Page 544 - How to Make Money in Stocks Trilogy

412 INVESTING LIKE A PROFESSIONAL

As mentioned earlier, our government should lower the capital gains tax
again and shorten the holding period to six months to help fuel a new cycle
of entrepreneurial start-up companies and jobs.
Today’s markets are more liquid than past markets, with volume of many
medium-sized stocks averaging 500,000 to 5,000,000 shares a day. In addi-
tion, significant block crossing between institutions also aids liquidity. The
institutional manager handling billions of dollars would be best advised to
broaden his prospects to the 4,000 or more innovative companies available.
This is better than restricting activities to the same few hundred large, well-
known, or legal-list-type companies. And today, a huge number of interna-
tional entrepreneurial stocks are available.
A sizable institution would probably be better off owning 500 companies
of all sizes than 100 large, mature, slow-moving companies. Pension funds
can address size problems of their own by spreading their money among
several different managers with different investment styles. However, size
isn’t the number one problem for institutional investors. Frequently, it’s
their investment philosophies and methods that keep them from fully capi-
talizing on the potential of the market. Superior performance comes from
fresh ideas, not from the same old overused, stale names or last cycle’s
favorites. For example, the super tech leaders of 1998 and 1999 will proba-
bly be replaced by many new consumer leaders in the twenty-first century.

Bottom Buyers’ Bliss

Many institutions buy stocks on the way down, but bottom fishing isn’t
always the best way to achieve superior performance. It can place decision
makers in the position of buying stocks slowly deteriorating or whose growth
is decelerating.
Other money management groups use valuation models that restrict
investments to stocks in the lower end of their historical P/E ranges. This
approach works for a number of unusually capable, conservative profession-
als, but over time, it rarely produces superior results. Several major Mid-
west banks that use this approach have lagged in performance.
Too many analysts have a P/E hang-up. They want to sell a stock with a
P/E that’s up and buy one if its P/E is down. Fifty years of models of the
most successful stocks show low or “reasonable” P/Es do not cause huge
increases in price. Those who buy low P/Es probably missed every big stock
market winner of the last half century.
Most of those who concentrate on the undervalued theory of stock selec-
tion may lag today’s better managers. Sometimes these undervalued situa-
tions get more undervalued or lag the market for a long time. In the market