Eden And The Theory Of Compound Advantage

“Tell this soul with sorrow laden if, within the distant Aidenn, It shall clasp a sainted maiden whom the angels name Lenore – Clasp a rare and radiant maiden whom the angels name Lenore.”

Quoth the Raven “Nevermore.”

Edgar Allan Poe

Poor Mr. Poe. Like so many of us, Baltimore’s leading dipsomaniac only wanted the comfort of knowing that somewhere…somehow…in the distant Aidenn [Eden]…all would be right.

Thoughts of Eden crossed my mind as I continued the perambulation which I described to you yesterday. I was – it already seems as though it was long ago, but it was just Saturday – walking along the crest of a hill along the Pacific coast of Nicaragua. On a southeast heading, the ocean was on my right, separated from me by a cliff of about 300 foot, which I had attempted to scale earlier in the day. Failing in my efforts at rock climbing, I wheeled around to the northwest coming onto the top of the cliff from the landward side. Now I was following the cattle path towards the unexplored section of our ranch.

Looking out at the sea from this high ground, Eden came to mind. Surely, this was Eden – or at least as close to Eden as Mother Nature allows.

For Mother Nature is never without her surprises…her tricks, her traps, her fatal attractions. And even Eden itself – the garden paradise where Adam and Eve discovered sin – came with a serpent.

I saw no serpents on my walk, nor any wildlife – except birds. A pair of birds with long yellow tail feathers seemed to be following me – calling to each other, cackling…as if they were making jokes at my expense. Like the raven on Poe’s Pallas, they flew from tree to tree ahead of me…screeching and calling, as if trying to tell me something. I imagined that they were mocking me…

And so I made my way uphill and down, trying to bring my thoughts back to the agenda I had set for myself. This Eden was surely attractive. And I had already seen that it could also be fatal.

Having invested money…should I go a step further, and invest time?

The Internet is a great thing. It has liberated information workers. People who work with information – which can be reduced to data and transmitted via the Internet – no longer need to be any particular place. The Internet allows them to travel, if they want to do so, while staying in constant contact with the people with whom they work.

More and more people are becoming “information workers.” “The 21st century is going to be the real Information Age,” said Bill Joy, Sun Microsystem’s chief scientist, “and I don’t mean the Internet.” What he meant was that more and more things are being digitized. Venture capitalist John Doerr described the Internet as the “greatest legal creation of wealth in the history of mankind.” But Joy noted that the “marriage of atoms and bits” – such as the reduction of the human genome to digital, computerized information – will “dwarf the Internet.”

“Aristotle didn’t even begin writing until he was 50,” my friend Mark had told me on Friday. Mark, who turned 50 recently, has decided to join the Information Age by beefing up the data storage area of his own brain.

“I just don’t have enough information,” he said, “so I decided to memorize at least one new fact every day. That may not seem like much, but it adds up.”

Aristotle was not idle during those first 50 years, Mark points out. He was accumulating data, studying under Plato’s guidance for many years.

You can invest money casually…even promiscuously. Since the markets price investments more or less efficiently…and since you can never predict what will happen to prices in the future…you will do almost as well tossing darts at the stock pages as you will by careful study. Sometimes you will do better.

What’s more, there is little to be gained by increasing the scale of your investment. Unless you are able to buy control of a company, the first dollar you invest will get the same proportional return as the last.

But time is different.

Suppose, in his 50th year, Aristotle had decided to become a general…or a businessman. There is nothing to say that he could not have been successful, but he would have had an uphill battle. All of his preparations were for something else.

While he was studying philosophy with Plato, others were learning how to conduct war and run businesses. Aristotle would have had a competitive disadvantage.

We are all familiar with the phenomenon of compound interest. Money compounds over time, growing at a faster and faster rate. It is not the investment of money alone that makes this possible, but the combination of money and time.

The trouble with time is that it is as unyielding as the raven’s “Nevermore.” There is no central bank of time that adds a few seconds to every day…or comes in with a few extra hours whenever it is needed. There may be a time for every purpose under heaven – but not a second more. Even in Eden, time passes.

Time compounds your money and your skills. But time is a jealous mistress. You cannot give your time and attention to more than one thing – or you will run into trouble. Dilletantes and dabblers rarely succeed – because they never develop a competitive advantage in any area.

That is why time needs to be coddled, protected and spent carefully. You cannot spread it around – you need to focus it on something that will provide the returns you are looking for. That is undeniably true in the business world. A business that focuses its efforts, over time, on providing a better service or better product will almost certainly do better than one that tries to do one thing one day and another the next.

Imagine the poor entrepreneur who tries to open up a shop offering plumbing repairs and hats…or used cars, ladies underwear and liquor. Imagine the artist who tries to make a name for himself as a virtuoso on the harmonica and chainsaw sculptor. What a challenge.

And yet, that is the way many people pass their time – going from one project to another…or worse…watching television or talking politics, activities from which there is almost no hope of profit!

You need to be very careful how you invest your time. You can get no more of it. And little bits of time add up. Before you know it, you have invested a major portion of your life – with no hope of ever getting it back. This is probably as true in your personal life as it is in your profession or business.

A half-hour had passed since I began following the cow path. I was making my way slowly. I could walk faster…but not while I was thinking at the same time. It is not safe.

