(written on 21 ‎September ‎2004. This is the last installment of my investing strategies. economy1-5 provides background on my market analysis.)
   
   This will be the last installment of my review on investment strategy. As my previous message pointed out, index investing is perhaps the best for most of you. I knew this and was fully aware of the risks in buying individual stocks as early as 1997. I just did not understand the importance of economy on investment. If you have learned anything in this downturn, it must be that economy is essential to stock investment, especially tech stocks. In fact, assessment of economy outlook is perhaps THE most important factor on tech investment decision, more important than stock selection, trading strategy, correct reading of the market, etc. Thus, if you do not understand economy, you should not buy tech stocks at all.
   
   One may say that I do not want to beat the market, just want to make money. Then, buy the index and consider nothing more. Otherwise you are just a gambler, buying something with the hope of hitting a jackpot. Some may say that I have heard that someone unknown has made big money in stocks. Do not believe that for a minute. Most likely it was a myth. Although I will not rule this out completely, just like I did not rule out that these Nobel Prize winners and economy professors could have found a way to beat the market, but the odds are so small that they are negligible.

   
   My initial purposes in buying stocks are (1) making money and (2) understanding business to prepare for tech startup. I have achieved my second goal. For (1), it is not efficient for me because I can beat the Australian market with ease. Unless I have $20M or more to invest in the US market, the time spent here is not worth of it. Thus, I plan to reduce and gradually ease out of US market watch. Now with PLT.AX and recently SRX.AX, I feel that I got all that I needed. So you should take this into consideration when reading my future messages.
   
   Before I finish my strategy review, let me summarize my knowledge on how to beat the market.
   (1) Know that you must beat the market participants, i.e. the majority of (mutual and fund) managers. This is very difficult and time consuming in the US market. Thus, nothing will come easy. You must have very high intelligence, broad knowledge, extensive experiences, strong nerve, and plenty time.
   (2) You must build in depth knowledge of the companies you buy. Just “good” company is not sufficient. You must know what the company’s product mix is, where the profits come, who its competitors are, what its financials are, etc. With such knowledge, you can use the incoming information to evaluate the quality of its management, its competitive positions, and its potential risks. This is much like doing scientific research. You build a theory and using new information to improve the model.
   (3) You must be extremely objective. Like in scientific research, a good scientist must assume that the result he obtained yesterday could be fault and put all theories into objective tests. Suppose you have bought a stock today. You must assume that this buy could be wrong tomorrow and make extremely objective assessment constantly.
   (4) You then must read the market movement correctly. As I said before, when you buy or sell a stock, in principle you assume that the market just made a mistake and you can profit from this mistake. Any movement is subject to numerous interpretations. You need experiences and be strongly objective in order to be correct.
   (5) The next step is to separate stock price movement with the real value of the company. This is a crucial step.
   (6) Always be prepared to change your strategy. The market is dynamic. You must be able to assume that your strategy could be wrong. Many famous fund managers stumble because they regard their past successful strategies as sacred rules. But the rules change as market participants and times change.
   
   Now come to my assessment of current economy and investment strategies. First, let me get the good news. Some recent numbers are excellent. The ISM(used to be NPAM) number one week ago clearly shows that US economy has beginning to recover. This is why the market rises for the last week. Second, one important number for long term tech investors is the productivity growth. This number is essential in several aspects. (1) Rarely (if at all) in a downturn the productivity grows. In past recessions, not negative would be very good. Last quarter the growth was some 5.4%. This is a very strong validation of New Economy. (2) This result clearly shows the benefits bought by technology, communication, dynamics of US companies, and the benefit of globalization. (3) A reasonable estimate on the long term growth should be 2-3% unlike 1.5% or below assumed by those economists who do not understand economy. This, adding 2% inflation and 0.5% natural growth gives US economy long term sustainable growth rate in the 5% (maybe even higher). Recall that I said before if GDP growth <3%, tech investment is not good at all and the higher the better. Third, even the data on employment start to improve. This is totally unexpected. I still watch the development closely.
   
   Now the bad news. One empirical rule in market economy [1] is that once economy breaks down it will take long time to recover. Although a number of reasons could make recovery quick, I would not bet on it. Second, such a severe stock market downturn often has some lingering effects. Third, non-tech businesses seem not willing to spend on investment (at least not yet). Forth, profits for tech company still hard to get.
   
   Although GDP may grow 5% in some quarters, one needs to see sustained growth to see tech company earnings improving.
   
   There are other things to worry too. For example, Fed policy, terrorists, globalization, etc.
   
   For safe entry of tech stocks, you probably need wait another year. If you want to take risk, wait until pullback sometime this year. Because profits of tech companies will not show accelerated growth anytime soon, there are likely several future pullbacks. I prefer software and semis over hardware.
   
   To learn about economics, start from [1]. Other good sources are WSJ, Businessweek, CNBC, CBSMaketwatch.com, etc.
   
   Some asks about Bay area housing. High house prices here are the result of tech boom. Although there has some stabilization recently, the outlook is not good. Long term housing price is 2%+inflation/per year. Recent house price appreciation may take decades to work out. The Bay area does have some advantages but not as high a premium in my opinion. In the mean time, the best for those who have bought a house is to hope not falling.
   
   [1] "The Coming Internet Depression", M. Mandel