A Blue World
“You just never know,” said Mr. Deshais. “It usually doesn’t get this cold. You see what it did.”
The gardener pointed to the blackened potato leaves, newly sprouted from the ground.
“It killed some of them. But I think they’ll be all right.”
“Why do you plant them so early,” I asked. “If you waited a few weeks you’d probably avoid these late frosts.”
Mr. Deshais looked mortified.
“Ahhh, but if you did that, you would never get good potatoes. You have to plant them early. And if you miss the full moon, you have to wait a month – and then, it’s too late. You have to stick to the moon. Don’t worry. They’ll be all right.”
The potatoes don’t look good. But Mr. Deshais knows what he’s doing. And even if he is completely wrong, there is no hope of getting him to change his ways.
Besides, since his approach to gardening agrees with my new theory of Essentialism, who am I to criticize? Mr. Deshais thinks he knows what is important to a good garden – and he sticks with it. What’s more, he has the cabbages to prove it.
While Mr. Deshais has spent decades studying the ways of nature, I spent my time studying the nature of markets. In either case, probably the best lessons are learned in the old-fashioned way – by error.
Years ago, I teamed up with Mark Hulbert to try to figure out who made money by investing – and how. The idea was simple enough – just study various investment newsletters, track their advice over time and see who comes out ahead.
If only it were that easy!
We began in the late-70s. At the time, the financial future seemed clear: the dollar was going the way of Italian lire and Polish zloty, inflation was getting worse and worse, and gold was becoming ever-more valuable. This was not merely a trend – it was an unstoppable, irreversible fact of life…since government could be counted on to inflate the dollar away to nothing.
This led me to publish a number of financial services whose main advice was to buy gold and gold mining shares. Alas, the debut of these services coincided with the beginning of a bear market in gold that has lasted for 20 years already, and seems destined to last forever.
The more certain you are about a financial trend, the less likely it is to come to pass. And past performance – thank God – is no guarantee of future performance.
But surviving a quarter century bear market in your favorite commodity is bound to have an effect. I emerged poorer in investment cash but immensely richer in modesty.
“Mr. Bonner,” the gardener continued, “you wouldn’t want to eat that stuff in the super-market, would you? Who knows what they put in it? It tastes like nothing natural. They can plant their potatoes whenever they want. But we have to stick to what we know works.”
Pere Marchand seemed to have the same idea in mind for his sermon on Easter Sunday. “We have to recognize,” he said, “that we cannot know why God does what he does. Why would he let his only son suffer upon the cross? Why would innocent little infants die? It seems incomprehensible to us. And yet, it happens. And it is hard for the parents to live with. But we stick with our faith. What else is there.”
“There is one characteristic,” writes Mark Hulbert, summarizing the conclusions of two decades of work, “that I have discovered that does distinguish the top performers: discipline. They were willing to stick to their strategies during the discouraging interludes in which they were lagging the market or even losing money. In fact, I think the importance of discipline may be the most important lesson to emerge from my 20 years of tracking investment newsletters. It is what keeps us from dumping a good long- term strategy because of short-term underperformance.”
The good long-term strategy is to find good investments at low prices and stick with them until they are no longer at low prices. Then sell them.
Another way to look at it: find the fool in the market and do the opposite. When fools are buying tech stocks; sell them. When fools are no longer interested in stocks: buy them.
I like to think that this approach is easier for me and other former gold-bulls than it is for other investors. We can spot the fool in the market, since we have been on such close terms with him.
Today’s fools believe they can buy stocks at 23 times earnings and then simply hold them ‘for the long term and get rich.
But as Hulbert puts it (in a NY TIMES article):
“Latter-day converts to the buy-and-hold strategy assure me that they won’t be foolish and throw in the towel in a bear market. But I don’t believe them. The only investors who could persuade me otherwise are those who were fully invested in late 1974, at the bottom of the last severe bear market. And there are precious few of them. All the other buy-and-holders either aren’t telling the truth or are too young to have anything more than hope about how they will behave in the next bear market.”
“At the top of every bull market, everybody talks about buy-and-hold,” Hulbert writes. “At the bottom of a bear market, you can’t find anybody talking about buy-and-hold.” At investment conferences in 1980, some people seriously thought the price of gold (then flirting with its all-time highs of over $800 an ounce) was on its way to $4,000. (Gold subsequently sank to less than $300.) And at those 1980 investment conferences, nobody was talking about buying and holding stocks. Back then, that was regarded as a fools game.”
What else is there, dear reader, but to look for the essentials, find the principles that are really important, and stick with them?
Even when we recognize that we can’t predict the future…nor even understand the present…we still have to do something. We have to get up in the morning…and get to work.
We still have to make decisions about what to do and what not to do.
And now, dear reader, I confess an ulterior motive to today’s letter. We have put together a new investment service…which we call the “blue” site. Its goal is simple. And modest. To provide you with a systematic, clear way to invest in the kind of insights you find here in the Daily Reckoning.
