Que Sera Sera

Emotions interfere with investment judgment (not to mention everything else in life). Would we be better off without them? Would the purely rational man be a superior man? Maybe even the ‘new man’ of the Marxist imagination?

Imagine the discussions with your teenaged children – without drama, heartaches, or emotional eruptions. No more Vesuvius at the dinner table. No more Krakatoa at breakfast. No Mount St. Helens at lunch.

Without the force field of emotion to persuade the data in one direction or another, an investor could coldly calculate the pros and cons…weigh out risk and opportunity…as analytically and honestly as a butcher without thumbs or a stockbroker with a conscience.

Matt Ridley, in his book, The Origins of Virtue, cites a remarkable study of brain-damaged people. “There is a small part of the pre-frontal lobe of the human brain,” he says, “which, when damaged, turns you into a rational fool. People who have lost that part of their brain are superficially normal. They suffer no paralysis, no speech defect, no loss in their senses, no diminution of their memory or general intelligence. They do just as well in psychological tests as they did before their accidents.”

This sounds pretty good, so far, but he continues, “Yet their lives fall apart for reasons that seem more psychiatric than neurological…They fail to hold down jobs, lose their inhibitions, and become paralytically indecisive.”

“But this is not all that happens to them. They also literally lose their emotions. They greet misfortune, joyful news and infuriating checks with equanimity and reason. They are simply flat, emotionally.”

In short, a person with this kind of brain damage is a less-than-ideal candidate for a game show contestant. He would not jump and up down as expected. Nor could he be relied upon to hug his wife or bring a tear to his eye at the appropriate moment.

Nor would he be an ideal investor. “Patients become so cold-blooded about rationally weighting all the facts before them,” says Ridley, “that they cannot make up their minds.”

What a shame. A small operation on the brain – and whammo, you might be as good an investor as, say, Warren Buffett before 1997. Or, maybe Jesse Livermore before he went bankrupt.

But it won’t work. Because the more you greet the world with equanimity and reason, the more the world confounds you with facts. There is an endless supply of information you must throw into the balance. The Internet merely speeds up the delivery and lowers the cost.

But “this time IS different” writes my old friend, partner and school chum Jim Davidson in Strategic Investment.I have yet to read a persuasive argument for why or how this‘new era’ really is different. But if anyone could make such a case, Jim could do so. His powers of reason and rhetoricare compelling.

“My basic contention,” says Jim, “is that the advent of the Information Economy has fundamentally changed the conditions which contributed to the bust phases of previous asset booms.”

Why? Because “as New Growth theorists like Paul Romer have shown, ideas are not only more important in realizing value than economists have traditionally thought, they are also less subject to diminishing returns than physical capital and labor.”

As near as I can tell, Jim believes that the data, facts and ideas now so prodigiously being loaded on the scales of reason will produce a self-reinforcing prosperity of the sort the world has never seen.

Why this would be so, I do not know. But I do know that Jim’s reasoning once led him to a very different conclusion. “I spent years looking through the telescope the wrong way around,” he confesses. But “at the end of the day,” he writes, having finally turned the telescope around, “one must be either exceedingly smart or downright stupid to persist in a practice that is as economically punishing as being globally bearish was in the 1990s.”

Jim was definitely wrong in the 1990s, though I might have forgotten to tell you at the time. But is he right now?

Jim is aware of the tug that emotion exerts on reason. “If I were fully self-aware,” he writes, “I would admit that at least part of my new attitude might reflect wishful thinking, in that I have extensive investments in high-tech companies which I wish to see come to fruition.”

‘Where thy purse is, there also is thy heart’ it says in the Bible. This little gem of wisdom is like the Lost Dutchman mine – neither Bible scholars nor I have ever been able to find it. (Perhaps it doesn’t exist…but it certainly should.)

But none of us live, as Jim puts it, “immaculately in a textbook.” We all have hearts and purses. Even I have an investment of sorts – a reputation for believing the New Era is nonsense. I would not want my reputation destroyed, anymore than Jim would relish the destruction of his New Era companies.

And so perhaps it is back to reason, after all. And luck. What more do we have to work with? Que sera sera.

