Monday, January 07, 2008

Luck, or Skill?

Investor A buys shares in XYZ Corp., confident that the company is undervalued. He or she invests in the business, and shortly afterwards, the stock drops by as much as 50%. For well over a year, the stock price remains dormant. All the while, the investor sees share prices rising at other businesses he or she's familiar with. Investor A reassesses the situation and does nothing.

Investor B, also favorable on XYZ Corp., begins buying shares a year later at about one-half of Investor A's cost basis. The following year, Mr. Market catches up with XYZ, and the stock doubles. Investor A is back to even, and Investor B is sitting on a 100% gain.

Which investor would you rather be? With hindsight, it seems that Investor B looks rather smart and savvy, while Investor A just got unlucky buying at the wrong price or the wrong time. Actually, the situation should be viewed from a totally different perspective.

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