So why didn't I make money in 1999

investmenttool.com Cover Story

A lot of people look at the news or this web site and then look at their brokerage statements.  They ask themselves why everyone but them seem to be making money in the market.

The answer is simpler than you would think.  The recent rally has not been very broad.  It has been concentrated in large capitalization stocks.  Although small stocks have been performing well, the large ones seem to be where the attention is.  This happens for a lot of reasons.

One reason this happens is because investors go with past winners.  For example, Dell Computer which is the best performing stock of the 1990's.  Almost every year it seems to set new records and make people rich.

Dell Computer's business has been awesome this year.  They are on track to a 45% growth rate in profits this year.  Last year their profits grew by about 50% over the prior year.  Their stock price ballooned 248% in 1998. This year, the stock price seems to be growing pretty much in line with earnings, up about 40%.  This reality check has shocked Dell investors who were used to returns of over 100% a year.

Last week we mentioned a bunch of stocks that grew over 200% this year.  Some of them are now up over 300% this year.  Every one of them is a pretty large company.

Part of Dell's growth is because of the popularity of S&P 500 mutual funds.  People perceive it as safe, and they pump a ton of money into it.  Every time that happens, the mutual funds actually have to go out and buy more shares of the stocks.  Microsoft, Intel, Dell, America Online, Yahoo.  They all go up when money is flowing into these funds.  It's a classic economic inflation.  Too many dollars chasing around too few stocks.

So what is the formula for making money.  Just buy big stocks, right?  Wrong.  Take a took at Xerox.  Xerox has fallen from a high of $63 15/16 a share to a current price of $21 7/8.  Gillette has been hammered this year as well.  Both firms failed to please Wall Street with their profits.

So big doesn't really mean better.  What to do.  Maybe find some small companies that haven't been discovered yet.  Be careful though.  Lyondell Chemical has about $1.36 Billion in market value.  Last summer it was worth nearly $3 Billion.

Riddell Sports is sitting at half its market value of late January, 1999.  It has a market value of $28 million.

Waddel & Reed has a P/E of 18, is trading near its high for the year and only has $1.5 Billion in market value.  A good deal?  Maybe not.  This stock has fluctuated sharply this year.

The key to making money in the market is not jumping in and buying what everyone else is buying.  The key is doing good research and finding good companies. 

I generally concentrate my investments in the technology industry.  That is because I work in that industry, with computers.  I am familiar with the various software and hardware companies and started buying them a few years ago.  I lost money on Borland now Inprise software and made money on Dell, Microsoft and Oracle.  I use all of their products, and keep abreast of their business.

I have about 20% of my retirement in a mutual fund called Fidelity Emerging Growth .  It is run by a 37 year old woman who graduated Harvard.  It used to be 10% of my retirement.  It's now up well over 100% for 1999, and 350% since I first purchased it.

This strategy will not make me a billionaire.  It has in connection with very high levels of retirement savings helped put me ahead of the average 34 year old in terms of savings.

Please note that none of the stocks mentioned today are being recommended by me.  You need to make your own decisions based on what is appropriate for you.  My only advice is to do good research.  That is why this web site is here.

Nothing in the above story should be construed or understood as investment advice.

Good luck folks.

Shmuel Protter
investmenttoool.com

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