Buy Low, Sell High
*** The last few months have been marked by disappointment and the reluctance of investors to give up on the dream of easy money.
*** Nortel was the latest victim of investors’ frustration. The poor company posted only a 90% increase in sales over the last year. Investors had expected 120%. So, the stock was punished with a 29% drop – effectively splitting the stock, the hard way, over the last 3 months.
*** The disappointment was felt first in the Nasdaq where the dreamers have focused so much of their REM waves over the last few years…but soon moved to the Dow…and then to Asian markets.
*** The Nasdaq lost 190 points, or about 5.5%, in the 3rd straight loss for tech stocks. The Dow lost 66 points.
*** Declining issues outnumbered rising ones on the NYSE by a 2 to 1 margin.
*** In addition to Nortel, Cisco fell $4. Broadcom fell $21. And Yahoo lost $3.
*** Lucent dropped another $1.50. It is now barely over $20. PMC Sierra fell $37.75, or 19%.
*** Conspicuously absent from the bear’s victims was Amazon.com – which reported better than expected results yesterday. Instead of losing 26 cents a share in the latest quarter, as it did last year, the ‘River of No Returns’ stock only lost 25 cents a share. At this rate, the company will breakeven in 2024. On the strength of this good news, AMZN rose about 8% to almost $32.
*** But while stock investors dream, bond investors are wide awake. They’ve priced Amazon’s bonds to yield twice the going rate – betting that the company has only about a 50/50 chance of survival.
*** “If [Amazon.com] – with a strong brand name, 25 million customer accounts and Madonna-like ubiquity – is poised to become the Wal-Mart of the Internet,” asks columnist Borzou Daragahi in Money.com, “why are so many people saying so many nasty things about it?” Well, the writer continues: “the company’s market cap remains 10 times that of profitable bookseller Barnes and Noble’s and its price/sales ratio stands at quadruple Walmart’s; and the company keeps scaling back expectations.”
*** In the Far East, Samsung Electronics felt the bear’s hot breath down its neck. Shares fell 9%.
*** It is not only on this side of the globe that dot.com executives are ‘unsavoury.’ The Financial Times reported today that executives of a Japanese company, Liquid Audio, kidnapped a rival. They handcuffed and blindfolded him…and eventually released him in the woods.
*** This latest drop in the Nasdaq triggers another round of bottom-searching. Investors believe that stocks tend to register their lows in October. But Richard Russell notes that this has not been the case in at least 17 different years since 1937. “The constant search for bottoms,” writes Bill King, “is the most pernicious aspect of bear markets.” Investors, trained to buy the dips, keep looking for the bottom of the dip – and are disappointed.
*** Almost everything was going down yesterday – except bonds. Gold lost $4.20 – bringing it to its lowest point in more than a year. The XAU, the gold mining index, hit a record low of 41.83 yesterday. Even oil went down 41 cents. And the euro hit another record low of 82.46 cents.
*** Meanwhile, the GDP report will come out tomorrow. “Be prepared for a fairly dramatic slowdown,” advised Robert McTeer, president of the Dallas Fed.
*** What are these things telling us? The economy is slowing. Stocks are erasing trillions worth of assets. Gold is shriveling. And the dollar, and dollar-based bonds, are triumphant? Are these indicators of deflation… or the bottom of a dis-inflationary cycle before inflation surges again? I don’t know. In fact, I don’t even have an opinion. But see below for why you don’t have to have an opinion…
*** “As early as 1985,” writes Dr. Kurt Richebacher, “We warned that the first weakening of U.S. economic growth would initiate the dollar’s collapse. In fact, stopping the dollar’s surge in 1985 by joint intervention actually cost the central banks less than $10 billion of their reserves. But to prevent the dollar’s freefall in 1987, they had to buy almost $100 billion in a single year and several hundred billions in the following years.” The credit excesses of the 1990s, says Dr. Richebacher, and the increasing imbalances in the financial system (i.e. the current account balance) have made the likelihood of a dollar collapse far more imminent today than in the late 1980s. (see: Freefall of the Dollar – a la 1987 )
*** “Assuming the revenue prediction for 2005 provided recently by Cisco’s management – a cool $50 billion – is met,” Rick Ackerman reports, by way of Kevin Klombies, “Cisco would likely have operating income per share, after taxes, of about $1. Let’s see…this company trades at close to 50 times 2005 earnings. Lovely.”
*** “There’s a silver lining in a market like this,” writes Porter Stansberry. “The high interest rates that the Fed is imposing and the tough conditions in the capital markets are very healthy in one respect: they weed out the folks that shouldn’t be in business at all, freeing up capital for those who should.” Well, yes. That sounds rational. Too bad investors are not rational. When they get scared…there will be little money around for any businesses, good or bad.
*** “Buy me some Cisco and AMCC…” writes William Fleckenstein, taking up the tune of ‘Take Me Out To The Ball Game’, “…I’m not scared of a sky-high P/E”.
“The other day,” he continues, providing evidence for what he calls the ‘Mania Chronicles’, “after one of his players hit a home run, New York Mets manager Bobby Valentine said: ‘It’s kind of like getting in early on an IPO – immediate returns.’ Not to be outdone, Seattle Mariners manager Lou Piniella apparently joked to one of his players just before he stole second base, ‘I told him that the Nasdaq was down 113 and Cisco was a helluva buy.’
*** Yesterday was the anniversary of the Battle of Agincourt in 1415. A force of 5,700 English soldiers, mostly archers armed with longbows, defeated a French army 4 times as large. The bowmen destroyed the heavily- armed French as they labored towards them through the mud. Technology is sometimes decisive in politics…but not often in investments.
