Good News: The Market’s Down June 16, 1998March 25, 2012 I’m writing this one a few days in advance, so for all I know the market’s been just jolly as you read this. But it doesn’t feel jolly today. Sure, the Dow’s down only 3% or 4%, but any number of smaller stocks are down 30% and 50% and more over the last few weeks. So for those few of you who may not own shares in Berkshire Hathaway or see Warren Buffett’s annual shareholders’ letter some other way (to my everlasting regret, I see them some other way — the press list) I thought that I would pull out a quote that seems apt … and could seem apter and apter if things don’t go well. “[W]hen you read a headline that says, ‘Investors lose as market falls,'” advises Buffett, “edit it in your mind to ‘Disinvestors lose as market falls — but investors gain.’ Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: ‘Every putt makes someone happy.’)” Especially if you’re young and adding to your investments each year rather than drawing upon them — investing rather than disinvesting — then a falling market is a wonderful thing. Of course, this presupposes the notion you are trying to buy companies that you actually believe will make a lot of money (profits) over the years to come, rather than merely buying stocks you hope will go up. If you’re not young and in or entering your disinvesting years, then market declines are bad news. And we may not have seen the last of this one.
Query From a Budding Stock Manipulator June 15, 1998February 5, 2017 From Aaron L.: “The short version of the question is: Is it possible to inflate the price of a stock by placing limit buy orders at a price above the stock’s market price? The long version: There is a fairly thinly traded stock I watch (average trading volume: 2,500 shares a day). Its price fluctuates only slightly from time to time. Let’s say I buy 5,000 shares. Then let’s say I offer to buy some more (100) at a higher price. I do this several times (perhaps from different accounts) to try to make the appearance of general interest in the stock at the higher price and eventually have the appearance of interest turn into actual interest in trading at that level, so it becomes a so-called “base” price level for the stock. Then I sell my shares and make a killing. This seems an obvious sort of gambit, especially on a stock where the trading volume is small, so there must be a reason this would generally fail. Any thoughts on the subject?” A.T.: Yeah, I have two main thoughts: There are SEC regulations against deliberate manipulation. If caught, you could be in hot water. Realistically, you would not get caught; but that’s partly because … It wouldn’t work. Normally, what you propose is called “painting the tape,” where a lot of little trades are done (though not necessarily above the current price range), to suggest, by the unusual activity, that “something must be up.” If nothing else, it’s a form of advertising — everyone watching the ticker sees this symbol they don’t recognize going by over and over, so curious investors around the world may take a look to see what the darn thing is. But a few 100-share trades are hardly going to arouse a lot of interest. Consider: If the stock trades 2,500 shares a day, buying 100 shares here or there won’t move the price. And what if you really get into this and made 50 little trades of 100 and 200 shares each, accumulating 7,500 more shares, say, and edging the price up 3/8 in the process? Guess what: when you went to sell what are now your 12,500 shares (or whatever), you’d likely knock the price back down by even more than you edged it up. Yes, there are ways to manipulate the market — some of the folks on various Internet sites passing on rumors may actually be starting those rumors in hopes of hyping the holdings they itch to sell. But homework and patience will ultimately serve you far better as an investor than trying to find a legal scheme for beating the system that no one ever thought of before — or an illegal one you won’t be caught at. But you knew that.
Six Thoughts June 12, 1998February 5, 2017 After 500 years of 3% inflation, $100,000 will be worth 4 cents. “The guy who invented playing cards was brilliant. But the guy who invented chips was a genius.” – Ricky Jay (himself a genius) Spending tens of thousands of dollars on a person’s last few months of life is compassionate – but spending. Spending tens of thousands of dollars to improve a person’s first few years of life is also compassionate – but investing. “A man who says he is willing to meet you half way is usually a poor judge of distance.” – Anonymous “This fishing tackle manufacturer I knew had all these flashy green and purple lures. I asked, ‘Do fish take these?'” “‘Charlie,’ he said, ‘I don’t sell these lures to fish.'” – Berkshire Hathaway’s Charles T. Munger, as quoted in Fortune THE LIMITS OF EXPERTISE: “Years ago my father was told the refrigerator was broken beyond repair. After the repairman left, my father kicked it, it started, and worked fine for eight years.” – my friend Mary O’Neil
Some Ideas In Re: Japan June 11, 1998February 5, 2017 In answer to my call for suggestions on sensible ways to invest in Japan, Neile Weissman wrote: “Try Tokio Marine & Fire Insurance ADRs — symbol TKIOY. TKIOY is an old line, well capitalized company that itself owns a diversified portfolio of Japanese stocks. Trading in the low 50s, it’s at a 25% discount to its underlying securities. Their website: http://www.tokiomarine.co.jp/index-e.html. Mutual funds that hold this security are deep value players like Sogen International and Third Avenue Value. One of Third Avenue’s past reports had an extensive write-up of TKIOY (visit www.mjwhitman.com).” To balance Tokio Marine’s mostly blue-chip holdings, Neile suggests the Warburg Pincus Japan OTC fund. “The guy who had been running the better-performing Warburg Pincus Japan Growth also took over this one.”
