“Don’t know much about the middle ages.
Looked at the pictures and then I turned the pages.
Don’t know nothin’ ’bout no rise and fall.
Don’t know nothin’ ’bout nothin’ at all.”
“What are you working on today…” asked my trusty right- hand man, Addison, this morning.
“I don’t really know,” I answered, truthfully, “but I think it is important.”
Yesterday, we marveled that even a stone at the bottom of the Pacific Ocean…where it could never be found and never seen…might be an effective store of value.
Ignorant of its location…or what it looks like…or its weight…color…geological make up – ignorant of everything about this stone, even its actual existence, Yap islanders would nevertheless trade it for valuable, tangible, consumable assets.
A private investor, buying a business, rather than a submerged stone, usually has access to much more information. He is able to go on location and ask detailed questions – often of the employees as well as top management. He is able to inspect the books, usually, and verify key numbers through independent audit.
He also typically buys a business that he understands. He has what Nietzsche called “erfahrung” – direct, personal knowledge. Often a guy who began his career pumping gas will eventually buy up other gas stations. Printers will buy other print shops – or maybe expand into related enterprises.
Erfahrung reduces risk. The more real knowledge you have – the more able you are to guess about what the business may do in the future. But even with thorough research before the check is sent, my experience is that only about one of two purchases works out as you expect.
Buyers hedge the risk by demanding low prices. Private purchasers in the publishing business, for instance, may pay only 3 to, say, 10 times what they think the business will produce in profit annually.
But in the public markets, a stock buyer has no personal experience…and no ability to closely examine, or make sense of, the business. Instead of erfahrung, he has to rely on “wissen,” the same sort of collective ignorance that politicians, busy-bodies and editorial columnists rely upon.
David Ignatius, executive editor of the Washington Post and columnist for the IHT, of which the Post is half owner, recently visited a meeting of oil companies in Venice.
“One executive explained for me the paradox of $35-a- barrel oil,” he writes, describing how markets work as though he had discovered it for the first time in his life. “In this topsy-turvy industry,” he notes, a Promethean light striking his frontal lobe with unaccustomed force, “executives have to make billion- dollar investment decisions for the long run based on a price that fluctuates wildly over the short run.”
Oil executives, like stock market investors, labor in a penumbra of ignorance only slightly less somber than the total blackout at the IHT editorial office. Despite the explosion of information…the bandwidth-a-plenty described by George Gilder…and the vanishing cost of data transmission, oil executives can’t tell you whether the price of oil is going up or down. And investors, no matter how many computer screens they have in their family recreation rooms, cannot know whether they would be better off betting their next $500 on a doggy tech stock or a nag at Pimlico racetrack.
Newspaper editors, like public market investors, seem to have no direct experience with anything. Instead, they use big, dumb words that give them the pretense of knowledge. Technology, Globalization, Global Warming, Democracy, Terrorism…the words mean almost nothing – or anything you want them to mean. They are empty, puerile and misleading. But they are the building blocks of collective thinking…piled one on top of another…and capped with a stone inscribed with the first plural pronoun – “we”.
“We need to get serious about the election,” writes Ellen Goodman. “We should support marriages,” says Linda Waite. We need to act like a “grown-up nation” says Paul Krugman. We need to look more carefully at globalization, says Robert Samuelson. We “can no longer run away from the ugly realities of the shadow war directed against [America],” says Jim Hoagland.
But, rest assured I am not writing today’s letter about the editorial page of the International Herald Tribune. My subject today is ignorance, which is the only reason the IHT leaped into my thoughts.
The investor in publicly traded stocks relies on the same sort of knowledge as the editorialist – wissen… indirect, abstract, collective ‘knowledge.’ If there is an ‘oil crisis’ in the news, he expects his oil stocks to do well. If ‘technology’ is increasing productivity as Alan Greespan says, he jumps into Juniper Networks or Amazon.com.
And yet, he really has no idea what the future will bring. He makes an investment that he hopes will bring him more money…but he has no way of knowing what will happen. Nor does he even know what money is! He can count his wealth in dollars – but what are they really worth? What will they be worth tomorrow? Are they really any different from the Yap stones at the bottom of the ocean – which might as well be imaginary, and have value only as long as people agree that they have value? Thus, the money itself is a sort of collective illusion.
People buy stocks whose SEC reports they have never read, in industries they do not understand, with products they have never used, run by people they’ve never met.
And then they measure their success in terms of dollars of whose real value, if there is any, they are completely clueless.
But so what?
“The problem with your views,” said my wife Elizabeth, who finds many problems with my views, and probably speaks for a fair number of Daily Reckoning readers “is that you are so cynical about everything. A person has to make decisions. You can’t just go hide in cave somewhere…”
Yes, you have to make decisions. And you can’t always have the flashlight of erfahrung in your hand. So what do you do?
Tune in next week for…
…”why it’s not a good idea to kill people, or buy ‘must own’ tech stocks at 200 times earnings”…
…and “what you should do with your money now, without any illusions about being able to predict the future”…
…and “why America’s currency is an ‘accident waiting to happen'”…
…and more about gold, too…and politicians…and newspaper columnists…and…and…
…I’d better stop…my brain hurts.
Your humbler and humbler servant,
Bill Bonner Paris, France October 20, 2000
P.S. Best wishes for a beautiful autumnal weekend. I will leave you with the same advice that James Cramer’s wife gave him: If you feel the urge to buy the Big Techs and dot.coms at today’s ‘bargain’ prices – go out and rake some leaves.
