FOOL'S EYE VIEW
Long-Term Buy And Hope

By Maynard Paton (TMFMayn)
April 6, 2001

Carburton Street, London -- Around this time last year, I wrote a Fool's Eye View on the subject of "trying to punt for the next Sage (LSE: SGE) or GlaxoSmithKline (LSE: GLXO)". In short, rather than consider the more established companies for a long-term investment, I suggested it could pay private investors to contemplate a spread of more immature companies:

"The greatest long-term winners of the future would currently be at quite an embryonic stage and perhaps operating in sectors such as software, media, the Internet, microchips, telecommunications and biotechnology."

The story of Rosa Elizabeth Hargreaves is a prime example of the long-term buy and hold (LTB&H) philosophy. She had keenly held onto to her late husband's Glaxo shares since 1949. On her death fifty years later, her son inherited a £6m portfolio.

It's all very well highlighting this type of story to underpin the benefits of a LTB&H investment strategy. However, few people take into account the situation at the time of Mr Hargreaves' investment:

"Was Glaxo the same industrial powerhouse fifty years ago that it is today? I don't think so. So, did the aforementioned Mr Hargreaves take a punt on an unproven biotech? Or perhaps he bought a handful of "possibles" in the hope that one may come good. Was Mr Hargreaves' purchase the equivalent of someone today taking a pin to the Financial Times and buying shares in Alizyme (LSE: AZM), British Biotech (LSE: BBG) and CeNeS Pharmaceuticals (LSE: CEN) and then tucking them away in the bottom drawer? No doubt the Hargreaves family would have been derided as a biotech gamblers in 1949. Fifty years on, they're now astute investors."

It's a similar situation to those who say "if you'd bought Microsoft (LSE: MSFT) or America Online (NYSE: AOL) at their flotations and held for the long term...". What these people don't consider is how those businesses looked back then. Would you have really have bought in at the IPO, given their prospects at the time?

Boom or bust

Thus I suggested that a spread of "boom or bust" investments could be quite Foolish. Enter the long-term buy and hope portfolio, any of whose constituents may become the next Glaxo, Microsoft or America Online:

"You only need to have been an early shareholder of Dell Computer Corporation (Nasdaq: DELL) or Amazon.com (Nasdaq: AMZN) to realise that it only requires one company to make an investment career".

Such a portfolio, though, is not for widows, nor orphans, nor for those investors with weak stomachs. Last year, I put forward seven would-be Glaxos, Dells and Amazons. My random proposals from a year ago have a lot of catching up to do.

Company                         Buy Price   Price Now    Change
                                   (p)          (p)        (%)

NetBenefit (LSE: NBT)             730.0        24.5      (96.6)
Lastminute.com (LSE: LMC)         176.5        49.0      (72.2)
Systems Union (LSE: SUG)          252.5        63.5      (74.9)
Telspec (LSE: TSP)                110.5        31.5      (71.5)
Cambridge Antibody (LSE: CAT)    2112.5      1705.0      (19.3)
Profile Therapeutics (LSE: PTP)   177.5        96.0      (45.9)
Xaar (LSE: XAR)                   287.5       150.5      (47.7)

Average                                                  (61.2)

FTSE 100                          6241.2      5621.8      (9.9)

Like everybody else who bought a selection of TMT-type stocks last April, my subsequent portfolio performance has been an utter disaster. Thankfully, it was a purely notional portfolio. After placing £7,000 into my imaginary ISA, it's now worth just £2,716.

Bad timing

Looking back, I can see the error of my ways. Not in the concept of the "long-term buy and hope", but in letting the emotion of envy cloud my timing:

"I've become increasingly envious of the gains to be had by simply looking forward. Looking forward and hoping, that is".

Picking a bunch of hotshot hopefuls in April 2000, after everybody and his dog had effortlessly made a packet from them, was never going to be a promising start.

Nevertheless, a year can be a long time on the stock market. These days, such "jam tomorrow" companies have fallen sharply out of favour. A raft of profit warnings and general valuation concerns have sent share prices in the "industries of tomorrow" tumbling. So now, more than ever, the long-term buy and hope concept has genuine appeal.

This time though, my selection will be different. Rather than put forward the sector small fry, it's now worth considering some industry heavyweights. They should counterbalance the original seven lightweights in terms of industry stature. Apart from that, the choice is again done purely on gut feel, with no proper research done on my part. Here are this year's punts.

Company                                 Price
                                         (p)

Autonomy (LSE: AU.)                      339
Baltimore (LSE: BLM)                      73
Bookham Technologies (LSE: BHM)          296.5
Emblaze Systems (LSE: BLZ)               316
IQE (LSE: IQE)                           171
Psion (LSE: PON)                          82.5
Trafficmaster (LSE: TFC)                 238

All in all, I think these seven stocks, in addition to last year's selections, should provide enough diversification for my notional long-term buy and hope portfolio.

All fourteen companies have great ambitions, great potential and possess great investment risks. There'll be more disappointment within the notional portfolio I'm sure. But remember, just one big time winner should more than compensate for the inevitable long-term turkeys. Will the hopeful fourteen outperform the stock market in the years to come? Only time will tell.

More: The original Long Term Buy And Hope Portfolio | Running A Notional Portfolio