Money Matters

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viewed the Tylenol tragedy for

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tips on how to “Buy low,

Probably the most-used (and overused) dictum of investing is “Buy low, sell high.” This principle seems trite, but it is the way to make money. Nevertheless, few investors follow this sound advice.

Two motivations—greed and fear— always play major roles in stock market action, particularly when there are ex­cesses in the marketplace. The events of 1987 show how these two forces pushed market indexes to unprecedented highs and then led to the greatest one-day drop in the history of the Dow Jones Industrial Average. In mid-September, when signs that the stock market had peaked were becoming clear, an older client of mine (who had been investing in nothing but tax-exempt municipal bonds) came into my office to talk about investing in the stock market. Discounting advice that the market appeared to be beginning a cor­rection, he said he didn’t want to “miss out on all the profits everyone else is making” and purchased a small amount of stock. Later that day, he called to say that his wife, who never had invested in the stock market, also wanted to buy some stock! Clearly, they wanted to “get on the bandwagon,” even though the bandwagon already had started rolling downhill. Several weeks later, on 19 Oc­tober, the opposite reaction to market events occurred, where many had an un­controllable desire to get out of the mar­ket, regardless of the consequence. In­vestors who sold on 19 October did so at the worst possible time, particularly those who had invested in mutual funds.* Most realized an actual loss, whereas those who rode out the storm by now have re­covered most of their paper losses.

Another dictum to remember is “Sell on good news, buy on bad.” The stock market often anticipates rather than reacts to events. The upward movement of the price of a stock usually reflects the ex­pectation of good news, such as increased earnings per share, a stock split, a merger, or leveraged buyout rumors. By the time the anticipated event occurs, the market already has discounted the news, which makes it a virtual nonevent. There­fore, the likelihood that the stock price will continue its upward movement, at least for the time being, has lessened and profit-taking may be a timely move. The stock market also anticipates bad news. For example, if a stock begins to weaken for no apparent reason, it is likely that weaker earnings or other bad news is an­ticipated. By the time the news is out, price erosion already has taken place.

On occasion, a stock that has per­formed well will be suddenly and ad­versely affected by an unforeseen event. This happened to Johnson & Johnson in October 1982 after the tragic tampering with bottles of its Tylenol brand pain re­company still was fundamentally and appropriate damage control by agement restored confidence in the ^ pany. In fact, the stock reached its ₀ for the year in December, less than months later. Those

was—a one-time event with only h¹¹¹^ impact—and bought stock when the p ^ was depressed were in an excellent P tion to realize a significant capital % Successful investing in the stock ^ ket requires both analysis and disctP^^j, Emotional decisions hurt short-term ers more than longer-term investors-

Next month I will continue the ^^1 sion of market timing with some p^ra ••