Profit Takers, Wall Street and Your Investments

by Fred Siegmund

Every so often I hear a television or radio commentator talking about the day’s trading on the New York Stock Exchange. Sometimes they say, “The market was up today, but profit takers drove stocks lower late in the day.”

They make profit takers sound like bad guys.

Does buy-and-hold investing produce profit takers? Or is timing the market the only answer?

10-Year Treasury Bond vs. GE Stock

Thanks to Web sites like Yahoo! Finance, it’s easy to track historical data of daily stock prices, interest rates, dividends and more.

Suppose we compare the financial performance of a 10-year Treasury bond with a stock in a long-established company like General Electric. The interest rate on the 10-year Treasury bond on July 1, 1999 was 4.6 percent.

If we bought the bond, we would have made our $10,000 back and have earned $460 a year for 10 years, or $4,600 in total interest. If the periodic interest earnings were reinvested at the same 4.6 percent, our total principal and interest comes to $15,758.42.

GE stock closed at $111.50 on July 1, 1999, so $10,000 would have bought 89 shares with $76.50 leftover. Daily stock prices were mostly up until August 28, 2000, when after a 3-for-1 stock split in May 2000 we could have sold 267 shares for $60 a share and a total of $16,020 — a $6,020 capital gain.

The compounded rate of return on just capital gains is 24.3% per year over the two years and two months.

That would have been a great investment if we were smart enough, or lucky enough, to sell on August 28, 2000. We would have had to be very smart, though, because the daily record shows that GE stock has not been that high since.

The price declined after August 28, 2000 until the end of November 2003, when it reached $28.67. The stock price made a modest recovery, reaching $36.50 by the end of 2004 and $42.12 on October 2, 2007.

After October 2, 2007, there is nothing but bad news for GE stock prices. The price reached a low of $6.66 on March 3, 2009 and traded for $11.64 on July 14th. A sale on July 14th would net only $3,107.88.

The Treasury Bond, Not Surprisingly, Wins Out

If we combine sales price with the leftover cash of $76.50 and the GE dividends earned over the 10 years at a 4% interest rate, the total comes to $6,358.54.

With an original investment of $10,000, it looks very poor, especially compared to the Treasury bond’s total of $15,758.42.

I am sorry to report I own some GE stock, but I’ve taken the same look at some other stocks and found gyrating prices and returns. Price data, at least for the last decade, tells me that high returns in stocks came from selling at the right time, not buy-and-hold.

I do not have secrets to earning a good return in stocks, but after reviewing stocks the last few weeks, I am thinking more about profit takers.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

{ 1 comment… read it below or add one }

Lee Distad August 4, 2009 at 10:41 am

Excellent points. “Profit taking” is one of those nonsense phrases that TV talking heads throw out there because they have to say something to fill 24-hours of ceaseless noise, and they feel compelled to state some sort of reason why the market just did what it did, even though they honestly have no real basis for making that assessment, or any other.

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