Silicon Cowboys and Indians June 10, 1998February 5, 2017 Recently, I wondered what would happen to MSFT when it had to start paying real wages rather than rely so heavily on stock options to keep its people happy. My musings elicited this interesting message from the ether: “I am not a fan of Microsoft and I hate Bill Gates, partly because I do not have money like him and partly his philosophy about selling software does not match with mine. However, I am long his stock, because he is a savvy CEO and the world demands his products. I think his stock will do good in the long run. However, I do not agree with your projection of labor cost etc. Following are my reasons. Just like when the US was a powerhouse in small scale industries in 70s and early 80s and now the whole industry is shifted to Asia and Latin America, software industry will follow it. It is a matter of when, not if. It could be 20 years, 50 years or whatever. Already you can see it. Microsoft has only 3 offices (R&D) in the world. 1. Redmond, WA; 2. Israel; and 3. Hydrabad (India) – will be operational by December 98. Microsoft does not believe in opening many offices and the fact that they have considered India as their only major offshore software development center is significant. Recent Bill Gates visit to India signifies his commitment. Almost all software companies worth their salt have some of their operations offshore (somehow they like to use this word). One big reason is that U.S. universities are not churning out enough graduates to keep up with the growth worldwide. American graduates cost more, demand more, and prefer to (or I should say forced to) move around. That creates a drag on product development. India has state subsidized (almost 50-95% of education cost. I am a great beneficiary of this subsidy and always grateful to the government) and very good education system and relatively stable job environment. Graduates cost less than 5 to 20% of cost of US graduates and the number of universities and institutes are almost equal to US. The engineering and science graduates pool is almost 2 to 4 times of the size of US graduates. Naturally, demand and supply works here and wages are rising about 20% a year for last 10 years. Microsoft entry would ignite this competition. Most companies offer restrictive (cannot sell before 5 year or 10 years) stock options to their overseas employees in US$. That alone is a significant attraction to most potential employees. How else they can get almost sure chance to become millionaire (in local currency, $1=Rs 40)? I know some of my friends, who did become millionaire by exercising stock options. Internet, satellite telecom and government support do play a big role. The world is so close. When I was in India recently, I was able to read your page, trade stocks and be in touch with my office, just as I would staying in US. This was not possible even 3 years ago. “Bottom line is, these technological advances will accelerate the migration of software jobs and will keep the production cost in check (in today’s dollars). Just think about it, your clothes, cars, shoes are much cheaper today (please include inflation in your calculation) than they were 50 years ago. “However, I do worry about unexpected things which no one has control of it. Would next CEO will be as lucky or smart or savvy as Bill? How about something like Internet, which Bill miscalculated badly. Would next president of US or justice dept. go after Microsoft big time. I do not know and frankly nobody does…So keep investing in profitable growth companies…and pray for higher stock prices.” A.T.: I pray for higher productivity, continued technological breakthroughs, good health, and auto insurance reform. I do not pray for higher stock prices. They’re already awfully high. Better to let earnings catch up for a while. But his message is interesting. When I was growing up, India was a distant abstraction. One day soon, my late-night customer service query may be handled (at noon, India time) by a customer service rep in New Delhi. Small world, indeed.
Fat Freedom June 9, 1998February 5, 2017 As if 4.3% unemployment, satellite TV and Viagra were not enough, now come Lay’s WOW potato chips from Procter & Gamble – fat-free and half the calories of regular potato chips, which I remember only vaguely from 1973 when I last ate one. (Many health nuts don’t even eat nuts, let alone chips.) Yes, there have been all those warnings about unpleasant side effects. But I’ve tried them anyway and – wow! They’re just like real potato chips. (Well, the “ruffles” are the best, and most like the Potato Frills of childhood.) And what of the rest of the menu? Toss a well-marinated ostrich steak on the barbie (2 grams of fat per 3-ounce serving versus 3 grams for turkey and 16 grams for hamburger), top it off with one of Fanny’s fat-free cheesecakes or her low-fat carrot cake – is this a great country, or what?
