Sin And Wickedness In The Marketplace


Most people imagine that the market is like an ATM machine that just dispenses cash without debiting your account. You just have to stand at the machine long enough… and you get rich. No brains required.

Yes, of course, the machine sometimes goes on the blink…but it is soon repaired. Best to stay in line even when it’s not working well…so you’ll be ready to collect your money when it starts up again.

This view is the one held by most people today. It is the view that informs the investment decisions of millions of people…and that under girds most of the financial industry. It is a view reinforced by experience… the last two decades of market history provides no serious counter-evidence. Stock prices (almost) always go up.

Keynes once commented that “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves to some defunct economist.” Keynes was, himself, the defunct economist to whom two generations of economist were enslaved. He viewed the economy as a vast machine that could be adjusted by turning a few knobs and pulling a few levers. Thus were his successors chained to their posts at central banks and councils of economic advisors, fiddling with the instruments of their respective economies…and generally making a mess of them…

Now, most economists understand that an economy is much more complex than Keynes imagined. Economies are unbounded systems…they cannot be successfully commanded and controlled, nor even predicted…but merely modeled, based on probabilities. A stock market is the same sort of thing. It is an equally unbounded system. It is not a mechanistic, automatic, wealth-distributing machine. It is more like a living thing. Real investors know that this is so… they give pet names to the different “moods” of the market… anthropomorphically describing it as a “bull” or a “bear.” They know from experience that it can be many things. But it is definitely not a machine.

Richard Russell says that “whatever your weakness…the market will find it.” He often describes a bear market as “vicious” or “cunning” and “out to take as many people down with him as possible.” What machine would do that? Is this just hyperbolic writing…or does the market actually have a mind…a will…and even malicious desires?

The answer is yes. And no. And maybe.

There…I hope that’s settled.

A market reflects and influences the economy that supports it. Not surprisingly, the qualities that make for success in the economy…or perhaps I should say, in real life…are generally those that serve investors well. What works in an economy? Effort, discipline, patience, and humility.

Perhaps no one illustrates these qualities more than the greatest investor of our time – Warren Buffett. Buffett (still) works extremely hard getting to know every detail of the businesses in which he invests. He does not invest on hunches. He does not guess about which technology is likely to succeed. He does not check out the buzz on Internet chat rooms. He applies a discipline and training that he has worked on for many years.

When he decides to invest in a company, he does so recognizing that it could take many, many years before his investment really “pays off.” He’s very patient. And he’s smart enough to be humble. He does not invest in things he doesn’t understand. He has never bought stock in Microsoft, for example, even though he plays bridge with Bill Gates. When stock prices generally do not make sense to him… he attempts to get clear of the market… as he did in the late 60s.

By contrast, what hurts you as an investor is what hurts you in the rest of life. Vanity: such as when you think you are smarter than other investors. Sloth: such as when you can’t be bothered to study an investment before buying it. Pride: when you won’t admit that you’ve made a mistake…and don’t cut your losses. Greed: when you think you can get a 20% return every year…without working…or when you think you’ll make a killing on a [Big Tech] stock…even though you have no idea what it’s all about. Timidity: waiting too long to make your move… needing the reinforcement of others before making an investment decision.

Porter Stansberry sent me this quote from Reminiscences of a Stock Operator, in which Edwin Lefevre described the investment consequences of greed:

“The sucker has always tried to get something for nothing… people who look for easy money invariably pay for the privilege by proving conclusively that it cannot be found on this sordid earth.”

Sin and wickedness rarely goes unpunished. Investing merely quantifies it.

Your correspondent,

Bill Bonner

Paris, France September 4, 2000

*** Ahh, Labor Day… burgers, beer and baseball. What better way to enjoy this, the unofficial final weekend of the ‘summer of love’?

*** France enjoys no such holiday. Having just finished the month of August in which all the fine citizens of Paris leave the city – and work – behind for fully compensated late-summer vacations. Only the newly hired, or chronically under-employed, fail to partake of Les Vacances. Today marks the beginning of La Rentree…the return. The metro is back to its crammed, stuffy self, and the patisseries are once again full of freshly baked eclairs and tartes normandes.

