It's an old joke: How do you make a small fortune in the stock market? Start with a big fortune.
It took all the cunning and wisdom the four members of the San Fernando Valley business staff could summon to turn our hypothetical $40,000 investment in the stock market into $27,000 in just nine months. That's a loss of 32 cents on the dollar.
People who dream small lose small, of course, especially if they are small.
Our chief rival in the pretend-portfolio business, 4-year-old Jennifer Foxworth, the daughter of a Times employee, lost only 26 cents per dollar. After nine months, Jennifer shrunk her $40,000 to $29,500.
The Oct. 19 stock market crash didn't help us any. About $500 billion in paper value disappeared on the three major American stock exchanges on Black Monday, and our two modest portfolios would have added to the damage report.
Simpler in February
The world seemed simpler in February when we set out to match wits against the stock market. Everybody was making money in stocks, and so would we.
The rules were simple. Each fund began with a hypothetical $40,000 to be invested in eight stocks from our weekly Valley stock list of 73 public companies. As any serious investor does, we tabulated our transaction costs for buying and selling stocks, and added in any dividends, to come up with our total return--or loss. After each quarter, as needed, we'd rejuggle our portfolio.
In August, six months into the game, the Wonder Tot held a measly $700 lead. But both funds were humming along: Jennifer's portfolio was up 9.4%, and our Sepulveda Fund was up 7.1%. In August, the stock market celebrated the fifth anniversary of the great bull market, having already climbed 245%. Then, late in the month, the Dow cracked another barrier, topping the 2,700 mark. Would it ever end?
After climbing out of our bomb shelter and sorting through the rubble, we can report that it has ended. Over nine months, the Sepulveda Fund's portfolio (excluding transaction fees) has now lost 31.2% of its value, while Jennifer's Crayon Fund dropped 25.3%. In the same time, the Dow Jones industrial average, a collection of 30 blue-chip stocks, tumbled 15.5%, and the Standard & Poor's 500 Index fell 15.9%.
After taking into account transaction costs and such, the net losses for both pretend portfolios are even higher. After nine months, the Wonder Tot has boosted her lead over us to $2,477. Put another way, she has lost $2,477 less than we have.
'We'll Go Together'
What to do now? Johnny Carson recently said: "I asked my broker today what I should buy. He said, 'Two guns. We'll go together.' "
Advice from the fortunetellers, of course, varies. Robert Prechter Jr., editor of the Elliott Wave Theorist, recently told Business Week that by the early 1990s, the Dow average would sink below 400, to be followed by a depression and maybe a war. Not long ago, Prechter insisted the Dow would climb to 3,700. Meanwhile, a Fort Lauderdale newsletter called Mutual Fund Forecaster predicts that its list of 40-odd mutual funds will climb 53% in the next 12 months.
As for the Sepulveda Fund, we decided to punt on third down and sold all eight of our stocks. Granted, many of the stocks we dumped are from sound companies, but we've suffered enough trauma. There's only one more quarter to go, and we're in the game not only to thrash the Wonder Tot, but to get back some of our losses. I say some because to reach break-even, our portfolio must appreciate 50% in the next three months. The Clippers are a better bet to win the NBA title in the spring.
Our new and improved stock-picking formula is to gamble on smaller, lightly traded companies, figuring that they are more likely to take a big bounce in a short time than more established firms. A prime example is Computer Memories, the former computer disk drive company that has shuttered its operations and exists only as a shell corporation. It's still a registered entity, however, and has a certain offbeat appeal for another company that wants to go public via a simpler and cheaper method than issuing its own stock.
Until a few weeks ago, Hemdale Film Corp. ("Platoon" and "Hoosiers") planned to merge with Computer Memories and go public. That deal fell through, but with Computer Memories' stock trading at $1.56 per share, we hope someone else might notice the for-sale sign.
We also bought HemaCare (at $1.25 per share), a Sherman Oaks firm that is still losing money but competes in a timely business: blood. It sells platelets and blood-cleansing technologies and stores blood. Only about 5% of its business is tied to AIDS prevention, but the stock seems a worthwhile gamble.