Thank God for big mistakes! Just when things seem to be getting completely out of balance, along comes some colossal blunder to put them back in order.
I described last week how Hitler’s Third Reich, advertised in the late ’30s, to last 1,000 years, was out of business by 1945. The short life span of the Nazi empire is generally attributed to the monumentally stupid blunders of the Fuhrer himself.
Instead of exterminating the British at Dunkirk, he let them escape. Then, instead of destroying the RAF, he tried to destroy London. Then, instead of giving Rommel the forces he needed to close the Suez Canal to the English, he attacked Russia.
By the time of the German invasion in 1941, attacking Russia was already recognized as a proven method of military suicide. It worked for the Swedes, and then for the French. “Russia is an easy place to get into,” wrote a military historian after Napoleon’s disastrous campaign, “but it is a hard place to get out of.”
Just to make sure that the incompetent Soviet Army could destroy him, Hitler committed the number one mistake of military commanders — he divided his army. Then he committed the second dumbest mistake of a military commander: he kept switching his objectives.
I give you this brief review, dear reader, not merely to recite what we discussed last week — but to provide a common point of departure. The question raised on Friday was whether these “mistakes” were the causes of Hitler’s defeat…or whether they were merely the means by which it was achieved.
And lest you think I am wandering way beyond my beat, I will phrase the question in financial terms: Did Henry Blodget just make a “mistake” when he failed to notice that investors might want companies that couldshow a profit? Or was he merely an accomplice to Mother Nature, an instrument by which the fools were separated from their money?
Philosophers among our Daily Reckoning readers may recognize the question as a familiar one: Does man control his own destiny…or not? For the purpose of this letter, I will take the latter view.
The question, at some level, is absurd. How could the course of human history be the product of anything other than the action of man himself? And yet people seem to make such obvious and moronic errors that it seems as if they were driven to it by some instinct of self-destruction — like lemmings periodically exterminating themselves in a march off the cliffs.
What’s more, this diabolical instinct seems to report for duty at the very moment when the future seems the brightest — that is, when it ismost needed! Just when men are most proud, most confident, most expansive in their ambitions and hopes…that is when they make the most lunkheaded judgments.
And who but Mother Nature herself would design such a world? Men are encouraged to apply all their strength, will and intelligence to a given situation. They see it yield before their efforts, thereby flattering their pretensions. And thus puffed up do they strut their way towards a humiliating destruction.
Charts of various manic markets, presented by Marc Faber in his excellent “Boom, Doom and Gloom Report,” all share the same pattern. Prices go up on the left side of the chart and down on the right. They tend to go up and down at more or less the same angle…and the lines tend to end up more or less where they began. Even as the lines near their peak, people continue to buy — even though it is obvious that they are committing a kind of financial suicide.
What’s more, the buyers actually feel good about it — they are convinced that they are smarter than everyone else and that they are going to get rich.
“At one point,” the International Herald Tribune quotes a man named Tim Martin, “I was one of those Nasdaq dreamers who thought I was literally a few months away from being a multimillionaire. I saw the pot at the end of the rainbow and then right before my eyes it was obliterated.”
“How Smart People Make Big Money Mistakes” is a book by Gary Belsky. It describes the many mistakes that an investor can make if he were eager to ruin himself. One of the most common is the unwillingness to take a loss. Instead of taking a small loss, investors will take even greater risks to “get even.”
A study by Terrance Odean, for example, found that investors were 70% more likely to sell winning stocks than losing ones. In a declining market, holding losing stocks is an invitation to disaster. But disaster seems to be what investors want. They had considered themselves geniuses a few months earlier …now, they must ride the market down to the point where they feel like total fools.
Describing the situation following the bull market of the 1920s, the IHT comments: “Investors eventually looked back and wondered whether they had been party to a massive self- delusion and misallocation of capital.”
Hitler’s campaign against France was brilliant. The Fuhrer considered himself a genius for following von Manstien’s plan. Then, at the beginning of the Russian campaign, the inept Soviet Army made him look like a genius again. But it was only a matter of months before the Germans were on the defensive. The sensible route was clear — withdraw and sue for peace. But Hitler would not sell his losing positions. Instead, he chose the maniacally suicidal route: he forbade his generals from giving up an inch of ground.
A year ago, Yahoo!, Cisco and Intel looked unstoppable. But what mistakes did these companies make? Maybe none. And yet, they too have been reduced as if by forces completely beyond their control.
The manias of human history — empires, enterprises and markets — are all corrected by time and “mistakes.” But so are the non-manias…even the everyday exaggerations of fear, anger, pride and self-satisfaction. Finally, life itself is corrected too. By the ultimate correction — death. Exeunt Omnes.
Your correspondent, in need of correction, but in no hurry…
Bill Bonner Paris, France March 12, 2001
*** Yet another rally has exhausted itself. The Big Bottom investors thought they had spotted early last week turned out to be a false bottom. So the bulls are changing their metaphors: “We’re in the eighth inning of declines,” said a broker on Friday.
