A Hot Tip
Information is overbought. Ignorance is oversold.
Such is the perverse, ironic and cynical nature of markets that while everyone proclaims the benefits of the Information Age, it is the most ignorant among us who have often reaped its biggest rewards.
From car number 8 of the Eurostar en route from London to Paris last night comes more evidence.
I was sitting next to the window, reading Alan Abelson in “Barron’s,” when two men entered the car and sat down across from me. They were casually dressed. Mid-40s. Americans. The sort of men you might find managing an electronics store or enjoying the Super Bowl with friends.
One took out a Swiss Army knife the size of a chain saw and opened a package. Out of it he drew a new watch — a monstrous thing that made it look like a flying saucer had landed on his wrist.
Soon they were joined by a third man who leaned towards them with a computer printout. He was reporting sales figures.
“We got a 5.3% sell-through on Jackson. 3.7% on Magruder. And, get this,” he continued, “6.5% on the new guy.”
“Hey…wow…” one replied, and then started laughing in a way that made me think his belt was too tight.
A typical conversation for the Eurostar. But then…
“Whoa,” said the one farthest from me, looking at the stock pages of the “USA Today,” “look at this…I bought this company at 30 two days ago. It’s up to 47.”
“I got a friend who knows someone at the company. They’re going to announce a merger or something. The stock is supposed to go to between 70 and 75.”
“What’s the name of the company?” asked the one whose belt was too tight.
“It’s called e-Plus, I think. Yeah, I think there’s a hyphen in there. e-Plus. The stock symbol is PLUS.”
“What’s it do?”
“I don’t know…computers or something high tech. But I’ve already made…$1,700 on this stock.”
“Why didn’t you tell me about it?”
“I did tell you. But you didn’t pay any attention.”
“Yeah, it was probably Saturday night,” then came the high-pitched laugh again, “I don’t remember anything from Saturday night…But I don’t like to miss a move like that. What d’you say was the symbol?”
A moment later, and I am not making this up, he had his cell phone out.
“Lenny? Hi, I’m calling you from France. [Note: we were still in England]. Yeah, I’m on the train. Can you hear me okay? Look, I want you to check out a stock for me. It’s called e-Plus.
“No, I don’t know what it does…technology or something.”
Then, turning to his friend, “He says he’s never heard of it…
“Ok…look my buddy says they’re going to make an announcement or something. Buy me 20 shares. The price should be about $47. It’s going to $75. Okay…
“I’m in France…so I can’t send you a check until next week. Just 20 shares, ok?”
I went back to my reading, thinking about how these guys were making money by, as Oscar Wilde described it, knowing “the price of everything and the value of nothing.”
Value? They didn’t even ask. In this age of information, these guys were ignorant of everything except the price. And the rumor. The company’s statistics, its business plan, its position in the industry, its management…its record of the past and hopes for the future were as unknown as the contents of a sausage or the voter registration rules of a distant galaxy. If I were grading them on their investment knowledge, I would give them, well, an E-plus.
But these fellows weren’t investing. They were having fun. They were like baboons at a Buckingham Palace dinner party. Throwing the food around. Laughing. Playing. Getting rich. They had no idea of the rules. No concept of the history. No clue about the risks. Investing is a game to them. And thanks to their ignorance, they are winning.
Does e-Plus have earnings? Does it really have a solid business? Don’t bother to check the fundamentals. Most likely, there are none. If you have to ask, it’s not for you. The more you know, the less likely you are to want to buy it. And if you don’t buy it, it can’t make you rich.
Abelson reports that a group of former bond traders got tired of missing out on the fun. Bonds do not go up 1,000% overnight. As Abelson put it, “their income was fixed…in nice sympathy with the stuff they dealt in…[but] in galling contrast to their stock-trading buddies across the aisle, whose income was climbing faster than the speed of light.”
So the bond buyers jumped into equities. Typical of the stocks they would buy was Puma Technology — which rose from $4 to $140. The firm had only $7 million in revenues in its latest quarter. But it had a market cap of $3 billion.
Another company, Smartserv Online, traded in a range of 70 cents to $186 in a 12-month period, perhaps not typical but surely illustrative of the opportunities ignorance provides.
This kind of stock play is not one you should approach with information…and certainly not with knowledge, or with its distilled derivative — wisdom. It is the kind of speculation that needs to be made in near-complete ignorance. Reckless abandon even.
The prevailing formula of the New Era is that Information = Wealth. Information is thought to be the currency of the age.
The reciprocal of this algebra is that Ignorance = Poverty.
But we have seen how the contrary is also true: at least a certain kind of ignorance is producing spectacular stock market profits.
