Unfogging The Future
I found the photo in the attic of the chateau. Rummaging through old books and ledgers left by the previous owner, a photo of five men in uniform fell out.
The surprising thing was that these men were not wearing the familiar French uniforms. Instead, they wore outfits like the one in the photo of my grandfather from 1918.
These men were American soldiers in France in WWI. On the back of the photo are their names:
C.A. Leland from Atcheson, Kan.
H.V. Hayes from Waco, Tx.
R.R. Reinert from Chicago
H.R. Schultz from the Sanford Ranch in Montana
And D.R. Arnold, also of Chicago
How the photo came to be in a French chateau on the other side of France, I do not know.
I wondered what happened to them. If they survived the war – they must have lived through one of the most spectacularly unpredictable series of events in human history… war… revolution… depression… Stalin… Hitler… Jackson Pollack… the dust bowl… television… air-conditioning… freeways… Communism… cubism… Republicanism… anti-smoking campaigns… Lee Greenburg… class action suits… maybe even Bill Clinton and Michael Jackson.
Few, if any, of these ‘jerks’ of history could have been foreseen by the handsome young men in the photo. And who, when the guns of August opened up in 1914 and the ‘fog of war’ fell over Europe, could have anticipated the series of lethal explosions that these guns were to trigger: the destabilization of Russia and the rise of the Bolsheviks… the weakening of Liberal institutions in Germany and the advent of Nazism… the reign of terror, initiated by Lenin and then pursued with such vigor by Stalin…the holocaust…the demise of Liberalism in the West, replaced by a different sort of liberalism – with government growing from 13% of GDP in 1913 Britain to over 50% after WWII…and similar expansion of state power in America…and the nearly-complete repudiation of the bourgeois culture that had evolved over 2,000 years – in art, architecture, and literature. (Only music escaped – it could not be intellectualized.)
As Harry Potter discovered in his latest adventures, ‘unfogging the future’ is tough.
“Don’t forget,” Jules reminded me on my last trip to the U.S., “buy a copy of “Harry Potter and the Goblet of Fire.” Among other things, the book tells of Harry’s visit to Professor Trelawny’s School of Divination, where students learn how to ‘unfog the future.” But Harry finds that the professor is a bit of a fraud. She has had only two predictions come true in 15 years – a record that might only be envied by a hard money financial guru.
Buying the book proved difficult. So great was demand for the book that the few bookstores I visited were sold out. I came home empty handed – and ordered the book from Amazon.com.
Harry Potter was such a sensation that Amazon was able to use it to secure 63,550 customers, not including your correspondent. Yet, the company’s real achievement was to do so at a net loss of at least $5 million. It is not hard to lose money on books. But losing a lot of money on one of the biggest short-term sellers in history deserves a word or two.
Amazon appears to have paid about $78.68 for each of its new Harry Potter customers. The idea must be to begin making money on them in order to recover the investment. But, as I explained yesterday, Amazon does not enjoy the Internet’s famous economies of scale. A book, unlike an e-mail message, costs money to produce. The 100,000th book is not much cheaper to produce than the 10,000th. And other people are selling the book too – so Amazon cannot control its own margins.
But let’s assume that Bezos and company can somehow get a 5% profit margin on future sales to these people. To recover the original investment, each customer would have to spend an average of $1560… plus interest. And that’s just to get back to breakeven.
We cannot presume to unfog Amazon’s future. We have no idea what the jerks of history will do with the firm. Amazon may turn out to be a decent company yet.
But without the inducement of super-low prices…that is to say, those that give the company no margin of profit…it is unlikely that customers will spend $1560 dollars with Amazon. I buy books from Amazon…but I know that the lowest price is only a couple clicks away. And I have no reason to be loyal to Bezos.
Amazon is, of course, not alone. The Internet rain forest is crowded with companies on the edge of extinction.
The B2C sites have mostly gotten their e-tails beaten. Now, the content sites are suffering too. In July, Feed Magazine joined forces with Suck.com. It was either that or death; Feed faced capital starvation. The WSJ – with one of the few successful pay-for content sites – reports that APBNews has closed up shop. CBS’s Internet group has laid off a quarter of its staff. “TheStreet.com and Salon are swooning,” says the WSJ.
Internet content sites – such our own dearly beloved DailyReckoning.com – do have some economies of scale. Once prepared, the cost of replicating readership is extremely low. But as the Industry Standard, and our own experience, suggests: “One thing is becoming clear; the Internet is no bargain.” TheStreet.com, for example, employs nearly a third of its staff to work in technical support capacity.
Which experiments will succeed? Which will fail? We don’t know.
In Divination School, Harry Potter studies crystal ball gazing, palm reading, and tea leaves. There is a special pattern – a large, black dog – which is especially ominous. It is called the ‘black grim’ – and it means death.
By now, the ‘black grim’ has almost surely visited all five of the young soldiers in the photograph. By this time next year, unless some new magic is found, many internet companies will be paying no more interest…and selling no more shares.
Beyond that, the future is still fogged.
Your writer in residence, enjoying the last foggy-dew days of summer…
Ouzilly, France August 31, 2000
P.S. It is impossible to unfog the future. So good investments are made on the basis not of what we know about what will happen, but what we don’t know. Ignorance, in other words, is the key to good investing.
In the course of your work, it often happens that you will work all day…but only in one hour will you do something that is really productive. Maybe a good idea will come to you. Maybe you’ll make a good move of some sort. Maybe you’ll just get lucky.
