Intellectuals' Capital

Information and knowledge are greatly over-rated.

I once knew a man who, for some un-diagnosed reason, was able to remember every hour of every day of his life.

“Do you remember when we went to Georgetown…” I asked him in the summer of 1969.

“Oh yes,” he replied after a moment of reflection, “it was on July 13, a Thursday…we left at 9:28PM”

His memory was comprehensive; his knowledge encyclopedic. And yet, as near as I could tell, this idiot savant talent had no known market value – either to him or others. All his life, he remained a man of great potential…a man of the future.

That was the state of things in the early ’70s when a group of free-market conservatives in the Maryland suburbs of Washington needed a candidate to run for Congress – on short notice. The man short-listed for the job had been caught in some peccadillo the only resolution of which seemed to be early retirement – leaving the field open to anyone who could not find honest work elsewhere.

Desperate for a last-minute candidate, the local hacks noticed that my acquaintance, John, was without gainful employment. They asked him to run.

I have devoted several of these letters to the concept of intellectual capital, for which I offer no apology. Instead, I will give you a promise: this will be my last.

The idea of intellectual capital – when applied to justify outrageous stock prices – is a bezzle, dear reader, a swindle, not unlike the many other ‘new metrics’ which were used to pick investors’ pockets.

Not that cleverness, knowledge and wisdom cannot be used to make money. A man with a good head on his shoulders, especially one that is packed with useful information and experience, can get up to all sorts of mischief – including many things that are profitable.

But he also might do nothing at all. Or worse, write pretentious drivel such as:

“Information, after all, represents the treasure of the modern age, as valuable as all the doubloons and bangles of the previous eras.”

Steven Levy, Crypto

Information can come in handy. But its usefulness depends entirely upon the context. You might have gotten an audience with Julius Caesar just after he crossed the Rubicon in 49 BC and revealed to him the secret of making an atomic bomb. Yet, he would much rather that you could tell him the disposition of the troops facing him.

In the abstract, knowledge of the atomic bomb formula must have far more intellectual capital behind it. But, out of context, it is useless.

Worse, information and knowledge are like tourists on a crowded sidewalk. They get in your way – distracting you with their inappropriate get-ups and retarding your progress with their sluggish pace. They are only valuable to merchants who entice them into a buying some gee-gaws at absurd prices.

And yet, it is widely accepted that information is roughly the same as gold bars …and that knowledge is not much different from real capital.

“In the past,” wrote economist Lester Thurow, a man who can be counted on to come to the wrong conclusion on just about every issue, “when capitalists talked about their wealth they were talking about ownership of plant and equipment and natural resources. In the future when capitalists talk about their wealth, they will be talking about their control of knowledge.”

At least when you put a stack of gold coins on a table, you can fairly easily judge its authenticity and value. But knowledge? It might just as easily be a pile of slugs as kruggerands. Knowledge, unlike metal, is difficult to assay.

You can dig into a plate of choucroute jambon or roti de porc at any almost any restaurant in Paris. You can judge the knowledge capital of the chef for yourself. Or, you can hire a painter, or plumber, buy a book or a software program – in every case, the intellectual capital behind the scenes is evident in the thing itself.

But ‘intellectual capital’, in the abstract, like ‘knowledge’, is simply a cloak for rascality. Most of it is as empty and worthless as a’s coffer.

But back to my story…

At first, it looked as though he might have a chance. John carried himself well. He seemed to be able to offer the proper expressions of concern at the appropriate moments. And his formidable archives of personal experience and book learning seemed to provide an infinite library of anecdote and information upon which he could draw.

“What about rising oil prices,” the press asked him.

“Oh yes,” he replied, “as the Wall Street Journal said on page 23 of the June 13 edition, down at the bottom of the page…” and then would he would quote the section as though he were reading it.

But gradually, it became apparent that this walking database had an impediment that even a vast archive of quotidian recollections and abstract knowledge could not overcome – one that made him entirely unsuitable to a life in politics: His internal word processor had no ‘edit’ function. He answered questions honestly and directly.

A free-market man, before it became fashionable, he was at the height of popularity when asked, on television, if his views were not a little ‘extreme’.

“Yes, they are,” he replied, making a gesture with his right hand for emphasis, and then awakening to the obvious conclusion, “I am an extremist!” he announced.

From there on, the campaign was doomed. Even prodigious acts of gratuitous knowledge could not save his candidacy. In the end, John got few votes…and returned to a life of intellectual eccentricity.

Your correspondent…careful not to let too much knowledge get in his way…

Bill Bonner Paris, France January 12, 2001

PS. “For a while, at least, anyone holding stock in Yahoo!…” writes Christopher Byron, “might have thought his or her money to be safe. After all, Yahoo! was and is one of the largest and best-known Internet companies, and it was – and is – one of the most profitable, with $61 million of net income in 1999 and $169 million in earnings for the first three quarters of this year.” Analysts expected Yahoo! to earn $268 million for the full year.

If any company had intellectual capital that did not show up on its balance sheet – it was Yahoo! The stock traded at $250 a year ago. And it has $1.7 billion in cash even today.

But yesterday was not a good one for the world’s leading Internet pure play. The company announced that growth has declined from a spectacular 88% last year to an expected rate of 18% now. Investors, for a moment, seemed to forget about the intellectual capital, the knowledge, and all the information in Yahoo!’s data banks. The stock fell as much as 21% following the announcement…and now trades at a price nearly 90% lower than last January.

Even at $25, few value investors would see much value in Yahoo!. Multiplying the share price by the number of shares outstanding gives us a market price for the whole company of $14.4 billion – or 66 times earnings. Why would you pay 66 times earnings for a company growing at 18 percent per year?

Well, maybe it has a lot of intellectual capital.

