Motley Fools

"You GOTTA READ THIS…" came a message from my friend, Porter Stansberry…

"This is a post I found on the Motley Fool from January of 2000 – right at the top of the tech boom. It’s from a guy who is announcing that he’s finally sold the Oakmont Value Fund.

"Bill, this is the best example I’ve ever seen of how the market makes a fool out of people."

Many are the ways that the market makes fools of us. Of course, many are the fools it has to work with.

"I used to invest solely through mutual funds," begins the writer, "an experience that has left me with little respect for the professional investment community…"

"But the worst, the absolute worst, were the value funds. These are run by geniuses that don’t want to buy strong companies because they’re too ‘expensive’ so they focus on second tier companies or outdated industries because they’re ‘cheap’. To be fair there was a time when this concept had considerable merit, but not recently and not likely anytime soon given the revolution going on in the American economy. Many people still don’t grasp these developments…"

It’s not what you don’t know that hurts you, as someone once pointed out, but what you think you know that ain’t so. Twenty-four months ago, people thought something big was happening. And something big was…but not at all what they expected.

"It was, in short, the infinite promise of America’s digital future," writes Christopher Byron, "conjured by seers like George Gilder and Nicholas Necroponte, that drove capital spending in the 1990s, reshaping the U.S. economy from a world of tangible value into one of virtual opportunity. We wound up building the greatest field of dreams in the history of world capitalism, and alas, no one showed up to play."

It must be comic to the gods. To watch us, I mean.

It is not hunger that gets a modern man up in the morning, dear reader. Nor is it the need to put a roof over his head that keeps him up late at night. Instead, most of human striving and pining has no more purpose than to help him feel superior to other men – to look better, to play better, to have more money or a better life. Nothing is so trivial or preposterous that it cannot give a man an edge. One is proud of his new automobile, another of his roses…one believes his steadfast labor raises him above other men of his rank…another thinks his stock market returns give him a mark of distinction. Thus, in pursuit of such an advantage, a man puts calluses on his hands with hard labor or dulls his dendrites with P/E ratios and World Economic Forum meetings.

Straining, sweating, climbing…whether he is working on his golf swing or his stockholdings…modern man struggles to the top of the hill. There, surveying the world at his feet, he puffs out his chest, puts his hands on his hips…and discovers that he has forgotten to put on his pants.

In January, 2002, our Motley Fool poster removed both suspenders and belt…and set himself up for ridicule two years later.

"I invested $10,000 in [Oakmark Value Fund] on 9 May 1996 and as of 31 December 1999, a period of better than 3 1/2 years, my investment had grown to the incredible sum of $10,199.71…"

"Well I have at last liberated myself from the folks at Oakmark…"

Liberating himself, our amateur author was free to do what everyone seemed to want to do at the time – ignore the debit side of the ledger. Debts? Why worry about them…they will be easy to pay off in the New Era. Profits? Who needs them…this is a growth company.

And why settle for 5% or even 10% annual rates of return…when it seemed possible to get 25% or more annually for as far into the future as the eye could see?

By January 2000, the Motley Fool correspondent had suffered three and a half years with no financial progress and did not feel good about himself. He still had his money. But that wasn’t good enough. He felt like a schmuck. So he ditched Oakmark and went on to complain about value investing in general and value stocks, such as Philip Morris, in particular. From now on, he implied to readers, he is going for growth in the Nasdaq.

What has happened since will come as no surprise to you, dear reader. In January, 2000, the Nasdaq index was about 4,000. Now, it is only at 2,000 or so. If the writer switched all of his money to Nasdaq stocks at the time of his post, he has lost half of it.

Oakmark, meanwhile, went from $17 in January 2000 to more than $27 this year. And Philip Morris, which we recommended to you in this space two years ago, has done even better. The stock was trading for less than $20 a share in January, 2000. Last week, it traded over $50 a share.

Your correspondent…trying to remember to hitch his suspenders…

Bill Bonner
February 08, 2002 — Paris, France

"This is a very dangerous market…very!!!"

The three exclamations points, along with the sentence itself, come to us from Richard Russell…who was following stocks before your editor was born.

Russell is worried. Why? Because the entire economy is straining under an enormous debt burden while stocks are still very expensive and incomes fall. The Labor Department reports that the hours people work just suffered their biggest drop since ’91. Fewer hours = less income = less spending = fewer sales, less profit and even higher stock P/Es…unless stock prices fall.

Last year alone, the Nasdaq fell 30%. The S&P lost 18%. And the Dow dropped 10%. But profits fell faster – the worst profit collapse since the 1930s.

Russell notes that since 1915 there have been 20 periods in which the Fed has cut rates 2 or more times. In 18 of those periods, stocks were higher a year after the cuts began. In only two were they not – the period following 1929 and the current period.

"The U.S. economy is heading toward a massive economic depression," writes Steve Puetz. "Investors have been slow to recognize the significance of the ongoing contraction. The majority believes that it’s just a normal recession, rather than the developing depression it is."

"This is an environment very hostile to stocks," he continues. "Yet cockeyed optimism has pushed stocks to record-high levels based on price-to-book ratios and price-to-earnings ratios – even considering the fact that, for the most part, earnings are entirely fictitious."

