The Burden of Memory And The Next Warren Buffett
Yesterday, I touched upon a paradox of money: if you
work hard enough and are lucky enough, you get to enjoy the lifestyle of people who have no money. You get to loaf and go fishing — and sit around drinking beer with your friends as I did in Nicaragua. The idle conversation at such times includes topics such as why the Republicans are such numbskulls…what the Internet will mean to human progress…how women are different from men…and who will be the next Warren Buffett.
If leisure is valuable, bums are rich. Those of us who work 12 hours a day are poor in comparison.
The world of money is full of paradoxes. But, like all paradoxes, they are not immediately obvious. This may be the wishful thinking of a middle-aged man, but I seem more able to see the paradoxes of life as I age. The subtle ironies of life that were hidden from me in my youth are more apparent now. Now that I have gotten over my fear of talking to girls, for example, girls are no longer interested in talking to me. And it is probably a good thing — otherwise I might disturb my domestic harmony.
The law of diminishing returns applies almost universally. The more you have of anything, the less each additional unit is worth. The only exception is love, which has paradoxes of its own. You get it by giving it, not by seeking it.
The law of diminishing returns is merely another way nature keeps things in balance. The more beers you drink, the less good the next one will do you. Soon, they will do you harm. This is true of gold, too — as illustrated in the allegory of King Midas. Touching a bar of lead and having it turn to gold is a good thing. Touching your daughter and turning her to gold is not.
Nature exacts a paradoxical balance between the impetuousness of youth and the wisdom of experience. Youth wants everything now…and believes it has found new truths that make it possible to have what it wants. Experience teaches that there are limits…and feedback loops that grant progress grudgingly, episodically and, usually, at great cost. Schumpeter defined the progress of capitalism as a process of “creative destruction.” The phrase applies to nature’s way of doing things — clearing out the old to make way for the new. Progress happens. But it comes at a price.
“Adam Smith” recounted the events of the Great Winfield during the “Garbage Market of 1968.” Winfield, now a neighbor of Doug Casey in Aspen, recognized that the bull market of ’68 was no place for experienced market hands. “Hold your nose and buy,” was Winfield’s motto. He hired a bunch of kids just out of Harvard Business School. He called it his “Rent-A-Kid” program. The kids, as Ray DeVoe put it, “were not encumbered by the burden of memory — of painful market disasters.” The kids just bought stocks — confident that the New Era of the late `60s…with mass marketing, technology, a global economy and enlightened management…would make stocks go up. The sky was the limit in ’68. Stocks sold for 50- 60 times earnings, though the old hands considered stocks at this level too risky. The Great Winfield couldn’t bring himself to buy them — but the kids didn’t hesitate.
Currency obeys the law of diminishing returns. All other things being equal, the more of it you print, the less each piece is worth.
That applies to the dollar as well as to the new currencies — the tech and Internet stocks that are backed by the full faith of the public and the full credit of Wall Street. Ray DeVoe reports that one company, Akamai, rose to such high levels that its stock was selling for 18,588 times SALES! It took investors with no memory and the incredible lightness of being young to buy that stock. Ray notes that the underwriting document listed 33 Risk Factors for the company. Most obvious was the risk that the company might never make any money. But so what? Fourteen months after it was founded, it was worth $31 billion.
But Wall Street has passed out of the hands of the old pros. Even Warren Buffett, the greatest investor of all time, is regarded as a has-been. He failed, it is reported widely, to make a shift from the Old Economy to the New one.
How could he? Burdened by memory…and the habit of stock analysis…and affection for value — he could no more become a trend follower than he could a ballerina. Buffett had to be pushed aside…destroyed…to allow younger, more adventuresome, less cautious players to lead the way.
Buffett was smart enough to miss the bear market that followed the “Garbage Market of 1968.” He told his investors that the valuations made no sense to him and pulled out. Here we are a generation later and once again the valuations of leading Internet and tech stocks make no sense. Buffett never got in them.
The “next Buffett” will be the investor who was able to ride the trend with the courage of youth…and abandon it with the wisdom of experience — before it is too late.
