With the sharks beginning to circle, we suspect days of freewheelin’ and dealin’ are numbered for Bernie Ebbers, Henry Blodget and the like. But rather than join a chorus of reprimanding do- gooders calling for blood, we thought we’d take a moment and remind you of your responsibility in this venture: your money.

Now the attorneys come.

This should be a classic. It’s pretty clear WorldCom was operated by a band of liars. It should be an easy gotcha for those picking the carcass hoping to get their capital back…except the carcass won’t have much meat on it. Accounting hi-jinks aside, WorldCom was a lousy business. The crooks hid a lot, but they weren’t able to hide that from anyone who honestly looked.

In the last 10 years, WorldCom has never met Fleet Street Letter’s minimum requirements. Never. Its return on equity was always below 12%, often negative. That, friend, is a clue that the guys holding your money are taking it off to Vegas or some other hopeless place. You give them money, they burn it.

The object of investing (in case anyone from Merrill Lynch etc. is listening in) is to give some guys some money, let them run a business to make profits while you drink margaritas or go fishing, and then collect your bit of the gains after they’ve done the work.

Just like Enron, there was an early clue that things weren’t going well at WorldCom. Cash flow fell three years straight. Operating income fell last year, too. Dividends? It didn’t pay any. Half the time there weren’t any profits to share, and these weren’t sharing kind of guys to start with. And for the opportunity to be fleeced, investors, including big-name institutions, were paying 49 times earnings last year. Even for a good business that’s too much. For a lousy business it didn’t even rank as an investment. It could only be called a wild speculation that some bigger dummy would come along and believe.

And now the attorneys will be pressing for shareholder rights and restitution. Frankly, in this market, if you want to make money, you’ll do it by thinking less, if at all, about your rights and more about your responsibility to your own money. If this year’s parade of accounting scandals and market meltdowns accomplished nothing else, it should have proved that we investors have to take care of ourselves. No one is going to make it foolproof. We have to do that ourselves.

I don’t doubt that at least a few people at Enron, WorldCom, and so on deserve a federal vacation behind a real high fence. But that doesn’t take the burden off us to look at what they’re doing.

It isn’t easy to pinpoint a sophisticated accounting hat trick like the ones Enron and WorldCom ran. I couldn’t do it. Nor could the average CPA. But there’s always some show-through. Bottom line, in good businesses, sales grow, profits roll in, and the company either reinvests them well (for a good return on equity) or pays them out (that’s a dividend). Any time you "invest" in a business that doesn’t do that you are playing hot potato with a hand grenade.

That worked for a few years, but after all that tossing, the pins in those grenades are loose and they are falling out everywhere.

Not long ago, we had the New Economy. Now we have the New Market, and the New Market is the Old Market…the one that runs by rules that are older than Wall Street. The stock market pays better than any other simple investment, but it doesn’t pay as well as many people think.

The historic return on U.S. stocks (and remember, we have been a growth economy, even an emerging economy, during much of that record) is only 11% or so. That’s 11% including reinvested dividends and ignoring the cost of commissions, taxes and inflation.

And that’s an optimistic number going forward. The United States is not inventing and perfecting railroads, automobiles, electricity, computers or even the Internet now. That’s been done. Maybe a new world-changing technology is out there in Tomorrowland, but maybe not. Probably not anything on the scale of those inventions. What’s more, most of that historic record includes a huge dividend boost. Historically, dividends on blue- chip stocks like the S&P 500 companies paid 3% to 5% in dividends. Today, the S&P averages 1.6%. Growth stocks pay much less or nothing. Realizing what this means is the biggest step you can take towards understanding what’s ahead and how to make money.

Look at the difference. You start out with $100,000 and put it in the market for a 5% dividend and 6% average capital gain each year. In 6 « years, you double your money. (Boy, that sounds different from the promises that NewHypeCo will make 100% by Tuesday, doesn’t it?) If you think that’s slow, here’s some really bad news.

After the bull market we had, we may be lucky to make 6% a year for the next decade. Suppose that happens while you’re making the generous 1.6% the S&P now pays. Instead of doubling in 6 « years, it will take you 9 « years. A third longer.