If Ignorance = Wealth and Information = Wealth, too, ergo, we have the algebraic proof of what we’ve been talking about for the last couple of weeks:
Information = Ignorance.
Swamped with facts, blinded by details, overwhelmed by an infinity of data and paralyzed by endless analysis — “information makes us all dumber,” as Michel put it.
And maybe poorer, too. Another way to look at this is that the inflation of the information supply has rendered it worthless. Like any inflation, we have been impoverished by it. The information, knowledge, wisdom and judgment that we saved up for so many years and used to guide our investment decisions — has been devalued.
(At least temporarily.)
Again, the high-pitched laugh…the man in the seat in front of this pair had turned around, drawn by the lure of easy money from a hot tip.
He spoke with an English accent. But he was no stranger to the New Era. After a few moments conversation, again, I am not making this up, he was on the phone with his own broker.
Alas, 24-hour trading has not yet reached The City, London’s answer to Wall Street. His broker had gone home for the day.
“Buy it tomorrow,” suggested the man with the flying saucer watch, helpfully.
That’s e-Plus. Nasdaq. Pssst.
Paris, France March 1, 2000
*** The rally continued yesterday. The Dow rose 89 points. The Nasdaq went up 118 points to a new record. Volume on the Nasdaq was over 2 billion.
*** I witnessed a tiny piece of the volume take shape yesterday while on the train back from London. More about that below…and why ignorance is underrated.
*** Dan Ferris of “Real Asset Investor” (http://www.realassetinvestor.com) wrote to congratulate me on the timing of my palladium comments. I said something negative on the very day it turned down. The secret? Ignorance. If I had begun asking questions, I would have found out all the “reasons” why palladium was zooming. Instead, in ignorance, it just looked like a fluke.
*** The A/D ratio is ready for a little relief rally. It’s been going down, with few interruptions, for nearly two years. So it took a breather yesterday. Rising issues actually outnumbered falling ones by 1,809 to 1,179.
*** But even that was not enough to reverse the downtrend in new highs versus new lows. While 78 stocks on the NYSE managed to hit new highs yesterday, 161 hit new lows.
*** Transports, down nearly 40% from their high, managed a bit of a bounce, despite a higher oil price. Oil rose to $30.40.
*** The big action was in semiconductors, which soared 10% on news of higher DRAM prices. Micron rose 27%.
*** Money continues to rush into the market. January broke a record for mutual fund inflows — nearly $40 billion. Most of the money, as reported here yesterday, goes into index and tech funds.
*** The euro slipped below 97 cents, down 18% since its debut. The French franc, which follows the euro, is trading at 6.74 to the dollar. My rent is down nearly 20% since I signed the lease on our apartment in August. But I doubt it will last. I believe, with absolutely no evidence, that there is a hidden agenda among central bankers — to hold the dollar and the euro in close proximity.
*** I reported that Bulgarian stocks rose 434% last year. Justin Ford wrote to remind me why. Steve Hanke, contributing editor to our own “Fleet Street Letter,” helped the Bulgarian government set up a currency board in 1996.
*** Currency boards link the local currency to, usually, the dollar — greatly reducing the threats of inflation and devaluation. Bulgaria’s Brady bonds rose 50% in less than a year after the currency board system was established. Argentina’s stock market more than tripled after Hanke advised the Menem government to set up a currency board. And stocks in Hong Kong grew 2,100% in the 14 years following the institution of a currency board there in 1983. “Where is the next currency board going in?” I asked Justin.
*** Yesterday I forgot to tell you something very important — perhaps life changing. Feb. 29 is the only day on the calendar on which it is acceptable for women to propose to men. But since I forgot to mention it yesterday, I think it would be okay if you proposed today instead.
*** The candidate who pledged to always “tell the truth, no matter what” accused Pat Robertson and Jerry Falwell of being “corrupting influences on religion and politics.” Political analysts described these attacks as a “calculated gamble.” Apparently, the calculations were off — McCain lost all three races yesterday.
*** Earth scientists know about as much about climate as I know about the stock market…or women. I have a lot of information, but no proven theory for how they work and no way of making a sure prediction. There is a pine forest in Michigan that is buried in sand. Scientists say that it indicates a dramatic, swift climate change 10,000 years ago. Within 25 years, glaciers melted, filled the lakes and pushed the sand over the forest.
Meanwhile, scientists in Siberia have dug a complete, well-preserved wooly mammoth out of the ice. They discovered that the beast had been eating aquatic plants — that were still green — just hours before it died about 20,000 years ago.
What these things indicate is that climate changes don’t have to take place slowly. A meteor may hit the planet. Volcanoes may erupt. Or incremental changes can reach an inflection point — like the boiling point of water — in which the whole character of the system changes suddenly. Stay tuned.