(written on 11 ‎February ‎2002)
   
   Recent market downturn is largely the result of two things. (1) Enron accounting is negative to investors’ confidence. (2) Earnings/outlook is not good. I think that the market overacted to (1). Although many companies are aggressive in accounting, most are correct. The earning worries, however, are real, especially for tech companies. It is hard to know when earnings will recover. For tech companies, there are several reasons. One is over investment due to Y2K, dot com, and telecom overbuild due to telecom deregulation. In the long run, these will correct themselves. However, I am afraid it will take awhile. It will take at least one year and could be several years to work out the slump.
   
   My recommend strategy to you is index investment. A best for most is to make a financial plan. Most of you still have many years to invest before retirement. You can work out how much you can accumulate using index. It is probably enough for you. If you want better return, you need to beat the index, which is very difficult.

   
   You might be curious whether I buy stocks instead of index. Indeed I buy stocks. However, the market changes continuously. My update will not be current. In addition, there are many reasons that I buy one stock. In the past, I gave you a recommended stock list and weighting. As I said before, prior Feb., 2001 the best investment strategy to me is buy-and-hold good company stocks. I studied the industry trend and growth, management quality, earning growth, gross margin, etc. These have long term values. My mistake was that in my prior model I did not consider economy. Thus, my prior strategy was flawed.
   
   One may say that I do not want to consider economy since few people understand economy. The problem is that unless you can estimate quantitatively the risk and reward of each stock anything you buy is basically gambling. My previous mistake was that I did not consider risk of economy.
   
   However, you may have already have bought stocks earlier or you cannot buy index in your 401K plan. You probably have to learn some about stocks. One way is to gradually move to index. In addition, if you keep 80+% in index, you may play with the rest.
   
   Suppose you have cash (I recommended against investing earlier for clarity in economy). One is to pay back your loan. The second is to buy index gradually. My feeling is that the index (SPY) is close to a near term bottom. Sept., 2001 lows are likely to be the bottom. Thus, you may, say buying ¼ and waiting future pull back to add.
   
   Some work on principles. First, I have studied optimization problems before. The interesting aspect of optimization in mathematics is that usually first order is quite good. If you want to improve to higher order, the required effort grows exponentially. Index investing is the first order optimization.
   
   As you know, I think that beating the Australian market is not too difficult. You may wonder why. The reason is simple. The Australian market is like a small lake while the US market is like a large ocean. It is an order of magnitude harder to beat most players in the US market.