TCS Daily

Buy anything - and hold it!

By James K. Glassman - March 20, 2000 12:00 AM

At TechCentral, we like to stand up and applaud the technology stars of the new economy. And we celebrate the freedom that has allowed companies like Microsoft, Cisco, and AOL to achieve tremendous gains for consumers and investors. Speaking of individual companies, we'll also be featuring Glassman Hot Stocks in the weeks to come - tech plays that we find particularly interesting.

Still, it's important to remember that picking the right stocks is not the most important ingredient in long-term market success. The most important thing is that you save every month, invest in a diverse group of stocks -- and then hold them for a long time.

It takes discipline to leave your portfolio alone for a long period. In fact, doing nothing is hard work. Every news bulletin and market gyration can make you want to trade. But make no mistake - "day trading" is for suckers. We of course don't think it's the government's business if you want to throw your money away, so the recent Senate investigation was misguided.

Avoiding market losses is your business, and as recent news reports make clear, very few investors prosper through constant trading. The commissions gobble up a sizable chunk of your returns, and you pay enormous opportunity costs. In other words, every minute you spend following the market, researching companies or placing a trade is a minute when you're not working and earning money from your real job.

Moreover, if you want to be an active trader, the odds say you'll have a very tough time beating the market averages. You may have noticed the ongoing contest in the Wall Street Journal between stock picks from Wall Street money managers and picks generated by Journal staffers throwing darts at the stock pages.

The professional money managers are having a tough time keeping up with the darts. It's not surprising. The contest was inspired by Burton Malkiel's classic book, "A Random Walk Down Wall Street," in which the Princeton professor demonstrated that a randomly-selected portfolio of stocks will match the returns of a portfolio selected by the average Wall Street pro.

Why? Publicly-traded US stocks may be the most efficiently-priced assets in the world. Think about it - stocks in this huge open auction we call the financial markets are re-priced every second by millions of investors acting on the latest information. Compare that process to the pricing of stereo equipment, for example. The manufacturer and its distributors set a price which remains the same for weeks or even months at a time, immune in the short term to market choices. Yes, eventually the seller of a stereo will adjust the price to meet demand, but it's nothing compared to the efficiency of the stock market.

What this means for you is that the price of IBM today already reflects just about everything you can know about IBM -- unless you have inside information, in which case you can't make a trade. No one can know what IBM stock will do tomorrow, so don't worry about waiting for the perfect time to buy at the perfect price. Just buy companies you like, whenever you can, regardless of the price, and hold them for at least a few years.

If you buy at least eight stocks, spread across different industries, you can expect long-term average annual returns of 11%. That's the way it's been for the last 70 years. And even if you go back 200 years, the average returns are roughly the same.

Beating that 11% average return over the long haul is extremely difficult for the average investor, so I urge you not to spend your life researching companies and making trades. Just buy anything - and hold on to it no matter what the market does next week.

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