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BEING STREET SMART
by Sy Harding
Wall
Street Doesn't Buy and Hold With
Its Own Money!
Wall Street tells public investors to simply buy good
stocks or mutual funds and hold them forever. Put them under the mattress.
Don't try to time the market, they say. Don't worry when their prices
plunge. Don't worry about market corrections, or even bear markets, because
the market always comes back.
Well, guess what. That's not how they handle their
own money.
Mutual fund managers for instance certainly don't
practice what they preach. The
Morningstar database of mutual funds shows that many of the best performing
funds have annual portfolio turnover rates of 100 to 300 percent. Yes, a 100%
turnover rate means turning their entire portfolio over on average of every
twelve months. A 300 percent turnover rate indicates an average holding period
of just four months. What are they doing? They're taking profits when they
have them and moving on to new holdings. The Fidelity Magellan fund, in the
period when it was managed by Peter Lynch and earned its reputation as the best
performing fund of all time, had a portfolio turnover rate approaching 300
percent in most years.
Brokerage firms trading for their own accounts engage
in market timing with even shorter holding periods. Their program trading, which
consists of the instant buying and selling of huge baskets of stocks based on
computer signals, accounts for twenty percent of the volume on the NYSE. As even
casual observance of daily program trading activity reveals, most days their
holding period lasts no more than a few hours.
We know that corporate insiders - the managers and
largest stock-holders of corporations - don't want us trading in and out of their stocks. But how do they handle their
own holdings? They can't hide their activity. SEC regulations require insiders
to file all changes in their stock holdings in a timely manner. Month after
month, year after year, those filings clearly show how persistently and
successfully company insiders trade in and out of their company's stock,
selling after the stock has rallied, buying back after it has declined to lower
levels. They're so successful with their market timing that Wall Street
professionals watch insider buying or selling in specific companies as a guide
to their own investments.
Even famed billionaire investor Warren Buffett, who
encourages his reputation as a buy and hold investor, has a history of
significant market timing. Buffett made his first millions running a private
investment partnership for wealthy investors. It's no secret that after making
huge gains in the mid-1960's bull market, he demonstrated exquisite market
timing at the bull market peak in 1969, by taking the profits, liquidating the
partnerships, and returning the assets to his investors.
Perhaps we should pay attention to recent disclosures
that Buffett began taking profits at the market peak in July, 1998, raising a
huge $9 billion in cash, and used the big market rallies since to take still
more profits, sitting by October, 1999 on an estimated $40 billion in cash. His
remarks about the situation are interesting. "I don't like holding cash, but
I dislike being foolish even more."
Could it be that Buffett will wind up being the
ultimate long term market timer again?
It really
is okay to take profits.