial entry than on subsequent additions to the position? I think the answer revolves around the impact that emotions have on our trading decisions. Initial entries are important because they are the toughest part of the trade. The greatest amount of uncertainty, and risk, comes when we first buy a stock. Because if we are wrong, we aren't giving back part of the profit, we're giving away some of our risk capital. This is why we are the most vulnerable to emotional trading at that time. The margin for error is small. This is why it is important to enter as closely as possible to the level which, if hit, informs us that we are wrong about the trade. We can make a quick exit for a small loss and chalk it up as a cost of doing business. But what if the entry is poor -- being very high above any credible support level? That creates a dynamic that puts us at a disadvantage. By the time the stock falls to critical support, we may be so emotional about the initial drawdown that we can't think clearly. Instead, our actions are more likely to depend on what's happening with the other positions in our account. If we have been doing well, then our action in managing this one errant position is likely to be different than if we have been losing money. That goes against the discipline of judging each position on its own merits. Try being patient with your entries. It's fine to want to get involved, just get involved at a good price.

Position Sizing

Eric Wolff submits: Figuring out the right position size for a stock, and deciding when to sell and when to double down is probably one of the more difficult aspects of stock investing, and an area I find myself struggling with regularly. It is one of those areas of investing that I believe is a bit more of an art than a science

A lot of position sizing usually depends on an individual investor's risk tolerance and desire for diversification. I know several people who keep a very concentrated portfolio (as few as 2-10 stocks), and others with upwards of 30-50 positions. Each has its benefits, though I personally lean towards the more concentrated portfolio, as it is easier to keep track of, and allows for more $$ in places where you have the most conviction. I personally like to fall within about 15-20 for the long side of my portfolio, as it allows for a bit more diversification while still allowing me to heavily weight my top five holdings, which I usually like to have about 40-50% of my total portfolio. I don't like to have a position grow to more than about 15% of my total portfolio, unless there is a very strong margin of safety or unless I am unusually confident in the companies' prospects. In general, my largest holdings are ones I have the most confidence in, and those with the largest margin of safety (I will rarely, for example, invest 10% in a speculative stock).

Position sizing is a constantly evolving question. As information changes (the stock price, company prospects, etc.), the position should be re-evaluated to ensure exposure is consistent with the risk/reward of the stock. In the case of Mad Catz Interactive (MCZ), I originally started it off at as a 10% position. When the halo deal was announced and the stock shot up, I continued to hold the position, as my fair value of its upside potential was now more than when I bought. When the stock reached $1.40, it was beginning to near some of my more conservative valuations. I asked myself if I would buy the stock again if I did not own shares, and the answer was yes--but it seemed to me more fitting of a 5% position in light of my other holdings vs. the 15% holding it had become.

When To Sell

I think this is another area that can be a bit more of an art than a science. With certain investments, I usually have a catalyst in mind that I plan to sell around--for example, strong earnings in a particular quarter. With others, I plan to hold the stock indefinitely as it is a company I want to be invested in over the long haul [EYE.A and Meta Financial Group Inc. (CASH) are good examples].

I try as best I can to stay objective with my holdings, and always ask myself if I would still buy if I did not own it--particularly after big moves in the stock price or news that alters my investment thesis. Madacy is a great example of an investment in which I lost my shirt, but I believe I played well, all considering. The stock got whacked down about 60% after what appeared to be a one-time issue with their largest customer. Management bought back shares, and I decided to double my position, as I believed my thesis was still intact. Over the next couple quarters, however, it became clear that this was more than a one time issue, and that the operating business was significantly impaired. I recently closed the position at a loss.

Most important, I think it is useful to continue to evaluate what strategy works best for you and what doesn't, and to make decisions accordingly. There are rarely hard and fast rules in investing, and I think this is an area in particular where that is true.

Options - Bull Call Spread is my favorite strategy.

I talked about call options and how you can use it to increase your return. You can also follow Lenny Dykstra's strategy of buying deep-in-the-money call options. So sticking with the options theme this week, I want to mention one of my favorite option strategies, the Bull Call Spread.