The Trouble With Socialism June 8, 1998February 5, 2017 Yesterday, I made a comment suggesting that libertarianism (the Ayn Rand school) goes too far. Today, I offer Jay’s comment on what happens when the pendulum swings too much in the other direction: From Jay S.: “You recently wrote: In this country, given our resources, capital and technology, we’d need relatively few people just to feed, clothe and house us. A true observation, as far as it goes. Being as I live in a country that is 30-50% poorer materially than the US — Italy — I’ve noticed one other major factor in addition to resources, capital and technology that contributes to the wealth of the average American (and which is completely missing in most of the rest of the world): a political-social culture of productivity and personal responsibility. “Here, between government regulation, stifling taxation, and a socialist mindset that causes the average person to regard a job as a fundamental human right which the government owes him regardless of his personal productivity, the output per person is far less than in the US. Throw in the wasted human labor, such as the army of guys who push the buttons in self-service elevators because they have jobs protected by powerful unions and everyone thinks it would be cruel to make them hunt for an actual job, and the end result is that everyone is poorer, even with abundant resources, capital, and technology.” A.T.: A happy balance between unfettered libertarianism and stifling paternalism may be the best bet — and perhaps not so far from where America is today.
The Trouble with Libertarians June 5, 1998March 25, 2012 Many of the smartest people I know are libertarians. They basically want the government to get out of the way, both in the boardroom and in the bedroom, and leave it all to Ayn Rand. I have never met a libertarian of average intelligence. They are always way smart, way capable. The kind of people who would for the most part succeed excellently in a libertarian world or any other. The one flaw in libertarianism, as best I can dope it out, is its silence on the matter of those who, for whatever reason, especially reasons beyond their reach, are born or rendered too weak or intellectually limited to hold their own. They need society’s protection/assistance/special care … and this sometimes requires the presence of government. I asked one of you, Chris Selland, about this a while back, when we were e-discussing it, and he wisely replied: "What do Libertarians say about those who can’t compete with Libertarians? They pretend they don’t exist. Which is why I can’t call myself a true Libertarian. I just believe, to pirate a phrase from Bill Weld, that the social safety net should be a trampoline, not a hammock." In other words, Atlas just shrugged, but Bill Weld and Chris and others are willing to lend a hand. Monday: The Trouble with Socialism
Reader Mail June 4, 1998February 5, 2017 MERGER MANIA From Toby Gottfried: “It seems that every week we hear about ‘the largest corporate merger ever.’ (Or, if need be, ‘the largest in industry X’ or ‘the nth largest.’) And each time the executives trumpet the efficiencies and wonderful prospects. Well, it seems to me that the logical conclusion of all this is to just merge everything into one company. We could call it ‘the company.’ Or ‘the government.’ Oh wait. They tried that in Russia. It didn’t work.” APR vs APY From T.S.: “I had to put in my two cents worth and remind everyone that you CANNOT earn an APR on a deposit account! APR – annual percentage rate – refers strictly to loans. Deposit accounts are stated as APY – annual percentage yield. Of course, no one intelligent enough to shop APY versus nominal rate will be foolish enough to put money in an account (with the possible exception of CDs) that is quoted as APY. (Hint: get a good mutual fund money market account instead!) ATCALL From Victor Smith: “Thank you for ATCALL. I have been a long time user of AT&T having been a stockholder in years gone past. After reading your commentary on Ameritrade I got a postcard from AT&T announcing HIGHER rates starting June 1. I’m not taking it any more! I called ATCALL at the 800-411-9696 and am now going to be switched to them within ten working days. My local phone company will charge me $5 for the switch but ATCALL will give me $5 credit so it cost nothing to switch plus I now will get 10 cents a minute anytime any day. This will be great because we’ve got six kids and grand kids and Nannie is a great talker!” A.T.: And now you can get 9-cent-a-minute calling through a deal America Online has arranged. But if you use AOL, you certainly know about it – talk about “in your face” advertising.