Of course, it’s not just the stock prices…or the losses…or the debt that is worrying. It is also the creeping doubt. Maybe the earnings aren’t what they’re supposed to be. Maybe the stocks will go down a third year in a row. Maybe rate cuts won’t really revive the economy, after all. Maybe this period really IS like ’29 and not like any other downturn. Maybe the Japanese are not as dumb as they seem…

Eric?

******

Eric Fry, reporting from the city that never sleeps…

– For a bull market, it’s uncanny how much stocks behave as if they’re in a bear market. The path of least resistance appears to be down…just like in a bear market. Mid-day rallies often fail and become late day sell-offs…just like in a bear market. In fact, this dreary trading pattern has repeated itself time and again over the last several weeks, including yesterday.

– By mid-day, the Dow had chalked up a 90-point gain. But the Blue Chips slipped steadily throughout the afternoon to finish the session 28 points lower at 9,625. Likewise, the NASDAQ’s slim advance early in the day evaporated before the closing bell. The index fell another 1.7%, bringing its losses for the week to more than 8%.

– It’s a little surprising the NASDAQ even traded in positive territory yesterday, given Cisco’s pathetic showing. A disappointing earnings report from the Nasdaq bellwether sent the stock plunging more than 7%.

– In the School of Financial Hard Knocks, investors are learning, albeit slowly, that tech stocks are not at all times – at any prices – a surefire road to riches. When the NASDAQ hits 1,000, class will be dismissed.

– Understandably, investors are not eager to surrender the dream of making 25% annualized returns in the stock market ("It’s not a loss until you sell, right?"). During the late 1990s, 25%-annualized gains seemed like an American birthright, and a lot of folks continue to hold fast to their perceived entitlement.

– But Warren Buffett thinks the time has come to lower investment expectations. In a recent interview with Outstanding Investor Digest, the oracle of Omaha said, "I think stocks are a perfectly decent way to make 6-7% per year over the next 15 to 20 years. But I think anybody who expects to make 15% per year – or expects their broker or investment adviser to make that kind of money – is living in a dream world…The probability of [Berkshire Hathaway] achieving 15% growth in earnings over an extended period of years is so close to zero that it’s not worth calculating. I mean we’ll do our best…But we can’t do 15% over time – nor, incidentally, do we think any large company in United States is likely to do it."

– Buffet’s long-time partner, Charlie Munger, concurs, "It’s stupid the way that people are extrapolating the past – not SLIGHTLY stupid, but MASSIVELY stupid."

– Speaking of massively stupid, that phrase fairly describes yesterday’s testimony from former Enron CEO Jeffrey Skilling. To paraphrase: "I didn’t know nothin’ about nothin’. It must have been all those other guys who were doing bad things while I was CEO."

– C’mon, give the guy a break; he was only the CEO. It’s not like he knew EVERYTHING that was going on at the company, especially not any of that complicated partnership stuff.

– Certainly, Skilling would not be the first CEO of a public corporation to possess little knowledge beyond how to tally personal stock options. Still, it’s hard to believe he knew absolutely NOTHING. After all, during his stint as CEO, Skilling was more likely to bump into an Enron partnership somewhere than he was to bump into his desk chair. Not surprisingly, his pure-as-the- driven-snow routine did not play well on Capitol Hill.

– "Mr. Skilling, a massive earthquake struck Enron right after your departure," said Rep. James Greenwood, chairman of the House Energy and Commerce oversight and investigations subcommittee. "People in far inferior positions to you could see cracks in the walls, feel the tremors, feel the windows rattling. And you want us to believe that you sat there in your office and had no clue that this place was about to collapse?"

– Skilling responded: "On the day I left…I believed the company was in strong financial condition."

– Thanks for clearing all that up, because for a second there we all thought that Enron’s CEO might have known a little something about how the company operated.

– Meanwhile, as Skilling, Fastow and Lay keep shoveling away at the hole they’re digging for themselves, gold keeps trying to climb out of one. This "Job" of the commodity world seems to be coming to the end of his trials and tribulations. He’s even gaining a few friends.

– The erstwhile safe-haven "currency" tacked on another $2.30 yesterday to close above $300 per ounce for the first time in two years.

– A prediction: gold’s status will advance faster than Skilling’s…at least on a relative basis.

******

Back in the city of amour…

*** Eric Gillin of TheStreet.com makes an interesting observation. People who try to ease their burdens by switching from credit card debt to home equity debt do not necessarily come out ahead. If you have $20,000 of credit card debt at 15%…and pay it off in 3 years… you’ve paid a total of $3,273.59 interest. The payments may go down if you move it to a home equity loan and pay it off over 10 years at 7.5%…But you will have paid more than twice as much interest – $8,488.42.

*** Mortgaging their houses to consolidate debt leaves consumers paying interest on chicken dinners for a 10- year period.

*** "I think it is charming the way the ‘experts’ explain that the Fed reducing interest rates is helping the over-indebted citizens bear their burdens," writes the Mogambo Guru. But, "the ugly fact to the contrary is that I am not hearing one indebted person say this is true. The statistics say they are merely going deeper into debt…"