It's better to use an example to explain the Bull Call Spread strategy. I mentioned I like Motorola (MOT) stock at $18 and it should go to $25 within a year or two. Currently the call option on MOT strike 20 expiring Jan 2009 is $2.05. Now let's say you bought 1 contract. It will cost $205 (plus commissions, of course). That's the premium you have to pay and it moves lower as time approaches closer to the expiry date if the stock doesn't appreciate in value. With the Bull Call Spread, here's how you lower your risk.

Because you bought 1 call MOT strike 20, you can sell 1 call MOT strike 25. Currently the call option on MOT 25 expiring Jan 2009 is $0.65. By selling 1 call MOT strike at 25, you pocketed $65 to your account (less commissions, of course). That's right, someone actually gives you money. You become like the casino operator. That means your total risk is $205 - $65 = $140. Your maximum reward is between the 2 strike prices (25-20 = $5.00 ($500)). Your maximum return can be 257% return (($500 - $140) / $140).

Bull Call Spread Disadvantages
-You spend more in commissions.
-Becomes more complicated so you have to know what you are doing.
-If the stock goes up, you return is not as high as buying just a straight call option.
-If the stock continues to soar beyond $25, you still only make the maximum $500.

Bull Call Spread Advantages
-Less capital outlay so your risk is lower if you are wrong in your prediction.
-If the stock goes down and you are confident in your prediction, you can close your higher strike sell call position and then sell it again when the stock goes back up. For example, if the MOT stock goes down $2 to $16 and the premium for the MOT strike 25 is $0.30. You can buy 1 contract at $30 and close that position and profit $35 since you original sold it at $65. If MOT stock goes back up $2 the next day to $18, you can sell the higher strike call again and pocket $65.

How to make money with call options

Options can increase your return a lot faster than stocks but are more riskier. So like speculative stocks, it should be only a small portion portion of your portfolio.

For a more detailed explanation, click the link below.

Options 101

When I buy options, I go for the LEAPS (expires in 1 or 2 yrs), although I pay more of a premium, it allows the stock enough time to move in my favor.

For example, I like Motorola (MOT) stock due to Carl Icahn & Eddie Lampert's buys but it's not a long term buy for me (my definition of long term is like 5-10 yrs). Because MOT is in a competitive environment and when technology can change in a hear beat, I prefer to buy the option if the premium paid is reasonable. With MOT stock at $18.00, I consider it a turnaround value stock play with the potential of going to $25 within 1-2 yrs. If I buy 100 shares of it, I'll make only 39% return on investment ($700 profit) if it goes to $25.

However if I buy a one, Jan 2009, 20 strike, call option, I pay only $210 premium. If it goes to $25, my return will be 138% return on investment ($500 profit). If I buy 2 options, I make $1000 profit (less commissions, of course)!

What's the downside if the stock stays at $18 in 2 years?

If you bought the stock, $0 gained/loss. If you bought the option, expires worthless and you lost $210.

What's the downside if the stock goes to $15 in 2 years?

If you bought the stock, $300 loss. If you bought the option, expires worthless and you still only lost $210.

What's foolish is if you used all $1800 to buy options. What's prudent would be to buy 1 contract and keep the rest in cash to yield interest or use it as a reserve. Money management is the key to options trading.

Here's another example of buying a call option compared to the stock. Recently I bought one call option on Walmart, Jan 2009, strike at 50, for $440. At the time, the stock was at $47. Now the stock is up to $49.50 and my option is worth $610. That's a 39% return ($170 profit using $440 capital). If I bought 100 shares, my return would only be 5% return ($250 profit using $4700 capital).

If you've never played options, start slowly...... Also just like stocks, buy in stages and in wide scales. And because options can expire worthless ....it's better to just sell it when you've got a quick profit. I may sell my Walmart call option pretty soon.

Oh by the way, it's good to compare options with the same price stocks so you don't overpay. At the time, Best Buy's similar call option when it was at $47 was at $6.00 vs Walmart's $4.40. (I guess people are more bullish on Best Buy).

What's Behind the Coming Market Crash?