And if you are looking even farther forward, say those retirement funds you want to have in hand 20 years from now, the spread gets worse. At the historic 11%, you will have a nice $806,231 come 2022. But if you only get the current dividend rate, you will have just $432,758 come 2022.

Low dividends hurt. A lot.

If you think that’s bad, the reality of the New Market is even worse. The average person is going to lose money this year. Probably about 15% the way things are going. Considering that the market may easily return just 6% in capital gains with today’s low dividends, it will take you nearly 12 years, not 9 «, to double your money. Or, in that retirement account, even your mildly-hoped-for $432,758 turns out to be only $376,844.

And want more gloom? All this assumes we won’t repeat the 1970s. From 1972 to 1982, the S&P 500 went nowhere. You put $100,000 in and 10 years later you could sell your shares for $100,000. Dividends were the only money you made.

But you know what? Warren Buffett got rich anyway. So did Ken Fisher, Bill Ruane, Sir John Templeton and hundreds of other unknown smart investors.

They didn’t blame the market, call their lawyers or grumble. They got down to work and made it their personal responsibility to pick through the offerings and buy only good companies. They weren’t traders, they were investors. They bought and held…but they only bought stocks worth holding. They did not buy stocks because they thought they could resell them to bigger fools in six months or a year. They bought stocks only a smart investor would want. They won’t catch all the crooks out there. Nor will accounting hat tricks go away. You have to take care of yourself. But it really isn’t that hard for anyone with common sense and a good system.

Lynn Carpenter,
for The Daily Reckoning
July 3, 2002

P.S. Despite all the accounting shenanigans, there remains some viable – even profitable – companies worth investing in. If you’re interested in learning a simple test for deciding whether a company makes the grade… or is a prime candidate for the scandal sheets, please see the article I’ve contributed to the Daily Reckoning website.

Editor’s Note : The Fleet Street Letter’s US editor Lynn Carpenter will tell you: "I’m not easily convinced by anybody about anything." And maybe that’s the secret behind her success outside Wall Street. Beyond the Fleet Street Letter, Lynn’s trading service, The Contrarian Speculator, has helped investors earn profits in everything from oil and steel to emerging technologies, defense stocks, Swiss annuities and commodities.


That’s not what happened yesterday. Nor, yet, on any day of this Great Bear Market. It’s just our advice to readers who have not yet sold their equities.

Richard Russell (relying on Lowry reports) tells us that selling pressure is at a 70-year high. Buying pressure, meanwhile, is almost non-existent. There are a whole lot of people with stocks they would like to sell…and not many with stocks they would like to own.

"How does that thing about more sellers than buyers go?" the Mogambo Guru asks himself, "Oh, yeah, I remember now: prices go down."

Blame it on a few rotten apples, if you want. But the whole barrel seems to be going bad.

As Eric reports, below, the Nasdaq has already erased 5 years of gains. And the S&P composite, according to Russell, is completing a huge "head and shoulders" pattern. Not good. Because the technicians tell us that the next move is likely to be down – and maybe down big.

It is Stage II of the bear market. Insiders are selling out. And foreigners are bailing out.

"There was no American miracle," says a headline in the Figaro. "The new economy could produce sales," explains the accompanying article, "but not profits…profits in America are back to their level of 10 years ago!"

"After years of pumping billions of dollars into the U.S. because it seemed the land of opportunity," adds the NY TIMES, "foreign investors are pulling back… There is unanimous agreement that the U.S. is not the best place to invest anymore."

"Unanimous agreement" troubles us…for the crowd can never be right…but at least the patsies, rubes, and yokels in America keep holding…and hoping – and there are a lot of them. Polls show that they are coming to believe that stocks may not perform well this year, after all. But they still believe in the long-term promise of stock market investing. And they’re not about to panic now and sell out at what they believe may be a bottom! What would Lou Rukeyser and the Elves think of them?

Nevertheless, we repeat our advice: panic now…avoid the rush.

Over to you, Eric…


Eric Fry from New York…

– The Nasdaq Death March continues – more than 3,600 Nasdaq points have perished, and less than 1,400 remain. But even many of the survivors are near death.

