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| STREET TALK, COMMENT AND OPINION A QUARTERLY NEWSLETTER Editor's Comment Everybody knows the way to make money in the stock market is buy low and sell high, right? The strategy one employs is the question. A major Research effort by James O'Shaughnessy, of O'Shaughnessy Capital Management, has turned up a new answer. James O'Shaughnessy's book, "What Works on Wall Street" provides a landmark computerized study covering 43 years of Wall Street action. His findings, to be published this summer, are already creating excitement among market professionals. O'Shaughnessy is the first outsider to win full access to Standard & Poor's vast CompuStat market database. "We studied 11 of the most popular investment strategies," said O'Shaughnessy, "and the best strategy that I was able to uncover contains three elements." To get the best long-term gains in the stock market, you should follow the principles of (a) value investing, (b) growth investing, and (c) momentum investing. A growth strategy of back-to-back earnings gains for five years is the first element in what O'Shaughnessy calls the Cornerstone Growth plan. The second element is a low price-to-sales ratio --the sales of the company divided by the value of its stock. Finally, the stock should be among the biggest price gainers of the previous year. Buying only stocks that meet the criteria has produced average annual gains of over 18 percent since 1951. By contrast, buying the stocks that had declined most in price over the previous year produced less than 2 percent per year. Part of the appeal of O'Shaughnessy's findings is that they require very little trading. "For the individual investor I would say, 'Go out, implement, let it work a year, then rebalance.' In addition to having more peace of mind, you'll have lower capital gains taxes on the stocks." That's good, because four decades of history says you will have capital gains. SOME OF THE SERVICES AVAILABLE FROM CCI FINANCIAL CONSULTANTS CCI Financial Consultants has updated its recommended portfolio of stocks for 1999. The firm's 1998 stock portfolio returned 86.3%. CCI Financial Consultants “Portfolio Recommendation Service” can be obtained by sending an e-mail inquiry to: portfolio@cciinternet.com In The Firm's Opinion GOVERNMENT AS PART OF THE WORLD ECONOMY Oh, how easy it is to move money around in this era of the World Wide Web. However, most money is staying home, here in the United States. Is this perhaps because our government is pro business? Probably not, but one must consider the alternatives. All of this could be very reassuring. Most of us, or our money, won't leave the country, not in person and not by wire. We won't have to. Competition improves the quality of everything else; it will improve the quality of government, too. Most politicians are pragmatists. They'll grasp that they have to deliver a good service at an attractive price or lose market share to the competition. Bill Clifton understands this. Like James F. Carve, he learned that the bond market runs the most powerful polls of all. Clifton ran as a budget conservative. The trend is already clear in monetary and fiscal matters, where the competition for good government is the fiercest. Many of the abrupt currency swings of yesteryear, overnight devaluations, for example, just don't happen as much anymore. Wired financial markets are less volatile and much more honest. Nearly all industrial countries have brought their annual inflation rates under 3%. In The Death of Inflation: Surviving and Thriving in the Zero Sum Era (Nicholas Brealey Publishing, 1996), Roger Bootle argues that the globalization of financial and labor markets left them no choice. Within this country, large states like California seem to be learning the same lesson. They have to stay in line on tax rates, investment climate and so forth or lose jobs, investment and residents to their better-governed neighbors. And while rigorous comparisons are difficult, it does appear that industrialized nations are gradually converging toward quite similar regulatory structures in monetary policy, banking, insurance and securities trading. The overall price that competing governments charge citizens for service, the tax rate, seems to be converging, too. Take away health insurance, which some countries book as "private" rather than "public," and you find that the tax rates in industrialized countries are all quite close, much more so than they were in the 1960s. Governments that don't keep up with the competition can lose market share fast. We, the people, are all shipping tycoons now with mobile wealth and mobile labor. We can choose Liberia's flag, for its unmeddlesome bureaucracy, or London's insurance, for its trustworthy courts. As managers, workers and consumers, we buy government in much the same way we buy shoes. Not through bribes or political action committees or anything like that. We buy it by paying taxes