He will be the investor who will leave this bubble with his money in tact. The others will lose their money — and be free to enjoy a life of leisure. Perhaps they will go to Nicaragua, lie on the beach…fish, drink and talk with their friends.
Best of luck to you,
Ouzilly, France February 9, 2000
*** America is number one. The world’s biggest spender. Household spending rose 6.9% last year — the fastest rate in 10 years. Income went up mightily, too, but not as fast as spending — at 5.9%, almost exactly in line with the increase in GDP.
*** Savings, meanwhile, hit an all time low — at 2.4% for all of 1999. In December the rate was 1.5%. Labor productivity was up 5% — a figure you should regard with some suspicion.
*** On the other side of the world, it was the opposite story. Japan seems headed for more recession. GDP fell 1%…after seven consecutive years of falling spending.
*** What’s wrong with the Japanese anyway? They’re supposed to be, on average, 10 I.Q. points ahead of us Americans. And they can’t figure out that the way to get rich is to spend, spend, spend…spend as if there were no tomorrow! Or is there more to the story? Could it be that the earth still turns…and that Occident and Orient may somewhere meet? Or even trade places?
*** Despite modern transportation, stock investors seem confident that whatever infected the Japanese economy has no way of reaching the United States. The Dow rose 51 points yesterday. Nasdaq was up 105 points on very heavy volume. It appears that the “moment of truth” has not yet arrived for tech and Net investors.
*** The techs and Nets generally rose…while the Old Economy stocks — Goodyear and Caterpillar, for example — hit new lows.
*** “Our strategy for Europe is: Attack!” said AOL chairman and first acknowledged master of the entire known world since Alexander, Steve Case. Instead, it was the Internet Titans who came under attack by unknown hackers yesterday. Yahoo and Amazon were closed down by “a renegade group of hackers” who may be “intent on wreaking havoc on the Internet and shaking public confidence in e-commerce,” says the report in the “Financial Times”. The “FT” adds, quoting an industry expert, that “there is no sure way to defend against such attacks.”
*** Hey…I’m innocent. I can barely get into my own site, let alone hack into someone else’s. Public confidence will be shaken in due course. But there’s an investment idea for an unscrupulous investor. Take out massive short positions on Net stocks — then hire a group of Internet whizzes in India to close down the major websites. Hmmm…maybe it would be better as a screenplay.
*** It make take a major digital quake to shake the public’s faith in the Internet. Ford is giving each of its 350,000 employees a free computer. Why? “Because this is the era of e-commerce; we have to stay ahead of the curve.” How this helps the company stay ahead of the curve remains a mystery.
*** Phillip Morris and other tobacco companies came under attack, too — by unscrupulous lawyers. The stock hit a new low at 19 5/16.
*** While the excesses of the stockmarket continue unabated, at least they’re becoming more “symmetrical,” as Jim Grant puts it. The Nets and techs are headed for distant galaxies…while Big MO, Goodyear, GM and CAT dig themselves into the ground. The Old Economy is getting to be a bargain, in other words.
*** I don’t know if gold is a bargain or not. The yellow metal fell again yesterday, closing at $269. Palladium, though, hit a new high — at $567.
*** You’d think Jorge Haider, who looks like Lee Marvin, was a member of the Dirty Dozen. Mr. Haider, you will recall, is head of the Freedom Party in Austria, a party that got 27% of the vote and had to be reluctantly drawn into the government. Commentators compare it to the moment Paul von Hindenburg invited Adolf Hitler to share power.
*** But I search the papers for any evidence that Haider is a Jew-hater and can find none. He is proposing tighter immigration policies — which is foolish enough, but hardly unusual. Still, Prince Charles has cancelled his visit to Austria and the rest of Europe seems to be looking for ways to shun the nation without upsetting the principles of a united Europe and democratic process.
*** Mr. Haider, interviewed in “Figaro,” expressed amazement at the reaction he is getting. He says he shares the ideas of De Gaulle and Adenauer and supports a “Europe of nations.”
*** The city of Osaka has banned platform shoes on the grounds that they make it harder to hit the brakes in an emergency. And 13% of the French say they’ve considered suicide.