Tuesday, July 29, 2008

Titans or Titanics

Whenever you turn on a financial advice program or read the commentary of some of the more measured and wise prognosticators, “buy good quality stocks,” is often one of the sage bits of advice offered. That sounds a lot like the Will Rogers quote, “the way to make in the stock market is to buy a stock. Then when it goes up, sell it. If it isn’t going to go up, don’t buy it.” Actually, I may have to go with Will on this one. He gives clearer advice.

It is human psychology to latch onto an idea and let go only very reluctantly. I still have remnants of self image when I wrestled at 153lbs. Remnant? My wife would say, delusion. She, on the other hand, insisted we buy an 8mm film camera when video was already advancing rapidly because she had grown up with one and we actually looked for a Renault LeCar when first moving to the United States. The first is somewhere in a closet and the latter became a home for a raccoon. Yet these were perfectly reasonable purchases once.

There is a tendency to find security in familiarity and tuck it away in safe deposit boxes, both real and emotional. Ten years ago a portfolio of good quality stocks could well have held a handful of blue chips with names like, Pfizer, Citicorp, Microsoft, General Electric, AT&T and General Motors. Those were some names you could sleep soundly with. Perhaps not. Below are prices after ten years from July 29, 1998 to July 29, 2008 and average annual change.

Pfizer $28.97 $18.44 -3.63%
Citicorp $23.67 $17.73 -2.50%
Microsoft $23.40 $26.08 +1.15%
General Electric $23.73 $28.17 +1.87%
AT & T $28.45 $30.68 +0.78%
General Motors $41.01 $11.67 -7.15%
Disney $32.29 $31.01 -0.48%

Times change faster than we do often and the brilliant idea of years gone by can be sunk by events unseen on the surface.

There is a natural inclination to relish the emotional ownership of a household name whether you drive it, fly it or take it before meals. Ironically, it is that very security of the familiar that can move us from dispassionate investors to financial has beens. If you have a drawer full of last generation’s titans and are unable to part with them for reasons of tax perceptions, emotional connection or simply benign neglect take a dispassionate eye and make sure your reality is correctly aligned with your ambitions. Balancing tax losses against tax gains can help. Tyco, Enron, USAir and Bethlehem Steel portfolio performance doesn’t just happen. It’s allowed to happen.

The relatively recent advent of exchange traded funds can provide sector exposure and diversification without the need to guess which specific company will avoid the pitfalls of event risk, poor management, competitor success. Very little investment success is the result of company specific choice, so avoiding the emotion of a “name” is a strategy well worth considering.

John Barnyak