“I started with only $10,000, and it has gone on to make as much as $5 million in a single year. This gave me a taste for the wealth that venture capital investing could generate.”

– Jim Davidson, Strategic Opportunities

That same $10,000 invested at 9% would only be worth $114,000. But because the company started with that “seed money” has prospered – it’s now worth many millions. Last year’s profit alone was more than 50 times $114,000. You simply can’t make that kind of money by pinching pennies.

And that’s what Strategic Opportunities is all about; catapulting your wealth with strategically placed investments in high growth companies – at the venture capital level. For more on…

*** Well, it’s almost just like old times on Wall Street. Companies report that their sales are falling and profits are squeezed – and investors hardly care.

*** So it was yesterday when Yahoo! gave investors little to cheer about…and Hewlett-Packard also admitted that things were not going as well as expected. The two companies were taken down… Yahoo! got whacked for a 15% loss. Otherwise the good times continued to roll.

*** The Nasdaq gained 116 points. It is up 7% for the year. The Dow ended the day up 5, fighting the suction of Old Economy moneymakers such as Philip Morris, which was down $2.50.

*** The Industry Standard believes it has spotted the “Light at the end of the tech tunnel,” as investors appear to be rotating funds from the Old Economy back to the new one. “We are trying to find a bottom,” said one analyst quoted by Reuters. Cisco rose almost $3 to close above $39. TheStreet’s Internet index bubbled up nearly 5%. And many, many other Big Tech…and Internet companies registered strong gains.

*** Sentiment seems to have turned more bullish – at least for now. Investor’s Intelligence reports that the percentage of bulls is at its highest level since early November. Ed Hyman at ISI Group also reports rising bearishness.

*** Still, perhaps in the middle of the night, investors must wonder: Could it have been as easy as that, to correct a bull market nearly two decades long…one that took the Dow from under 1,000 to more than 11,000? The boom created a whole new class of ‘dude billionaires’ and changed the financial habits of an entire generation of Americans… adding nearly $9 trillion to the nations debt and credit within the last 5 years alone; could its excesses be so painlessly forgotten? Maybe not, dear reader, maybe not.

*** “One might have expected folks to learn something from the damage that’s already been done,” says Bill Fleckenstein, but “these really aren’t markets – it’s just a casino.” Still, “…for those folks who are overextended, you are getting a once-in-a-lifetime opportunity, for however long this rally lasts, to get your financial house in order. Regardless of whatever prestidigitation happens in the short run, we are headed for an economic and financial market calamity of epic proportions. All we have succeeded in doing thus far is delaying the day of reckoning, thereby ensuring that it will be worse than it had been.”

*** This is whisper season…when analysts and brokers speculate about what earnings companies will report. But the whisperers have recently changed their tune. Forbes reports that “whisper estimates flowered in the bull market. Usually higher than the official Wall Street consensus, they justified pushing stock prices ever higher. Now that’s begun to work in reverse, moving into uncharted territory.” Psst… It is rumored that eBay won’t report 7 cents a share of earnings on Monday, as forecast, but only 5 cents. And on Tuesday, Intel, it is whispered, will not announce earnings of 38 cents a share, but only 36 cents.

*** Another rumor has it that “work/life employee retention provider” laid off 50% of its workforce Wednesday – about 35 employees.

*** And here’s something interesting: Forbes also reports that the Internet company with a name one dare not speak in polite society, F*, has decided to auction itself off – on ebay. Bids have reached as high as $9.3 million – proving either that Internet investors are half wits, or they still have a sense of humor.

*** But while a new tech boomlet seems to be underway in the U.S., Japan’s boom of the late ’80s is still deflating. Prices of real estate in Japan’s 4 major cities fell last year – for the 10th year in a row.

*** Yesterday, the yen slipped to a new 18-month low against the dollar. And the Nikkei stock index is barely above its post-bubble low of October ’98. At 13,000, Japanese stocks have lost 67% of their value over the past decade. But that’s the dumb Japanese for you. They must not have had any ‘intellectual capital’. That sort of thing could never happen here, could it? Nah, no way.

*** Trend-setter Titan Motorcycle, maker of custom-made machines, went ‘chapter’ yesterday…seeking the protection from its creditors offered by the 11th chapter of the U.S. bankruptcy code. Shares traded at 3.5 cents on Wednesday.

*** Gold dropped 80 cents. The mining index fell 2%. But the pure gold mining index, HUI, rose 2%.

*** Oil rose $1.84 a barrel as OPEC continues to promise output cuts.

*** “America has seriously depleted both its capital stock and its manufacturing capacity,” writes Dan Denning, recently assuming the helm of Strategic Investment, “We no longer make the things that create wealth, produce new jobs and income, and lead to greater productivity. In short, America no longer manufactures the way it used to. Hard industries like textiles and electronics have been replaced by software and services. And the net effect has been bad for the economy.”

*** And here’s a remarkable quote from a remarkable source:

“Human nature never changes, and that fact is reflected in the mirror of all economic activity, the stock market. All lasting change is incremented, based on unfolding traditions and developing institutions. Revolutionary upheavals may change how the world looks but seldom changes the way the world works. Lasting historical change comes not through tidal waves but through the irresistible creeping tide.”

– Richard Nixon

*** My son Will goes back to college today. I’ll miss him – especially since the container of furniture we shipped from the U.S. finally arrived. I was counting on Will to help me move it. A strong back, as they say, is a terrible thing to waste.

*** Ending this portion of The Daily Reckoning on a high note… last year, almost to the day, I noted that was “in trouble” and suggested you avoid it like you would a Baltimore emergency room late on a Friday night. On January 13th, 2000 it was selling for $11.56… today you can back up the hearse and buy as much dr.koop as you want for just 44 cents a share.