As it was, I discovered the end of the trail as I had found its beginning – by accident. Coming down the hill, all of a sudden, the path ended…at the edge of a cliff. But there, looking out, was another vision of Eden…with forested hills leading to rock cliffs…falling down to the ocean. Beautiful…and treacherous…like Mother Nature herself.

Your rambling correspondent,

Bill Bonner Baltimore, Maryland (the purple city) January 30, 2001

*** Cisco’s CEO announced that he was “absolutely, very confident” that his company would be able to grow at 30% to 50% per year over the next 3 – 5 years.

*** He wasn’t so sure about the next couple of quarters though. Sales could be weaker than he expected a few weeks ago…when he expected sales weaker than those he expected a few weeks prior to that. So, he may not know what will happen in March…but 2006 is no problem.

*** Hearing this cheerful absurdity, investors decided to trim the Cisco Kids’ stock by 5%. JNPR took a 2% cut in sympathy.

*** But otherwise, it was a pretty dull day – as Wall Street waits: later this week will come new GDP figures…and tomorrow, the FOMC meeting at which Greenspan is expected to cut rates by an additional 50 basis points.

*** But suppose Fed governors were suddenly struck with a desire to fulfill their legal responsibility…that is, to protect the value of the U.S. currency rather than destroy it? What would happen if they decided against a rate cut?

*** The market would collapse. Investors have staked everything on the proposition that the Fed stands ready to provide liquidity…and that the easier credit will boost the economy and the stock market.

*** They are almost surely right on the first point. The Fed will almost certainly come through with the rate cuts. It is the second article of faith that will be tested and should provide some entertainment.

*** So sure are Americans that the economy and stock market are in good hands that they are still going into debt at a frantic pace. Mortgage refinancing applications continue to soar. And between Thanksgiving and Christmas, consumers charged $113.7 billion to credit cards – 23% more than the year before.

*** Why haven’t investors left the market? Why haven’t consumers become more fearful? Jim Bianco has a hypothesis. “Since 1990,” he writes, “the public has put about $14 trillion into the stock market and they have about $1.88 trillion of market value.” Despite the $3 trillion Nasdaq collapse last year, investors still have an unrealized gain of $479 billion. Investors still feel themselves to be playing with the house’s money. Only when this gain disappears, he believes, will they exit Wall Street. (DR readers might want to take advantage of this opportunity to beat the traffic.)

*** The Dow gained 42 points yesterday. The Nasdaq rose 56.

*** Business Week reports that technology companies boosted profits by 34% in the third quarter of last year. But consensus earnings estimates for the fourth quarter are only up 2%.

*** In its survey of 114 important companies in all major sectors, Business Week found earnings up 0.8% in the fourth quarter. But if you were to take out the energy and utility companies, earnings would be down 9.2%.

*** And Barron’s says that “consensus estimates” for next year are now below estimates for the current year. This is having an obvious effect on P/E ratios – they are rising, even though stock prices are about the same. P/Es on the Dow have risen from an average of 20 at the end of last year to 21.5 now.

*** Disney is calling it quits in its goofy Internet portal venture, Go.com.

*** GE fell another 1% yesterday.

*** Oil dropped 71 cents. And the dollar rose slightly – pushing the euro below 92 cents. (Again, DR readers might want to take advantage of this dollar rally to sell.)

*** TheStreet.com’s Internet index is up 32% for the year. (Another great selling opportunity.)

*** When the history books get written and “…folks try to determine whether they think Greenspan is the maestro Bob Woodward says he is, or [a] bumbling fool…[I offer these] “Top 10 Reasons Why Americans Should Feel Confident That Alan Greenspan Will Navigate A Hard Landing For The Economy”:

10. Believes that consumer debt is ‘a very potent and very desirable financial institution’ — July 25, 2000.

9. Believes that ‘most people have a generally good idea of how much debt they can carry, and they don’t go beyond it’ — July 25, 2000.

8. Believes that the combination of ‘a slowing in inflation and sustained rapid real growth’ over recent years is due to an ‘acceleration of productivity’ — July 22, 1999.

7. Believes that ‘the central bank cannot effectively directly target stock or other asset prices’ — July 22, 1999.

6. Believes that derivatives are ‘an increasingly important vehicle for unbundling risk’ — March 24, 1999.

5. Believes that ‘to spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong’ — June 17, 1999.

4. Has difficulty defining ‘with precision’ the limit of prudent money growth — Oct. 19, 2000.

3. Believes ‘it is not possible to manage something [money] that you can’t define’ — Feb. 17, 2000

2. Cannot define ‘what part of our liquidity structure is truly money’ — Feb. 2, 1999.

1. Believes that ‘bubbles generally are perceptible only after the fact’ — June 17, 1999.”

*** “Since 1994, nominal (not inflation rate-adjusted) GDP is up $2.7 trillion,” says Dr. Gary North. “But corporate and consumer debt is up $4.75 trillion. Indebtedness of the financial sector is up $4.1 trillion. Overall credit creation is $8.9 trillion. With respect to economic growth, the economy is no longer getting much ‘bang for the buck’ from its credit system.”

*** How well did the short sellers do last year? David Tice’s Prudent Bear Fund rose 30% in 2001. The largest bear fund, Rydex Ursa Major, rose 17%. David Tice is a contributor to the Daily Reckoning, by the way, and can be reached at dtice@tice.com.