This file was sent 9 January 2002.
   
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   Wish you Happy New Year!
   

   (This message started several weeks ago. I hoped to send it before Christmas. Because I have been busy with other things, it took longer than I expected.)
   
   First, if you get the points of my previous emails you know that my suggestion now is investing in index. In my viewpoint, only strategy I favor to beat the market index is to buy economic sensitive stocks of well run companies (tech stocks in particular) and keep them for an economic up cycle. The problem is that I may be not interested in investing for some reason (for example if my investment in PLT.AX pans out) and it is very difficult for you to tell an economic cycle. So you probably should consider only index investing. If you have already bought tech stocks, you probably should wait until economy and company earnings recover somewhat.
   
   For index investing, one may consider Vanguard. You may also buy IYY or SPY directly. You may start buying index now monthly. But if you have some cash, I suggest to wait until market pulls back. Between now and June, there may be 10-15% pull back for S&P 500 (probably 15-20% for NASDAQ).
   
   It seems that you can open an account for Australian stocks at
    https://www.comsec.com.au/CommSecHome.asp
   Besides PLT.AX, there is another biotech stock NAL.AX interesting. It is a new technology to deliver drugs. Its name is NORWOOD ABBEY. Its web site http://www.norwoodabbey.com.au/indexst.htm
   
   The comments below are for trading purpose. If you do not intend trading, you may ignore them. However, it may take quite a few quarters for tech companies to grow earnings again.
   
   The market will probably fluctuate for sometime. On economy front, there are some good news and some bad news. (1) Payroll reduction last month was bad but this month has improved. (2) Commodity index becomes flat. Deflation risk is reduced. This is good. (3) Last quarter earnings were bad. (4) Capital spending outlook is flat (or down for telecom equipment) in 2002. (5) Capacity is high. (6) The recovery is likely to be mild. This implies unemployment will increase probably to 6.5% before improving. (7) Productivity gain is healthy (2%). This is good long term. Note that it is estimated that GDP growth needs to be >3% to reduce unemployment rate because 2% due to productivity gain and 1% natural labor growth. Probably employment will not improve significantly until 2003 – 2004. Another worrisome sign is that cash on the sideline keeps growing. If investors’ confidence do not recover for a long time, a long recession like Japan is not out of question. On the other hand, I do not see that the market going down too much in Jan. and Feb. unless something very bad happens.
   
   This downturn is quite different from previous downturn. Previous downturn often was demand induced while this downturn is investment related. Therefore, past empirical rules on stocks, recovery, etc. may not apply.
   
   My own strategy is as follows. The earnings for technology companies are likely to be poor for 2002. For long term investing, you probably have to wait for 2003. I will sell stocks in Jan. and Feb. and if opportunity appear, I may trade some. But generally speaking, I will be mostly out of market by the end of March. If you want, there may be some trading opportunities when market is down (this will happen from time to time). But generally speaking, I do not encourage trading. When you buy or sell an individual stock at a particular time or price, basically you claim that the market is inefficient, i.e., the price of this particular stock is cheap because the market prices it incorrectly. As I said earlier, this is quite difficult in the US market.
   
   In the next few messages, I will outline my strategies, successes, and mistakes. From these, maybe you can decide your long term strategy. In my viewpoint, most of you need only consider index investing.
   
   How to beat the market? First, in theory there are numerous ways to beat the market. Since there is much uncertainty in stock prices, you can gain big if you are lucky. But relying on luck is like gambling and generally speaking bad to your wealth and health. On the other hand, as I said before no solution on this optimization problem is likely for foreseeable future and heuristics has to be used. But heuristics is not fault proof, thus a correct statement of the problem is how to maximize your return with high certainty. Certainty of 50% is too low (index would be a better choice) while 90% may be too difficult for most of you. So I assume that you want to beat the market with 70%-80% certainty. As anyone who has studied optimization problems in mathematics and computer sciences can testify, many heuristic methods may work. The one I use follows my extensive studies on previous successful investors. You need to read many books, newspapers, and analyst reports to get basic education and many years experiences to be prepared.
   
   The above are just the starters. In addition, you need to think independently, have deep insight and high intelligence. You also enjoy competitiveness, are willing to admit mistakes, and are highly objective. You need a lot time to follow the market. The market is fluid and dynamic.
   
   One may wonder how Peter Lynch was able to beat the market while he probably did not satisfy all the above. Maybe he was lucky according to [1].
   
   Before Feb., 2001, my investment strategy was buy-and-hold good companies long term. This was suggested by many well known, successful investors and summarized from many articles, books, etc. I would study a company, its competitors, the industry, revenue and earning histories, management, and potentials. Once a good company was identified, I would determine a good entry point and hold the stock for long time. I focused mainly on tech companies because of two reasons. First, one of my investing goals is to study how to run a good company and my business interest is mainly in technology companies. Second, I already have non-tech investment in Australian stocks.
   
   By beginning of 2000, I thought that I could relax with my investment. I was wrong. I did not factor the impact of economy into my estimate.
   
   For your reading, the following is an article on China’s Xingjiang problem. It is much severe than I thought. There are a few other articles but the point is similar.
    www.cnd.org/HXWZExpress/01/11/011121-2.gb.html
   Another article concerns militant China:
    www.cnd.org/HXWZExpress/01/11/011124-4.gb.html
   Although this can be a problem, I think that most likely this will not eventuate.
   On China-US relation, the following interview is interesting:
    www.cnd.org/HXWZExpress/01/12/011226-6.gb.html
   
   1. "A Random Walk Down Wall Street," by Burton G. Malkiel