*** Still, Bill thought he’d give you a little Labor Day respite himself – in the form of a truncated Daily Reckoning. These market notes have been brought to you by Addison, followed by another Daily Reckoning greatest hit… first aired Labor Day 1999. Read on, read on…

*** Friday saw the Dow close up 23 points at 11,238. The Big Tech Nasdaq shimmied up 27 points to finish the week at 4,234. And the S&P 500 inched its way 3 points higher to 1,520… all very modest gains, but consistent with a late summer Friday – when all the traders appear to leave early leave in an attempt to avoid traffic on the way to the Hamptons.

*** “Wall Street Bulls See Reasons To Smile,” states a Reuters headline boldly. “Recent economic data has showed the economy slowing enough for the U.S. Federal Reserve to most likely stay put on interest rates,” says the article “but not so deep as to hurt corporate America’s profits.”

*** Still, “You wonder why people are happy that the economy is slowing,” an analyst in the article asks… “Companies are not making more money…[yet] the stock market is being priced for profit growth and we’re not getting the kind of growth needed and eventually it is going to catch up.”

*** This morning in Europe… US$.90 will buy you a Euro, US$.94 will buy you 100 Yen and One Crisp US Dollar will buy you 7.36 French Francs. By way of illustration: the litre of Vins de Pays L’Aude I shared with my wife on our modest dinner table last night cost a little over 8 Francs.

*** “Traditionally, whoever leads on Labor Day – the end- of-summer holiday in the United States – wins the White House,” Reuters warns us. Homo Digitalien Gore has lead the fickle-public opinion polls since the end of the Democratic National Convention on August 18. The election is Nov. 7.

*** What’s really at stake? Who knows. Gore has promised to spend your money on increased compliance with Kyoto environmental controls, Internet access in every classroom and health care for five million children who – for whatever reason – are not covered. Bush has promised to spend a ton of money, too… to get elected.

*** “…so much money is changing hands – upwards of $2 billion in a presidential election year – the cloud never lifts,” says a website run by the non-profit group Public Agenda. In a poll they conducted 59% percent of Americans reportedly believe the election is ‘for sale’ to the candidate who can raise the most money.

*** But chances are, this time, barring an immediate collapse of the dollar, Gore will spend the early morning hours of November 8 enjoying the fruits of this Fed- inspired economy… that is, this vast illusion of prosperity, whereby the average American consumer has been willing to borrow and spend his way into negative savings territory and dump his future happiness in the laps of many a 20-something mutual fund manager.

*** “I’m going home for the long Labor Day weekend,” wrote Lynn Carpenter last Friday, “wondering what it means when CEO pay rises 535% over the past 10 years while everyone else’s pay rose just 32%.

“Shouldn’t there be some more wage pressure than that? This is full employment, isn’t it? Is it possible that we’re just so darn happy that we don’t need to bug the boss for another raise? Do we have enough color TV’s, Lexus’s and four-bedroom houses to satisfy the majority? If so, we would be the first people in the history of the world to know we had it good enough… on the other hand I suspect those rising gas, food and insurance prices the Fed has been ignoring is going to turn into wage pressure yet. After all… who asks for a raise in the summer?”

*** In a pompously titled directive titled: “Labor Day: How It Came About; What It Means,” the Department of Labor tells us Matthew Maguire, a machinist, and secretary of Local 344 of the International Association of Machinists in Paterson, N.J., proposed the Labor Day holiday in 1882. “Labor Day differs in every essential from the other holidays of the year in any country,” said Samuel Gompers, founder and longtime president of the American Federation of Labor. “All other holidays are in a more or less degree connected with conflicts and battles of man’s prowess over man, of strife and discord for greed and power, of glories achieved by one nation over another. Labor Day…is devoted to no man, living or dead, to no sect, race, or nation.”

The Daily Reckoning