Increasing Capital Gains from Common Stock Investments

Abstract

CAPITAL GAINS FROM COMMON STOCK INVESTMENTS are more likely to be achieved if a definite objective for the rate of gain has been established in advance, and transactions are effected only after consideration of the likelihood of that rate being attained. If, for example, the investor establishes a 20% annual rate of increase as a goal, he is then unlikely to invest in a stock which promises some gain (perhaps as much as 20% ) at an indefinite time in the future; nor is he as likely to continue holding a stock in which he already has a satisfactory gain, but whose prospects for further gain are indefinite in time and apparently rather limited in amount. Only stocks affording the likelihood of substantial gains over a definite period of time would be bought or held. Switching would be effected freely, with commission expenses being considered in the same light as would any business expense; the desire to prove that every selection was right and to avoid taking losses would be subdued. Dividend income would be disregarded, except as a factor to be considered in appraising capital gain possibilities. The use of this approach implies that it is possible to ferret out substantially undervalued stocks, which are likely to be accorded a higher market valuation in a limited period of time. When overall stock market conditions are not unfavorable, this does not pose excessive difficulty. There are always some companies of substantial merit which have suffered a setback for one reason or another (perhaps the digestion of new acquisitions); and it can be ascertained that effective remedial actions have been taken on which the payoff will not be long delayed. There are other companies which are effecting cyclical recoveries, in line with improving prospects in their industries. Perhaps an extensive capital improvement program may be reasonably expected to start paying off in the near future. It is in the timing of an increase in market valuation, rather than in the selection of a likely prospect, that the difficulty lies; and it is, of course, the advantage of the predetermined rate approach that it forces attention on timing of transactions. As a means of continually visualizing the progress of actual investments against predetermined goals, the market value of each stock may be plotted weekly against a line representing the desired percentage rate of increase (semi-logarithmic paper may be used, if desired, simplifying plotting of rate lines). If the stock stays on or near the target line, that portion of the total fund is meeting appreciation objectives. If the stock lags, the natural question is, can it get back to the line? If this appears unlikely, the next question is, can it reasonably be expected to move along a rate line drawn from its present position.