You might as well only work that one hour, and play golf the rest of the day. But the problem is, you don’t know which of the hours you work will turn out to be the good one. As someone once remarked, “when I work 14 hours a day, it’s amazing how lucky I get.”
*** There’s a three-way battle going on in the currency markets. I’ve been watching the dollar against the euro – but the action, the last couple of days, has been between the yen and the euro. The dollar index fell 7 points yesterday.
*** The euro hit a new low against the yen yesterday, and still rests near a new low against the dollar. European Central Bank officials are meeting today – and promise a rate hike. It should be on the news this morning.
*** The English pound has sustained some ‘collateral damage’ in the war of the titan currencies. The pound has been knocked down to its lowest level (against the dollar) in 6 « years. $1.45 will buy you a pound today. Of course, if your memory goes back more than 6 « years you may recall that you could buy a pound for just a little over $1 in 1985.
*** Meanwhile, in the stock market, “there’s a little bit of complacency,” says one analyst, speaking of the highest levels of confidence, optimism and self-esteem in 100 years.
*** The Dow fell 112 points yesterday. Nothing special… a few weak earnings announcements. Mostly, investors expect stronger earnings, which prompted this quip from a Federal Reserve member: “Isn’t it odd that there is such confidence in strong earnings numbers coming along in the second half, while there is a comfortable acceptance of ‘slowdown’ as benign….” Another mystery.
*** The Nasdaq rose – 21 points. It was led by none other than Amazon.com – which shot up almost 10%, following a reaffirmation by Goldman Sachs that the world’s biggest e-tailer is a “trading buy” with a “positive” outlook. I’m sure Bezos has a positive outlook, but what’s positive about the outlook for Amazon shareholders? The company just opened its French branch – accompanied by some fanfare in Paris. And it announced it is going to sell digital books. More below, as we ‘unfog the future.’
*** Amazon wasn’t the only Internet to rise. The whole sector did well yesterday. Linux was up 15%.
*** Oil rose 58 cents – to a new high of $33.32.
*** Gold rose too – up 70 cents. Platinum, however, fell $2.50.
*** And Treasury bonds bounced after a 3-day decline. I wondered, in yesterday’s letter, whether we may have seen a top in bonds for this cycle. We’ll have to wait and see.
*** “Insider selling of large blocks of stock, that is $1 million worth or 100,000 shares or more, through July was $43.1 billion, which is twice as much sold in the comparable spans of 1998-99. In fact, sales for the first six months of $39 billion tops all of last year.” This item illustrates the way things get around on the Internet. It is from Bob Chapman, via Bill Murphy’s Le Metropole Caf?, via Harry Schultz. (Incidentally, I got Harry’s web site wrong yesterday – as you may have noticed. The correct address is www.HSLetter.com)
*** Like information on the Internet, “many things in society, life and business are clear examples of contagious behavior,” says Ray Devoe. “‘Ideas and products and messages and behaviors spread just like viruses do.'” Ray is quoting from a book by Malcolm Gladwell, which describes the process leading up to “one dramatic moment when everything can change all at once.” Little changes can have big effects. Finally, when these changes occur, they happen in a hurry.”
*** And here’s some depressing news. Class-action jackals have launched a suit against Microsoft for “overcharging” its customers. MSFT, the suit claims, “harmed consumers” with its monopolistic business practices.
*** Of course, in a free country, Microsoft would be allowed to charge as much as it wants. So, why don’t federal judges throw these low-life ambulance chasers out of court? The answer comes from Paul Craig Roberts on an Internet forum: “This is because White House nominations and Senate confirmations of federal judges defer to career bureaucrats in the Department of Justice (sic). The bureaucrats choose the judges according to the department’s litigation interests.” Roberts went on to say that he got a letter from a federal judge who explained this to him…and remarked in his letter “that he has never seen a judge who has reined in the government be elevated to a higher bench.”
*** My last few days in the bucolic tranquility of Ouzilly…aaah…
*** But what’s this? Mr. DesHais is in a tizzy. He talks to himself all the time anyway…but now he is having a heated exchange. A bulldozer arrived yesterday to clean a century’s worth of muck and mud out of the pond. Mr. DesHais is a purist…a retrograde rustic…a romantic soul who detests all forms of mechanization. Though I have never heard him mention computers…I’m sure he regards them as the devils’ own work.
“They’re going to ruin the banks of the pond,” he argues forcefully (to no one in particular…I am eavesdropping from my office window). “They’re going to make a big mess…”
Finally… after 45 minutes or so…
“Mr. Bonner,” he calls to me, agitated. For a moment I think he’s been drinking. But then, he seems steady – just upset. “I need to talk to you.”
“Okay…come on up…” I reply, leaning out the window.
“Mr. Bonner…I don’t like to bother you.” (He is always very courteous and deferential. He treats me as though I were the aristocrat he wishes I were.)…”But do you know what they are doing down there?”
Yes, of course I do…I hired the guy with the bulldozer and have been waiting more than a year for him to show up…
“Well, I’m just afraid they are going to make a big mess. And I was planning to put that whole area in order this winter. But if they tear up the banks of the pond… they’re going to kill the trees…what a mess…what a mess…what a mess…”
I felt I must intervene at this point…this lament could go on as long as a Grateful Dead song…
“Well, what else could we do?” I ask.
“I’ll dig it out myself…”
“But the pond must be at least 2 acres…” I protest. “It would take 10 years to dig it out by hand” (a slight exaggeration, but you have to use hyperbole to get your point across sometimes).
“Well…you have to do things right…”