and complying with the laws. But when shopping in one government's mall gets too expensive or inconvenient, we shop in another's. So the old political carnival, filled as it is with freaks and geeks, may soon be over. The old game of big promises on election day, soon forgotten in the enjoyment of power, is diminishing. Citizens now vote continually, with London, Bonn and Tokyo on the ballot, too. Are you wondering where to invest your money? Do you have a long range financial plan that meets your and your family's needs? Are you comfortable with the returns you have been getting on your investments? If you would like to discuss what CCI Financial Consultants can do for you send an e-mail inquiry to: invest@cciinternet.com. IN THE HEAT OF THE TECHS Summer is a good time to buy into languishing technology issues. Although the NASDAQ is flirting with record highs, recent drops in tech stock prices mean that now could be the time to plunge into the investment ocean. Typically tech stock prices decline substantially during the summer months. "Six of the seven last years, technology stocks have been weak around that time period. Chip stocks are starting their summer swoon. Looking at technology stocks in the Montgomery Securities growth-stock index, June 1995 emerges as the only recent summer month that didn't follow the trend. That was when Microsoft was getting ready to unveil Windows 95, and Intel was readying its Pentium chip. The traditional tech tumble actually has its roots in the natural business cycle. Corporations, especially in Europe, tend to stop ordering technology equipment during the summer vacation months. Moreover, many individuals wait to do their product buying during the back-to-school and Christmas seasons. Professional investors, with their short-term mentality, have an impact on the tech market as well. "We are aware of this seasonal pattern and we do tend to lighten up on technology stocks around the end of May, beginning of June," said Kraig Cummings of CCI Financial Consultants. "We look to buy back the same companies at a lower price some time in the dog days of August." Analysts say this summer, tech stocks could be in for some more rough times. Intel's short-term prospects, for example, could suffer from a Tech stocks improve number of product transitions. But weakness can present a buying opportunity. If you had bought the basket of CCI's June 4, 1997 growth tech stocks on the first trading day of June for each of the last seven years and held for the full year, you never would have lost money. In fact, your average return would have been spectacular. Experts say long-term investors should not try to time volatile technology stocks. But history says that if you pick solid technology companies, buy on summer weakness and hold for the long term, you'll do well. THE INVESTING MANTRA It's almost become an investing
mantra - you need to diversify to protect your portfolio from volatile swings in
individual stocks. But some investors may be taking this diversification principle too
far. "There's always the impulse for an individual, as they see more stocks, they buy
more stocks, and they almost buy stocks like baseball cards," says Charles Carlson of
Dow Theory Forecasts. Carlson says having too many stocks in your portfolio makes it hard
to track them all, not to mention being difficult to keep coming up with high-quality
names. Even legendary investors like Warren Buffett say you only need a few great
investment ideas. It's true that the more stocks you own, the lower the risk of your
portfolio. But only to a point. Studies have shown that once you get to about 20 stocks,
adding more doesn't significantly reduce the risk. Carlson says about 15 to 20 stocks is a
good number and aggressive investors say you can diversify with even fewer. "I think
you need to have at least six or eight stocks in your portfolio to diversify, making sure
some are affected by different fundamentals," said Kraig Cummings of CCI Financial
Consultants. "For instance, two energy stocks would not work, but having one energy
stock and one in the insurance industry -- those would be affected by different
fundamentals." Experts say it's important to be disciplined. Once your
portfolio reaches an appropriate number of stocks, you should sell a stock every time you
want to buy one. That will keep your portfolio from growing too large and encourage you to
be a more selective stock picker. CCI FINANCIAL CONSULTANTS DISCLAIMER CCI FINANCIAL CONSULTANTS SHALL IN NO EVENT BE HELD LIABLE FOR DIRECT, INDIRECT OR INCIDENTAL DAMAGES RESULTING FROM THE USE OF THE INFORMATION SUPPLIED HEREIN OR THE INFORMATION PROVIDED FROM THE COMPUTER ANALYSIS OF THE INFORMATION SUPPLIED. ANY PERFORMANCE DATA REFERRED TO IS HISTORICAL. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE. ALL INVESTMENTS INVOLVE SOME DEGREE OF RISK. Click below to order CCI's "Newsletter" via email.
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