*** “The worst is now over,” said a Lehman Bros. analyst. “The perception is that the market isn’t going any lower,” said another analyst to a Reuter’s reporter. We’ve just witnessed the “capitulation” of the bear, said yet another.
*** Whew! I’m glad that bear market is over.
*** Investors went to Redmond, yesterday, searching for a heart of gold – and they thought they found it. Microsoft said earnings rose more than expected and its Windows 2000 was selling as forecast. So, MSFT shares shot up almost 20%.
*** Nokia gave out similar good news – and its share went up 27%.
*** The Dow rose 167 points on the good tidings to close well above 10,000. And Nasdaq rose a stunning 247 points to close even weller above 3,000.
*** Intel climbed almost 10%. Broadcom added $24.75 to its share price. Cisco and Yahoo were each up about $6. Sun Micro rose almost 7%. LSI Logic jumped 23%.
*** Advancing stocks beat declining ones more than 2 to 1 – 1949 to 927. But the number of new highs was still disappointingly low – just 28, compared with 94 new lows.
*** The bullish sentiment even carried over to the old economy as Gillette posted a 17% gain after its CEO said he would leave.
*** This was the 3rd largest gain ever for Nasdaq. Of course, the 2nd largest gain and the first largest gain also occurred during this year. And so far for this year the index is down 18.4% – even after yesterday’s gain.
*** The Dow, meanwhile, is down 12.4% for the year.
*** What’s going on? Is this rally going to chase Mr. Bear back into his cave for an early hibernation? Will the indexes recover, as Abbey Joseph Cohen forecasts? I don’t know…but at least I know that I don’t know…and what to do when I don’t know. More below…
*** Not all the stock news was good yesterday. AOL lost $1.47, off 3%. Apple lost 6%.
*** Even after its surge yesterday, MSFT is only worth about half as much as it was last December. Analyst Doug Cook increased his target for earnings per share from MSFT but decided it was time to move his price target from $90 to $65, “to reflect the correction in the market.”
*** Henry Blodget, a longtime AOL bull, noted that the company was “clearly seeing the impact from the dot.com shakeout.”
*** Does anyone take these analysts seriously? I hope not. Wasn’t Blodget the one who said Amazon was worth $200?
*** “Clearly, the great consumer goods companies that were hailed as the ‘winner-take-all’ companies of the globalisation movement of the 1990s have fallen on hard times,” writes Marc Faber. “Why is this the case? After all, the 1.2 billion Chinese and 1 billion Indians are increasingly purchasing soaps, films, razorblades, soft drinks, and jeans. In this respect, I remember well an investors conference hosted by a major investment bank in 1997 in the Bahamas at which companies such as Kellogg, Gillette, and Coca-Cola were touted as the ‘must own’ stocks of the future. Why have these companies performed so poorly since then?”
*** “We’re an investment bank that knows technology,” says the ad for Goldman Sachs on FT.COM, “or is it the other way around?” You’d think they would know the difference between a bank and a tech company. Goldman has hitched its wagon to ‘Technology’ the way the Chase Manhattan Bank once hitched itself to third world debt. Good luck.
*** But Alan Greenspan assured investors yesterday that all was well – investments in high tech have held down inflation…and there’s little evidence that this investment surge is coming to an end. What’s more, said the former jazzman, higher oil prices are not yet posing a threat to the economy.
*** Also buoying investors’ spirits yesterday was the news that the trade deficit shrank in August. But this might not be the good news investors think. The trade deficit is an indirect measure of how much Americans are willing to go into debt. When they are feeling rich from the ‘wealth effect,’ they do not hesitate to spend. But when the ‘wealth effect’ turns negative, so does their willingness to part with cash or turn to credit.
*** The ‘wealth effect’ has turned sharply down this year. Half of the nation’s families own stocks. And stocks are down, on average, at least 15%. The most popular ‘must own’ stocks are down a lot more – like MSFT, AMZN and INTC…down 50% or more.
*** So consumers are beginning to de-leverage themselves. And the real economy – like the trade deficit – is feeling the effects. USA Today reports the Coca-Cola Co. is laying off 5,000 workers. Ingersoll Rand is laying off 4,000. And 6 of the nation’s largest movie theatre chains have declared bankruptcy in the last 13 mos.
*** Outside of the smoky information technology sector, manufacturing output in America has been stagnant for the last 3 years. “Excluding high-tech,” writes Caroline Baum on Bloomberg.com, “manufacturing output, which accounts for 88 percent of industrial production, is at the same level as it was in October 1999, according to the Federal Reserve. High-tech output is carrying the entire factory sector on its shoulders, with a 52.8 percent year- over- year increase in September from a year earlier…. Output of motor vehicles and parts plummeted 20 percent at an annualized rate in the third quarter, the first quarterly decline since the first quarter of 1999 and the biggest since the first quarter of 1996, which coincided with a General Motors strike.”
*** And even in the computer sector there are signs of a slowdown. Apple announced a hiring freeze last week and Intel said it would be “far more cautious” in the months ahead. Our guess is that consumers are going to be more cautious…and investors, too.
*** It is, after all, the Autumn of Anxiety. Caroline Baum adds this note: “Paul McCrae Montgomery, a market analyst and money manager at Legg Mason Wood Walker Inc., had studied the literature of cycles and knew some theorists found the power of the autumnal equinox, when the length of days and nights is equal, to be compelling. He never took it seriously, however, until he read some research from the Department of Neuroanatomy at Yale Medical School. ‘They found that the human nervous system typically undergoes measurable perturbations,’ coincident with the vernal and autumnal equinoxes, Montgomery says.”