Amazon Short Update January 6, 1999March 25, 2012 As I write this (Monday night), the stock market values AMZN at more than Federal Express and United Airlines combined. This could make sense, as Ive argued several times before, if everything goes right and Amazon becomes one of a handful of companies that control all global e-commerce. Usually that kind of thing doesnt happen, especially when competition is likely to be fierce. But it could. I sort of hope it doesnt, because I foolishly shorted a few shares of AMZN a couple of months ago. But it could. I shorted it on November 16 at 128 up from 25 earlier in the year. Thirty days later, I shorted a little more at 290. Not a bad 30-day run. Monday, it closed at 354 (and then split three for one, so now you have to divide all these numbers by three). In the meantime, for book buying, Ive begun switching to www.booksamillion.com. It charges about 20% less than Amazon, and when you buy as many books as I do, that mounts up. Tomorrow: Free Books
Dogs of the Dow With Bonds January 5, 1999March 25, 2012 Should you find yourself aswirl in a cloud of antimatter and flung, thus, back to the year 1968, I have an investment strategy that will turn $10,000 in a tax-free individual retirement account (if only there had been such things in 1968) into $5.7 million. The strategy is informally called (in a recent Barrons, anyway) "the dogs of the Dow with bonds." It is based on Michael OHiggins new book, Beating the Dow With Bonds: A High-Return, Low-Risk Strategy for Beating the Pros Even When Stocks Go South. That same $10,000 invested in OHiggins earlier dogs-of-the-Dow formulation without bonds that is, simply investing each year in the five cheapest of the Dows 10 highest-dividend-yielding stocks would have grown to but $1.4 million assuming no taxes. And yet that is still a heck of a lot better than having just put $10,000 in the Dow itself and hung on. That theoretical exercise (theoretical because the 30 stocks that make up the Dow change a bit from time to time) would have produced a mere quarter million or so. The new plan with bonds calls for you to be out of the market altogether when the yield from high-grade corporate bonds exceeds the implied "yield" from the S&P 500. If the S&P is selling for 25 times earnings, then its implied yield (even though you only get a portion of it in actual cash, as dividends) is 4%. At 20 times earnings 5%. At 10 times earnings 10%. At 50 times earnings 2%. Lately … well, even since 1980, actually, this new system would have had you out of stocks and in bonds. Thats right: no stocks in your portfolio these last 18 years. And you would have done great, because what people forget about bonds is that in addition to paying interest, when the general level of interest rates falls, bond prices go up. The added twist to OHiggins new system has you choosing one of two polar-opposite kinds of bonds (in years like 1980-1998 when the system dictates bonds): one-year Treasuries when inflation is feared; long-term, zero-coupon Treasuries when its not. (To determine this, according to the OHiggins system, you simply look at the price of gold. If its price is lower than a year ago, inflation is not in the cards. If gold is up from a year earlier, watch out.) And by following this system, there in your 1968 blue jeans and radical sideburns, if you could have conned your parents out of $10,000 (and found a way to shelter the interest and capital gains from taxes), youd have your $5.7 million today. Youd be what was it we used to say in 1968? made in the shade. All with what the author suggests could be 15 or 20 minutes effort each year. So now we know the second best way you could possibly have invested your money these last 30 years: this system. (The even better way, you will be sick by now of hearing, is to have put your money into the stock of Berkshire Hathaway and never, ever thought about it again.) The question is: How about the next 30 years? Personally, because I rarely do find myself aswirl in a cloud of antimatter (or if I do, it resets my memory chip, so I dont know it), this question is of more interest to me. And for this Im afraid the system may be nearly worthless particularly for money you dont have under the shelter of a tax-deferred account. Yes, in many years the system might do fine, just as, looking back, the Dogs of the Dow did well. (Yet in the last couple of years, when the system became widely popular, the Dogs actually trailed the Dow oh, no!) But what if you had a year when the system dictated all your money should be out of the stock market and in long-term, zero-coupon Treasury bonds? Putting all your money in one thing is risky. And long-term zeroes are riskier still. They zoom when interest rates fall, but crash when interest rates rise. So there you are, having sold all your stocks (and owing Uncle Sam and his local counterparts perhaps 30% of your profits) and having put the proceeds into zeroes, as per OHiggins, because the price of gold is lower today than it was a year ago. And now, having spent your 15 minutes on this, you go on auto-pilot for a year. Fine. But what if, even though gold didnt predict it, inflation fears should take hold mid-year? Down come your bonds, up goes gold … so come January you have to sell all the zeroes at a huge loss (only $3,000 of which serves to lower your taxable income, with excess losses carried over to future years) and buy one-year Treasuries (or else stocks, if theyve finally gotten cheap enough). So it was foolproof in hindsight (as any good system constructed with the benefit of hindsight is). But going forward? Basically, with this system you are betting you can time U.S. interest-rate movements by assuming that the price of gold will work as an inflation predictor in the future in the same way, and with the same timing, it has in the past. And it may! In which case youll do very nicely. Or it may not. In which case you wont. All that said, and taxes aside, the very broadest strokes of this idea are useful. We should be nervous about U.S. stocks at todays levels. And there are times when a safe bet in one-year Treasuries will prove a lot more lucrative than something more exciting. But beyond that, it doesnt seem to me this system is the golden key after all. Shucks! (Note one other serious problem: With zero-coupon bonds owned outside a tax-sheltered account, you have to pay ordinary income tax each year on the imputed "interest" you earned even though the actual amount of cash interest you got was: zero. So zeroes really make sense only within a tax-sheltered account.)
The Pitbull System 25 Months Later January 4, 1999March 25, 2012 Ever wonder about all those amazing easy-riches strategies that come in the mail? You know it cant be that easy … but, but …. Well, I wonder about them. And I marvel at the skill of the copywriters who prepare them. And, well …. So here was a message I got two years ago from one of you, Sandy Price: "While youre checking out stock market systems, check out the Pitbull system advertised nearly every day in Investors Business Daily (great paper, by the way). Over 200% per year! He retired in his 40s! Just thought you might get a chuckle." Indeed, Sandy signed up. "Its not making 200% per year this year for me," his message went on to say. "It does not appear to be for him either, based on the picks at the web site. But I am making money at it." Hmmm. That was November 1996. So how has it turned out? Did Sandy earn 200% a year? Does retirement loom? In his case, as it turns out, no. "Commissions on that system were eating me alive so I abandoned it," he reports. "Dont know how I would be doing now, but I was losing money too fast to continue with it." (Sandy traded with Charles Schwab, the well-known discounter but not a deep discounter. When youre trading frequently which I do not advise even discount commissions can kill you. Say you made one trade a day. The difference between, say, $13 a trade and $50 comes to about $10,000 a year.) Of the 33 positions Sandy traces on the Pitbull system, the net result appears to have been a loss of $3,663 on an investment of $83,026. The point of this is not to attempt any kind of scientific debunking of the Pitbull method. Ive actually forgotten what the method is (though I do remember being so taken by the sales literature that I, too, sent in my money, out of curiosity, but then never found time to read the material, let alone "try" it). Rather, I just mean to suggest that in the real world, you are probably doing the right thing if you resist the temptation to open these remarkable direct-mail solicitations promising the cant-lose newsletter or the money-back-guarantee seminar or the book-and-tapes-normally-an-$849-value-yours-for-just-$149. Isnt hindsight fun? Tomorrow: The New Dogs of the Dow System