Forum Archive Index - July 2002

[Phaedrus <Phaedrus@techemail.com>]

 Snoopy, your argument contains a number of errors that I would like to draw to 
your attention. 
(1) If you base your comparison on the expectation that TEL will continue to 
range between $4.50 and $5.50, in all fairness you cannot at the same time 
continue to count on an annual appreciation of 28 cents per share, benefitting 
only the Longterm holder. 
(2) The figures you give regarding estimated trading profits are PER TRADE. The 
overall profit will depend on the number of trades executed - you have assumed 
only a single trade per year. A range trader such as you describe would not 
consider that a viable proposition.
(3) You have charged the trader brokerage of 15 cents per share per completed 
trade. A much fairer figure would be 2 cents, or even less if the trades were 
for more than 3000 shares. (At a flat rate of $30/trade) This means another 13 
cents profit per share per trade, every trade. A substantial increase, 
particularly since the putative trading range here is a relatively narrow one.
(4) You seem to assume that anyone using TA or trading at all, NO MATTER HOW 
INFREQUENTLY will automatically have their capital gains taxed. Not so. I think 
you would find that very few ShareChat participants are paying tax on their 
gains, for example.

 Snoopy, If you were trying to convince anyone of the wisdom of buying and 
holding "Income" shares, you could hardly have found a worse example than 
Telecom. Longterm holders of this stock have seen the value of their 
"investment" HALVE in three years.

 Your conclusion that "The completely dumb long term investor who buys and 
holds no matter what is likely to be 25% better off than the very best of 
traders who executes the very best trade possible" is simply wrong, 
qualitatively and quantitatively. Take a look at the chart below. This is the 
situation as seen by a very, very lazy chartist, only monitoring their stock 
once a month. They would have seen TEL making higher highs and higher lows in a 
steady uptrend. After 6 years or so, they would have noticed that TEL had 
stopped going up, and had started making lower highs. Or they might have 
noticed a moving average crossover Sell signal. Or they could have noticed a 
falling ema, for the first time in many years. In any case, there was plenty of 
warning that the ride was over, and plenty of time to exit. Almost any time 
over the next year, an exit at between $8 and $9 was easily achievable. Lets 
assume they bought 5000 shares at $2.20, at a cost of $11,OOO. Selling at, say, 
$8.20 would realise $41,000, less, of course, two lots of brokerage at $29.50, 
leaving $40,941. To this should be added approximately $6500 of dividends, as 
per your example, giving a total of $47,441, achieved after six and a half 
years - a gain of $4606 per year.  Now lets look at your long term investor. 
The same $11,000 investment is now, ten years later, worth $24,750, to which 
should be added about $10,000 in dividends making a total of $34,750, a gain of 
$2375 per year. This is HALF the annual return achieved by a lazy chartist 
using only the very simplest of technical analysis tools, trading ONCE in six 
and a half years! 
 
 This result shows that a long term investor buying and holding is likely to be 
far worse off than one that keeps an eye on the chart (even only once a month) 
and acts to preserve their profits, should the need arise.

 Moral of the story:  Buying shares and holding on to them no matter what, is a 
wealth hazard.  Don't do it Jefley!

                 Phaedrus.

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