Uvarov’s Lament June 3, 1998February 5, 2017 “I want a world of warm puppies, butterflies and sunny days,” writes our friend Uvarov, “a world where the makers of wealth are not dishonest, rapacious rascals. I’ve read up on very rich men (and in the case of Estee Lauder, women) to see if there is one who was not a rat (even if a charming one) somewhere along the line. I haven’t found one. (Well, maybe Gene Autry…but I don’t know much about him.) Bill Gates’s early public image was that of a clumsy, endearing nerd who…well, it seems that Lawrence Ellison is right when he says, ‘Gates likes to think of himself as Edison, when actually he is Rockefeller.’ Gates stole the Stacker technology outright — to name one nasty thing he did — and only after Stacker took Microsoft to court, did Microsoft start paying them a royalty. “Richard Branson was the other hope for a right wing Republican trying hard to believe in Mom and apple pie. Well, I just read a book on Branson and he 1) almost went to jail early on for breaking England’s import/export laws 2) sold boot-leg Jimi Hendrix records that he bought from a dealer…and when the dealer drove up in his truck to sell his records to Branson for 1 pound each, Branson showed up an hour late and, since he knew the dealer did not know what Branson looked like, asked the dealer, ‘Who are you and what are you doing here?’ The dealer said, ‘I was supposed to sell these records to a bloke for a pound each, but he hasn’t shown up.’ Branson said, ‘Well, bad luck, mate. How about I buy them off you for 50 pence each?’ And the dealer said, ‘Okay,’ and Branson sold them through Virgin mail order for the intended 3 pounds each. 3) When Branson started Student magazine, he had the magazines printed on cheap pulp paper…except for the copies he gave to advertisers. Their copies were expensively printed slick ones, and the advertisers were led to believe that all copies of Student were constructed thus…meaning they paid higher ad rates than they otherwise would have. “I had four close friends in high school (we are all in our mid-thirties now). They were all fun to be with. One now runs an antique shop, and his worst crime against humanity was that he could be snooty now and again. My second friend now owns a small screen-printing business…that provides a nice income, but certainly nothing with which he can buy and sell congressmen. And his worst crime against humanity was that he would brag about being a better surfer than he actually was. The third friend is now an electrician, and his worst crime against humanity was that he asked a girl we both liked to the prom before I had a chance to. (Okay, so it was a crime against me, not humanity.) “My fourth close friend…MADE IT ONTO THE FORBES 400 LIST !!!!!!!! He has since plunged off it like a sky-diver falling toward a field of iron-ore with an electric magnet strapped to his chest. But even though his company has since hit a reef, he is still worth many tens of millions. (And, annoying to old friends like me…his head has grown right along with his bank account.) This fellow’s worst crimes against humanity were: a) shoplifting music tapes from a record store by stuffing them in his pants; b) stealing car stereos and reselling them black-market style. He once stole a car stereo from a girl he knew and who lived two doors down from him…and when she got a car alarm after the theft, my friend (who wasn’t so close a friend at this point) laughed with his accomplice in front of me at the fact that the alarm was the most expensive one she could find. He also actually approached my prom-date-usurping friend and said, ‘Do you need some seat covers? Because I know a car that has some neat sheepskin seat covers, and I could steal them and then sell them to you.’ c) He stole a lot more stereos to sell to other students. d) When he wanted to get into a certain college after two years of junior college, his brother — who looks very like him and was very academic — took his S.A.T. tests for him…and my old friend got into the desired college. (I’ve since read of a student serving six months in prison for having someone else take his S.A.T.’s for him). “Now, for my one friend who had/has a serious criminal streak running through him to be the one to end up richer than God…it’s one of those moral lessons about life one would rather not learn. And to try to find at least one HONEST fellow in the world who is stinking rich, and failing in the attempt… What is your take on the men who have built up wealth?… Is there such a thing as a morally upright filthy rich man? Can one get up to that level without being a rapacious manipulator? Will the nice guy always finish, at the best, second?” A.T.: Uvarov, Uvarov! What kind of attitude is this! Surely you are being too gloomy. Michael Dell is no pauper, and is he a rapacious manipulator? Warren Buffett has played honest and fair all his life, I expect. And yet while I like to think there are numerous examples of nice guys finishing first, it is intriguing what you say. In my elementary school class, the one boy I remember as being “socially maladjusted” (my mother’s term, at the time) and who, if memory serves, was expelled for something having to do with a magnifying glass and kindling (though memory may indeed not serve — this was a long time ago) recently resurfaced in the pages of Business Week, worth $100 million. None of my high school classmates is, to my knowledge, stinking rich, but there was the boy expelled from my older brother’s class — again, just a bit too rough, raw and defiant — who became one of Mike Milken’s junk-bond-financed band of centi-millionaires. So there may be more to what you say than any of us would like to think. But I still believe you’re being way too pessimistic. It must be that baleful, fatalistic Russian soul.