*** More likely we’re in about the third inning. But we won’t know until the game is over and a new game begins.
*** Friday, the Dow fell 213 points further from Abby Cohen’s target for the year, ending five straight sessions of growth. The Nasdaq dropped 115.
*** Breadth was negative on both the NYSE and Nasdaq, by 2 to 1 on the former and 3 to 1 on the latter.
*** Reasons for the turnaround? Two things happened to worry investors. Intel and Cisco warned investors that business might not be as good as they had hoped. Intel said revenues were off 25%. And Cisco said that the problems it was having may last more than two quarters. Cisco fell 10%; Intel lost 11%.
*** Neither did the unemployment numbers bring joy to Wall Street. Unemployment for the month of February registered 4.2% — just as it did the month before. But investors were hoping for something worse. They’re afraid that if the ranks of the jobless do not swell, Alan Greenspan might take a break from destroying the currency. They’re still counting on another rate cut next week — and will be deeply disappointed if they don’t get it.
*** IBM slid seven points on Friday. GE declined 5%. No two companies pose a greater threat to investors’ money — since so much of it is locked up in these two overpriced shares.
*** I mentioned last week that investors had lost more money on Cisco than any stock in history. A reader challenged me: “Didn’t the money just change hands,” he asked. “Wasn’t there a seller for every buyer?”
*** Alas, most of the people who lose money when a stock goes down are neither buyers nor sellers. At any given moment, only a tiny handful of shares are actually in play. This tiny handful determines the market value of all the shares. In an extreme case, the buyers disappear all together. A stock with no bid is worthless — no matter how many millions of shares remain on the sidelines.
*** Many of the people who lost money as the Big Techs tumbled never even held the shares. Instead, they had options to buy at fixed prices. For example, employees at Yahoo! were given millions of dollars worth of options. But as the stock price fell from $205 a year ago…to $17 Friday…80% to 85% of those options have become worthless.
*** Gold was the star performer on Friday. It rose $5.40. Newmont shares are now worth more than Yahoo! shares…and almost as much as those of Cisco.
*** While the United States is probably in the early innings of its bear market/economic slump…the end of the game may be near in Japan. “Japan’s Economy: The Nightmare Chain Reaction,” warns the cover of a leading business magazine. The country is “approaching a state of collapse” says the nation’s finance minister. After 11 years of trying to spend its way out of a slump — building dams, airports and highways — the Japanese government has piled up debt worthy of an American consumer…equal to 134% of GDP. A crisis seems at hand. Perhaps sensing that a crisis might mark the bottom of the ninth, a Japanese economist quoted in the Financial Times says, “A crisis would be good! Good, good, good, good, good!”
*** And he may be right. But a crisis in Japan may be bad for the United States. Japanese corporations, banks and other institutions own billions of dollars worth of U.S. stocks and bonds. Whether they choose to sell them or are forced to sell them, the effect will be the same: bad, bad, bad, bad, bad.
*** But enough of this gloomy talk! Let’s turn to something more important — the epizootic that is threatening all of Europe:
*** “It’s too late,” Mr. Deshais announced on Saturday morning. He was standing in the courtyard discussing the panic that has gripped farmers all over the continent. “Mr. Bonner,” continued the gardener, “we missed our opportunity. Not only have the markets for live animals been closed, last week they forbade you from transporting animals from one farm to another.”
*** “Yes,” added Pierre, always ready to complain about farmers’ lot, “and they have already arrested a guy in Normandy…and they’re going to put him in prison.”
“What did he do?” I asked.
“He just picked up a few sheep from one farm and took them to his neighbor,” Pierre explained.
“So we can forget about buying our pigs…for now,” continued Mr. Deshais, a twinkle in his eye in anticipation of the destruction of Western civilization.
Later that day, I drove over to the farm coop to buy some supplies. In order to enter the packing lot, I was obliged to drive through a bath of straw soaked in disinfectant. Then, at the entrance to the store, a large pan of water (which I presume contained some form of antibiotic) was placed. Customers had to walk through the water in order to enter the store.
In a nearby town, hundreds of sheep were killed when inspectors discovered that they had recently been imported from England. Around the farm, two concentric rings were drawn — one at 1 kilometer…the other 3 kilometers out. The whole area has been placed under quarantine…disinfected …and will be observed for several weeks. If no evidence of the bacteria is found, they will disinfect the area again and then unlock the quarantine.
Still, no confirmed case of the disease has been found in France!
*** The church choir is revving up for Easter. We practice every Saturday evening. The organist can’t play. Neither the sopranos nor the altos can sing. And we practice in an unheated stone church built in the 12th century — a place so cold and tomblike that I feel we should be singing funeral dirges.
But the acoustics are good. And Pierre (a different Pierre) and I, the only two bass voices, amuse ourselves — singing as though we were members of a paratroop glee club with a weekend pass to Paris.