Your exceedingly smart, or downright stupid, but in any case hopelessly devoted man-on-the-scene, down on the farm in Ouzilly, France…

Bill Bonner Ouzilly, France July 3, 2000 P.S. Why doesn’t reason work better? Because the reasoning process is not digital. We do not pile facts upon facts…as though we were building a pyramid. Instead, we know and understand things by analogy. That is, we understand things creatively, not logically. In a moment of recognition, we say, ‘Oh that is like…’ That is why it is so hard to talk to people about the politics…and why intelligent people of good will and good judgment may disagree about almost everything. They use different analogies to understand the world around them – which leads to very different conclusions about how things work and how thing should work.

*** The Dow fell a bit on Friday. The Nasdaq rose a bit. More than a bit, actually – 88 points.

*** The week ended with the Dow up nearly half a percent. The Nasdaq rose more than 3% over the week.

*** More stocks rose than fell during the course of the week – 1917 vs. 1421. Is this a bear market? Yes…but it’s the strangest bear market ever. Which makes sense…because the bull market was the strangest, the most extreme, in history, too.

*** We’re in a period in which stock prices are mostly falling. But it’s the ‘summer of love.’ People still think that everything will get better. Sure, the Internet stocks are getting crushed. The e-tailers, B2B, and content sites seem on the verge of bankruptcy…but everyone now claims to have realized that their valuations were insane…and maybe they should never have been taken public in the first place.

*** Following the ‘summer of love,’ most likely, will be the ‘autumn of anxiety’ and the ‘winter of our discontent.’ But that is, of course, in the future… and we seen into the future darkly, if at all.

*** “An unusually high number of companies have already put Wall Street on notice that they may fall short of profit estimates,” says today’s Reuter’s article. The New Era, as I explained in an earlier letter, may produce marvels, but profits are not among them.

*** Dell computer reported a very healthy earnings growth in the last quarter. According to the company, earnings rose to 19 cents per share, well above the expectation of 16 cents. David Tice, writing in Strategic Investment, reports, however, that “a closer look at the numbers reveals that despite rapid sales growth, EPS grew only 6% when gains from investments were removed. That’s hardly the typical growth rate for a company with a 70 P/E.”

*** Well, at least it has earnings. And at least they are growing. In fact, Dell – one of the leading “New Economy” companies – has earnings growth very near to the average growth rate of corporate earnings for the last 40 years – 5.7%. Maybe ‘new’ is not-so-new, after all.

*** Bees go where the honey is. In the mid-90s only 6% of IPOs were for foreign companies. But in the first half of this year, nearly a third of the money raised on Wall Street through IPOs was destined for overseas firms.

*** Gold rose 80 cents on Friday. Platinum, whichHarry Schultzsays will go to $800 before the end of the year, rose 50 cents.

*** Today, the purchasing managers will give their number – showing the rate of price increases at the wholesale level. But, on the eve of the 4th of July, few people will be on hand to react. Friday, payroll numbers will be disclosed.

*** And tomorrow, Japan unveils its Tankan Report. This document is supposed to pave the way for the elimination of Japan’s zero interest rate policy. Free money from Japan, lest we forget, has been one of the major contributors to the U.S. hyper-bull market.

*** What else is interesting? Hmmm…100 years ago yesterday, Jean Sibelius premiered his “Finlandia” – one of the great achievements of musical history. And Hemingway committed suicide on this day in 1961.

*** Last evening, I was working on my own music – practicing my version of Jimmy Roger’s ‘blue yodel.’ I believe I am the best blue yodeler in the greater Lathus area. I was by myself on the veranda. But the animals seemed to like it. The cows bellowed and the chickens squawked. Or maybe they didn’t like it.

*** It’s summer vacation time in France. Everyone who could left Paris on Friday evening or Saturday. I got down to Ouzilly in time to meet the group of International Livingsubscribers who were learning how to cook a la francaise under the tutelage of master chef Jean Rouget. I’ve been eating their delicious leftovers all weekend. But Edward, 6, took a bite out of the terrine de saumon and pronounced this verdict – ‘yech.’ Edward is no gourmet.

*** While the Parisians begin taking it easy, the farmers are working almost around the clock. It’s `peach pickin’ time in Georgia’ for them.