– Yesterday, another 46 points breathed their last as the index fell more than 3% to 1,358. The closing price marked yet another new 5-year low. The Dow also stumbled – falling 102 points to 9,007.

– Will the Nasdaq number be less than 1,000 before the Death March comes to an end? That is the fear from Wall Street to Main Street…and back again.

– "The last time the Nasdaq hung at 1,000 was in September 1995," reminisces Pierre Belec of Reuters. "For those with short memories, those were the days before stock investing became a national pastime and the market turned into the main topic of conversations at cocktail parties."

– Remember, says Belec, when the "Nasdaq soared 40 percent in 1995, rocketed another 23 percent in 1996, then climbed 22 percent in 1997 and jumped 40 percent in 1998. Just before the crash in the spring of 2000, Nasdaq went up by an eye-popping 86 percent in 1999, making that gain the biggest in the history of American indexes."

– Ahhh…those were the days. At its peak in the spring of 2000, the Nasdaq was "worth" more than $6 trillion. Today, its market value has plummeted to less than $2 trillion – and that might still be $1 trillion or so too much.

– Now that the Nasdaq has tumbled about 75% from its peak, some investors are starting to question this whole "buy-and-hold" idea. In fact, they are having trouble remembering why in the world they wanted to buy stocks in the first place…Was it, perhaps, their spouse’s idea?

– According to Lipper, more than 99 percent of equity funds investing in the U.S. stock market lost money in the second quarter. In fact, they lost a whole lot of money – nearly 14 percent on average. That was the worst quarterly performance since 1987’s third quarter, which, as most investors remember, was a quarter to forget…or to try to forget.

– The losses are becoming quite exhausting. "The UBS/Gallup Poll of Investor Attitudes fell sharply in June to its second lowest level in its history," reports CBSMarketWatch. "The overall index dropped 18 points to 72 from 90 in May. According to the poll, just 38 percent of investors say they are optimistic about the prospects for the financial markets over the next 12 months, decreasing from 46 percent in May."

– But while most investors find themselves trying to decide between hanging on for the long haul, or simply hanging themselves, a few – very few – investors are actually enjoying themselves.

– "Fund types that are traditionally laggards in a bull market are making tidy sums now," notes CBS MarketWatch. "Gold, real estate, and specialty diversified equity funds – a hodge-podge of 56 quirky portfolios in the ‘miscellaneous’ category – represent the only positive equity categories out of the 41 tracked by Lipper.

– "Gold funds, infinitesimal in scope compared to overall mutual fund assets with just $4 billion spread across 41 class shares, scooped up gains of roughly 18 percent for the quarter and are ahead 59 percent year to date."

– It’s a very tough market out there. Invest wisely.


Back in Gay Paree…

*** With the opportunities disappearing in the stock market, the poor are giving in to envy…and the ambitious are succumbing to opportunity. The N.Y. Post reported yesterday that Elliot Spitzer, officially attorney general and unofficially candidate for governor, has decided to bring criminal charges against Henry Blodget and a list of accomplices.

*** There is nothing like opportunity to bring out the worst in people. According to experts quoted in the International Herald Tribune, the War Against Terror (WAT) has been a total failure. There are more potential terrorists running around now than ever…and with bigger scores to settle against the U.S. But the WAT was a great success politically. It boosted the reputations of hack Republicans enough to send them "untersuchunglustig," or searching for further military adventures. (We don’t know German…we just like to throw around German terms because we like the sound of them.)

*** Donald Rumsfeld reflects on the WAT: "There are no knowns," said the Secretary of Defense. "There are things we know that we know. There are known unknowns, that is to say there are things we now know we don’t know. But there are also unknown unknowns, things we do not know we don’t know."

*** The people of Kakarak rediscovered a "known" a couple of days ago: a bomb dropped from an American warplane into a wedding party does a lot of damage. Le Monde reports as many as 40 people killed.

*** What will happen next? What unknown unknown unknowns await the unwary? Will the gods look with favor on people who drop bombs on nuptial ceremonies? We don’t know that either…but we caution readers: economics may not be all that matters after all. Lynn Carpenter takes a stab at suggesting what you should do in the event that that likelihood is true… below.

Bill Bonner

The Daily Reckoning