Nicholas Vardy submits: Only a few weeks ago, markets around the world were hitting record highs, day after day. After two queasy weeks in the markets, the mood has quickly turned somber. Scan the strategy pieces of investment banks, and a coming market crash has become conventional wisdom virtually overnight. Morgan Stanley has predicted a "14% correction over the next six months." Rival banks place the odds of a market crash before the end of the year at one in four. Union Bancaire Privée, Switzerland's private banking giant, called all financial assets simply "jaded" -- recommending cash and commodities. Only Ravi Bahta -- (in)famous author of the "The Great Depression of 1990" -- appears unnervingly optimistic. He recently published a new book entitled: "The New Golden Age."

The Coming Market Crash: Today's Bubbles

Markets crash when financial bubbles burst. Certainly, today's financial market has its share of bubble candidates. Famous "Gloom, Boom and Doom" monger Marc Faber noted in the Financial Times last week that the only global asset that isn't in a bubble is the U.S. dollar. That being said, here are my own top three bubble candidates.

Bubble # 1: Global Property

Although the air is being let out of the property bubble in markets as diverse as Florida and Spain, the global property boom trundles on. Big bonuses on Wall Street and London, recycled petrodollars from the Middle East and Russia, combined with looser lending standards for the Average Joe, have driven property prices up across the globe. Property in central London is reaching dotcom era levels of absurdity. A two-bedroom flat in Mayfair -- a tony part of London -- last week went on the market for $3 million. After attracting 14 bidders, it was sold for close to $5.4 million -- 85% above its asking price. To get a 6% gross yield, it would have to rent for $27,000 per month.

Bubble # 2: Private Equity Boom

Private equity today suffers from the familiar and often fatal symptoms of a financial bubble: "too much money chasing too few goods." Companies that were valued at PEs of 12, are now being sold for 20 to 30 times earnings. The fuel for this particular financial fire is low interest rates. For the first time ever, some banks are lending out money below base rates. And they're doing this with "cov-lite" ("covenant lite") terms that give little legal recourse when things go awry. Justified by plenty of "this time it's different" thinking, banks' looser lending standards may be planting the seeds of their own demise.

Bubble # 3: "Chindia"

Scan any business bookshelf in your local bookstore, and you'll be struck by the number of books with the word "China" in the title. Financial newsletters touting Chinese stocks are the top-selling newsletters around. Books on India are slightly harder to come by -- hence the new term "Chindia," which binds the economic juggernauts together in one convenient slogan. The apparent inevitability of Chindia's domination in the 21st century mirrors predictions about Japan 20 years ago. Another worrisome sign of the Chindia bubble? Time magazine featured both India and China in cover stories over the past six months -- a terrific contrary indicator.

The Coming Market Crash: The Causes

The reason for the coming crash will be clear as day -- with the benefit of 20/20 hindsight.

Today, that reason is still murky. But here are some guesses.

Cause #1: A Sharp U.S. Slowdown

Conventional wisdom has it that the United States has successfully weathered the worst of the recent economic slowdown. Yet a handful of economists predict that the combination of skyrocketing debt as a percentage of GDP, the slowest corporate earnings growth since 2002, and the collapse in the housing market will cause the global economy to fall out of bed. Although European commentators revel in their observation that the U.S. economy isn't quite the big kid on the global economic block it once was, it's still the case that when the United States sneezes, the world catches a cold.

Cause # 2: Rising Interest Rates

Change the interest rate assumptions behind all those spreadsheet models that justify the investments by private equity firms, and the private equity financial locomotive can quickly become derailed. Ditto for commercial real-estate deals. Every financial mania also has its iconic transaction that portends its collapse. Remember Jerry Levin and Steve Case shaking hands in the AOL-Time Warner (TWX) deal? Blackstone's (BX) IPO last week -- and Steve Schwarzman's $9 billion fortune -- just may turn out to be that transaction in the private equity era.

Cause #3: The End of the China Mania

When the China market crashes, it will be the most telegraphed crash in history. Ironically, the Arab markets -- which, like Shanghai are off limits to global investors -- crashed just 18 months ago. No one noticed. But like the Middle Eastern markets last year, China's market collapse is not a question of if, but when. No market in the world -- including the United States in the 19th century -- emerged as a global economic power without massive booms and busts in financial markets. To claim China will be different is simply ingenuous. The only real question is whether global markets will have the stamina to shrug China's collapse off -- or will China drag Western markets down with it.