I’ve already sent you some information about it. And Addison has provided more details. Will it make you rich? Who knows. Will it beat the market averages? I don’t know that either.
As in life itself, there are no sure things. And no one can tell what will happen.
But I don’t ask much of you. The Daily Reckoning is free. And since it is free I feel I have the right to pass along my little reflections on things that have nothing to do with investing. This new “blue” service is not free. Maybe that is reason enough to subscribe: you won’t have to read my views on the arts, on history or philosophy. The blue site is all investments.
And, if it helps you improve your investment performance – even just a little – it should be worth far more to you than it costs.
So all I ask is this: just take a look at it. If it is not useful to you, your money will be refunded. So don’t worry about that part of it. And with a little luck, it will actually help you make some money…or help you keep the money you’ve already made.
And thank you.
Your humble, grateful editor,
April 16, 2001
*** There is not much new financial news today…the markets were closed on Good Friday. But the financial press seems to be looking for a resurrection of prices this week. “A record number of earnings warnings have cleared the way,” says the Reuters report from Sunday evening, “for stocks to gain this week as investors look past the bad news toward sunnier days ahead.”
*** “Buyers are swooping in” continues the article. Then, quoting Louis Navellier, “I feel confident that the market is putting in a bottom and most stocks are oversold.”
*** The Nasdaq rose 14% last week – its second best week ever. But it is still down 21% for the year. Investors are hoping that this rally is big enough to push the stone aside and allow their stocks to come back to life.
*** The crash of ’29 was followed by such an impressive 6- month rally that investors were lulled into believing that “the worst was over.” But stocks soon began falling again and continued falling until 1931.
*** Stocks approached the 1,000 mark in 1966…fell, and then rallied until ’68…fell again…rallied again and actually moved above the 1,000 mark in 1971…and then – in 1973 – began their worst slide since ’29. Throughout the entire 20-year period, from 1966 to 1986, adjusted for inflation, investors got nothing but dividends.
*** A big rally, it is hoped, will give investors another chance to “get even.” But if they’re smart, they’ll take it as an opportunity to get out. It is too late for investors who bought tech and Internet shares near their peaks. Amazon, for example, would have to rally about 700% to get back to its high. A Reuters report explains that if you had bought JDS Uniphase on March 6, 2000, when it was trading for $146 you’d have to wait 21 years to make up the 87% loss you’ve suffered – if the S&P grows at its average rate since ’26, that is, about 11% annually.
*** The waiting period for many stocks would be even longer – 40 years for Inktomi…41 years for CMGI, a stock that once traded for $163, but you can buy today for about two and a half bucks.
*** Of course, these companies will probably go out of business long before the share prices recover. Most likely, they’ve had their 15 minutes of fame. Now they can be forgotten.
*** “Analysts are expecting earnings growth to zip up” in the 2nd half, said one item on the Reuters line.
*** But “astute corporate insiders have been selling their companies’ stock at a very high rate,” writes Ned Davis. “With the market down so much, this is very unusual and I take it to mean that profits are even worse than the hard landing that I had expected.” Why? Davis explains: “The long up-trend…of productivity growth since around 1980 has been broken to the downside. Sales, income and production per employee have plummeted.”
*** Sales figures for March suggest that consumers are feeling a little pinched. “March,” says Kurt Barnard, who tracks retail spending, “turned out to be one of the weakest months in 25 years of tracking this. It really was a very, very poor performance on the part of most retailers.”
*** And this from the WSJ: “The U.S. economy appears to be worsening, according to several reports. Jobless claims hit a 5-year high last week and consumer confidence fell to its lowest level since 1993.”
*** A second half recovery? Probably not. The U.S. may be doomed to endure a particularly long and frustrating slump simply because it has avoided a slowdown for so long. “Recessions have a parallel with earthquakes,” suggests Andrew Smithers. “Frequent small ones may be essential to avoid truly damaging large ones.”
*** Smithers notes that Alan Greenspan has very successfully avoided recessions – until now, perhaps. But he is not the first to enjoy a long period of expansion. Andrew Mellon was re-appointed by Herbert Hoover in 1929 – after presiding over the boom of the ’20s. At the time he was hailed as “the greatest secretary of the Treasury since Alexander Hamilton.” Two years later, he resigned – widely regarded as a failure.
*** Addison reports from Paris that the city is dead. Easter Monday is an important holiday in France. Only we Americans are at work. Are we smart, or what?
*** I’m becoming a connoisseur of French attitudes towards illicit sex. Not by intention, of course. It is just that it is such prominent feature of the culture I can’t avoid it. On Friday, for example, I took a bus down from Poitiers (the train was not running for some reason). On the radio was a remarkable program wherein the host would ask a woman to phone her husband and tell him that she was having an affair. The host would then come on the phone and pretend to be the lover. The cuckolded husbands threatened and insulted while their wives’ pretend lovers parried with jokes and ribald humor. Then, when the ruse was announced, everyone had a good laugh.