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BUY LOW, SELL HIGH
There are a number of rules to successful investing. Cut your losses. Never meet a margin call. Diversify. Invest only in things you understand.
Jesus reduced the moral laws to just two over-riding principles: love God and love thy neighbor. Investment rules can be reduced to a single principle too – buy low, sell high.
Most people have no problem with the first part of this formula in their private lives. When they go to the grocery store, they don’t buy the soap packages that advertise: “Now, one-third less cleaning power!” They don’t pick up the bottles that proclaim: “Special Bonus – 20% fewer ounces!” They don’t rush to buy up the cereals that offer “half the flakes at twice the price.”
Instead, they seek value for their money – more, better, new & improved products…at lower prices.
This is true of business people, too. It is a rare purchasing agent who gets promoted for buying ‘leaders in their field,’ or choosing a supplier because ‘it has been going up in price’. Even in their professional lives, people want value for money. They shop for the best value in their computers. They bargain with suppliers for better deals. They will work for hours, days, weeks, to get a small reduction in the price of their raw materials.
Buying a business is no different. If you went out to buy the corner gas station or funeral parlor…you would want to examine every detail and make sure you were getting value for your money. You wouldn’t rely on a stochastic chart or media buzz. You’d want to make sure you were getting something that would pay off. If you couldn’t get the information you needed, you’d probably pass…and go look for another business for sale.
In all these transactions, people think as individuals… using direct, personal information and experience (erfahrung)…and make their decisions as though ‘the market’ did not exist.
But most people approach investing in an entirely different way. They are no longer interested in value for money, because they have no idea what value is…or how much of it a dollar should buy. Instead, they make their investments – as if investing were voting or a team sport – using mob-thinking and the collective knowledge (wissen) of the financial media.
Even Al Gore and David Ignatius, as well as Abby Cohen and Henry Blodget, drive on the right hand side of the road, close their doors in the wintertime, and avoid the dark alleyways of S.E. Washington. I don’t know any of them personally, but I see no reason to doubt that they are smart people…they may even have a sense of humor. Like everyone else, they are not likely to be drawn into a store that advertises: GOING OUT OF BUSINESS…PRICES MARKED UP 50%!
And yet, collective thinking turns them all into jackasses. This is not a matter of opinion – it is simple fact. Gustave Le Bon explains (courtesy of Marc Faber):
“The reasoning of crowds is always of a very inferior order…however great or true an idea may have been to begin with, it is deprived of almost all that which constituted its elevation and its greatness by the mere fact that it has come with the intellectual range of crowds and exerts an influence on them.”
Crowds think like they act – like morons. Even smart people, when they rely on that primitive little part of the brain responsible for collective thinking, become very stupid. Carl Jung made the point: “A crowd of a hundred influential people together make up one blockhead.”
The bigger the crowd, the lower the common denominator of intelligence descends. That is part of the reason that the financial media has been dumbed down in recent years – it is playing to a much wider audience.
Collective thinking is difficult to resist. It is so much more fun to worry about what ‘we’ should do about public health …or how ‘we’ can improve ‘our’ schools…than it is to actually do some exercise, stop eating like a pig and help your children to learn something. And what a thrill it must be to start a revolution and call each other ‘comrade’…and have the pleasure of robbing and destroying ‘our’ enemies…
Collective thinking is what keeps CNBC in business. Investors, cut off from any direct knowledge of the tech industry, for example, and hearing almost every day about how people are getting rich by investing in tech stocks, find it almost irresistible to ‘get in the market’. ‘The Future is Technology’ they’ve been told. Who wants to be left out of the future?
And so they pile into expensive stocks like teenagers in a Volkswagen – and drive off as though they had somewhere to go.
But resisting collective thinking is exactly what is required for good investing. And it is especially important at those moments in market history when the great mass of investors are about to suffer the consequences of their own collective delusions. It is all very well to go along with Napoleon on his march to Moscow…but the trip back will be a nightmare.
How do you do it? How do you just say no to crowd thinking about investments?
Well, you have to approach investing as a private buyer would. You don’t want to ‘get into the market’ or ‘invest in stocks’. You just want to find a decent business. So, you have to do what Warren Buffett does. Ask yourself, would you buy the entire business if you could? Ask yourself that question of General Motors or Philip Morris and the answer might be ‘yes’. Ask it of Cisco or Amazon…well, you can decide for yourself.
You might also pretend that ‘the market’ did not exist. Suppose you would have to sell the stock as though you were selling a used car. You’d have to convince a private buyer that the shares represented good value for the money. Again, you might be able to get rid of your GM shares…but you might have to send your AMZN shares to the junkyard.
And what about gold, bonds, antiques, real estate? You cannot know whether prices are going up or down. Every day, in the Daily Reckoning, we try to understand what is going on in the world…and often guess about which way prices are likely to go. But you don’t want to base your investments on those guesses. You need to stick to the rules – and buy only what makes sense as a good value, such as the ‘Darned Cheap Stocks’ I mention from time to time in these letters. Then, you don’t really care what happens to the collective ‘market’ – you have investments that you are happy with.
Does this sound too ‘straight and narrow’…too dull and boring…too Calvinist? Perhaps it is. But it doesn’t mean you can’t take some of your money and bet on a tech stock…or on the crap tables in Las Vegas. You don’t want to take money too seriously, or you’ll end up stuck in the eye, unable to get into heaven.
But it’s a good idea to understand the difference between investing and entertainment – just as you understand the difference between sin and wickedness.
There’s a time and place for everything.
Your preachy correspondent…still trying not to be a Calvinist sourpuss,
October 26, 2000