The Coming Market Crash: What Is to Be Done?

Analysis is easy. Taking action is hard. Getting the timing right is almost impossible. I know several London property owners who exited the market two years ago. Today, they are living in rented accommodations -- and are farther than ever from getting back on the property ladder. They claim they weren't wrong -- just early. Time will tell.

The almost uncontrolled growth of credit, trade and derivative flows makes this both a heady and uncertain time in global financial markets. As one commentator pointed out, anyone who says he has found an answer has not done his analysis.

But all this hand-wringing is perhaps the best news of all. Financial manias peak when the future is clear blue skies as far as the eye can see. Financial headlines about a coming crash may themselves be a contrary indicator. The mere talk of a crash provides a "wall of worry" for the markets to climb.

Six biggest investor mistakes

Posted May 11th 2007 6:39PM by Peter Cohan
Filed under: Getting started

Investors make mistakes every day. If they didn't we'd all be as rich as Warren Buffett and we're not.

Here's a list of six such mistakes:

• Follow hot tips. As a blogger on AOL's BloggingStocks, I know that some of the most popular posts are the ones that repeat what Jim Cramer said on his TV show five minutes before the post appears on the blog. The reason these posts are so popular is because lots of people are Cramer Ditto Heads (CDHs). He tells them what to do and they do it. While some use Cramer as a starting point for further research, many are too willing to be led and are not inclined to do their own research.
• Don't know how to research fundamentals. One of the reasons people don't do their own research is because they don't know how. Specifically, one kind of research many people don't know how to do is understanding how a company -- whose stock someone wants to buy -- fits within its industry. Many people would not know how to begin answering fundamental questions such as: Is the industry profitable? Why? How is that profitability likely to evolve? What is the company's market share? If it's a leader, can it sustain that leadership? If it's behind can it catch up? What kind of cash flow does the business generate? How much cash flow is it likely to sustain in the future? Does the market recognize these future cash flows in its price?
• Don't know how to analyze technicals. Many times fundamentals have nothing to do with how a stock performs. For example, in December 2003, Martha Stewart Omnimedia Inc. (NYSE: MSO) stock started going up from $9 when its Home & Garden Television (HGTV) show was taken off the air to $36 in February 2005 when Martha Stewart got out of jail. During that time the company saw its revenues shrink 20% a year and its losses skyrocket. The reason the stock went up is a mystery. But I thought people who were loyal Martha Stewart Ditto Heads (MSDHs) bought MSO as a show of support. Many investors do not know how to analyze money flows that would provide clues to what is driving a stock up or down. This can cause them to buy when they should be selling, or sell when they should be buying.

• Don't set stop losses. Many investors buy a stock and assume that they must own it for years because Warren Buffett is a buy-and-hold investor or for some other reason. This despite the fact that sometimes when a stock goes below the price at which an investor purchased it, it will never return to that initial price. Since nobody can predict where a stock will go, it makes sense to set a stop loss, at a price that is 2% or 5% below the price that the investor bought in. While such as stop loss can certainly stop investors from gaining if the stock recovers, it will definitely keep them from losing more than the stop loss percentage once the stock has been sold.
• Don't set target sell prices. Similarly, many investors hold on to their gains too long because they keep hoping that the stock will go higher. This reminds me of the phrase that bulls make money and bears make money, but pigs get slaughtered. While it is hard to let go of a stock that has made money, it is definitely profitable. The biggest challenge is overcoming the emotional barrier associated with giving up on the possible lost opportunity of making even more money by holding on.
• Ignore reality due to confirmation bias. Confirmation bias is a decision-maker's tendency to embrace information consistent with his or her expectations and to reject inconsistent information. Confirmation bias is quite common among investors. In mid-September 2001, I commented in a newspaper that an unprofitable fiber optic network carrier, Williams Communications Group, was likely to go bankrupt. This prompted an e-mail from a holder of the stock suggesting that I take my family on an airplane and hoping that the plane would crash. When I e-mailed this person the evidence on which I based my conclusion, he replied -- sans apology -- that my argument was compelling. His initial response was evidence of confirmation bias and his second response showed he was capable of rational thought -- and extremely impolite.

Do you agree or disagree? What investment mistakes have I missed?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.