Year: 2001

Michael Joy: ‘I’ve been reading and hearing the talking financial heads say things like “the market needs investors to give up on stocks before it will rebound” and other such bon mots. What on earth do they mean? Seems counter-intuitive.’

☞ It’s an age-old cycle. A market peaks when everyone is bullish, excited, euphoric, the economic news is great – because ‘there’s no one left to buy.’ I mean, it’s such a no-brainer! Stocks clearly outperform safer investments if you’re patient, and gee, if you can borrow against your house at 4% after tax and compound it in the market at, say, even as modest a goal as 10%, how can you lose? So everyone’s in the market, everyone’s psyched and expecting it to go higher . . . and that’s the top. Seems counter-intuitive, doesn’t it?

(I’m exaggerating when I say ‘everybody,’ but you know what I mean.)

Well, the other side of it is that once the market starts to go down, people go from euphoric to long-term bullish and then to, well, hopeful that the worst has past . . . to hanging on until their stocks come back to what they paid – they’re determined not to sell at a loss – to disillusioned (why didn’t they tell us it could be this bad?!) . . . to completely disillusioned and disgusted or panicked – and finally they get out while they still have something left. At this point, everyone hates the stock market, and the only stories you hear are filled with woe and gloom (‘look at Japan – after 11 years, it was down 70%!’).

And that’s the bottom. There’s no one left to sell. The people left holding stocks are so stubborn, they will not sell. And some others who did sell, and have some cash as a result, venture back.

At the top, nobody cares about rational valuations. Everyone’s making money, and you feel like a chump being left out. The last ones in are buying in total disregard of rational value.

At the bottom, nobody cares about rational valuations. ‘If I never see another stock again it will be too soon! Feh! Feh!’ The last ones to sell are selling in total disregard of rational value. (For a year or two around 1974, practically every story I wrote concluded, ‘It the world doesn’t end – and it usually doesn’t – stocks are a raging buy. And if the world does end, what difference will it make?’)

Is it always this simple and clear? (Or ever?) No. Nor, as the saying goes, do they ‘ring a bell’ at the top or the bottom. But this is the gist of how great swings in the market usually work. And there’s a pretty good case to be made that we haven’t reached the irrational disgust stage. With luck, and with lower interest rates, and with all that 401(k) money flowing in – and with our ‘sole superpower’ status and the stunning pace of technological change (with its concomitant productivity gains) – we may not have to. But we may. So, as always, never keep money in the stock market that you will really need in the near or even the intermediate future. The Dow three years from now could certainly be 40% lower than it is today. I am not predicting that it will be, but it certainly could be.

OK: Tommorow We’ll Cover Selling Puts. Today, we have to solve Friday’s puzzle.

In the equation SEND + MORE = MONEY, as you will recall, each letter stands for a digit. No two letters stand for the same digit. What digit does each letter stand for?

Hats off to the many of you who sent in the correct answer: SEND + MORE = MONEY translates into 9567 + 1085 = 10652.

I would definitely stop reading here and go about your business. If you got it right, you need read no further. If you had the good sense not to try, don’t spoil it now. And if you tried but got it wrong, this will only annoy you.

Still, for the record, here’s one way to figure it out:

We know M can’t be more than 1 because even 9,999 and 9,999 = less than 20,0000. So MONEY must be a five-digit number beginning with 1 (no five-digit numbers start with 0).

SEND + 1ORE = 1ONEY

That tells us that S = 8 or 9, because there would be no other way to get these two four-digit numbers to add to a five-digit number (even 7,999 and 1,999 wouldn’t make it).

So:

M = 1
S = 8 or 9

That makes O, in a sort of visual pun, equal 0. It can’t equal 1 (already taken) or higher than 1 (there’s no way that even 1999 + 9999 could equal 12,000 or more).

So:

S = 8 or 9
M = 1
O = 0

And S has to be 9, because the highest MORE could be is 1098, and how could you get SEND + 1098 to equal at least 10,234 if S were less than 9?

So now we have

  9END
+ 10RE
———
10,NEY

Since 9 + 1 already give us the first two digits — 10,NEY – we can simplify what’s left as:

END + RE = NEY

END
+0RE
——
NEY

Now, it would appear that E, sitting above 0, equals N. But that’s not possible because E and N have to represent different digits, so E must have had to ‘carry the one’ — meaning that N = E +1. E and N must be a pair like 2,3 or 3,4 or 4,5.

It would also appear that R, sitting beneath N and adding to E, must be ‘negative one,’ since E is one LESS than N. But negative numbers aren’t possible in a simple addition like this, so it must be must be 9, except that, oops, 9 is already taken, so it must be 8 with a ‘carry the one’ picked up from D+E.

So now we have

  9,END
+1,08E
———
10,NEY

We know all ENDY must all be between 2-7, as the other digits are now taken.

So E,N are a series, like 2,3, or 3,4, or … well, at most 6,7.

And D + E must add up to at least 10, to result in a carry to the next column. They can’t add to only 10 or 11, since that would require the letter Y to be a 1 or 0, both of which are taken. So it must add up to equal 12 or more.

Okay, with the numbers 2,3,4,5,6, and 7 available, you can either D or E is gonna have to be 7, because the next highest two numbers are 6 and 5, and they only add up to 11. So which letter is 7: D or E?

Well, it can’t be E because we already know N is one larger than E and that would make N be 8, but 8 is already taken. So D equals 7.

  9,EN7
+1,08E
———
10,NEY

With D 7, E has to be 5 or 6, or else D+Y won’t get you above to 12 or more. But E can’t be 6, since that would make N 7 – and 7 is already taken. So E has to be 5, and thus N must be 6.

  9,567
+1,085
———
10,65Y

And that makes Y = 2.

9567 + 1085 = 10652

It is just conceivable – I am not predicting this – that this numerical equation will one day translate into DOW + S&P = NIKKEI. It’s quite close (9505 + 1140 = 13,405). But that’s a much tougher puzzle

BUY USED CARS

Thanks to Paul Lerman for forwarding this supposedly real advertisement from an Irish newspaper:

1985 Blue Volkswagen Golf
Only 15 km
Only first gear and reverse used
Never driven hard
Original tires
Original brakes
Original fuel and oil
Only 1 driver
Owner wishing to sell due to employment lay-off
Photo Attached

AND SPEAKING OF SMALL ISLANDS

A cruise ship sinks and three men make it to an uninhabited island.

The first man, a Christian, tears two branches from a palm tree, creates a cross, and prays to the Lord to be saved from the island.

The second man, a Muslim, pulls several fronds from the palm tree, creates a mat, kneels facing Mecca, and prays to Allah to save him.

The third man, a Jew, falls asleep under the palm tree.

The other two can’t understand how this man could remain so calm and serene, and ask him how he could be so at ease.

‘Two years ago I gave $1 million to the Jewish Federation,’ he explains. ‘Last year I gave $2 million. This year I pledged $3 million. Don’t worry … they’ll find me.’

Monday: ‘Selling Puts.’ But first, a puzzle for your weekend. (Warning: this could ruin your weekend.) In the equation SEND + MORE = MONEY, each letter stands for a digit. I.e., the ‘S’ in SEND may be 0, 1, 2, 3, 4, 5, 6, 7, 8, or 9. No two letters stand for the same digit. Your task: Deduce what digit each of the letters stands for, so that it does, in fact, add up. No higher math skills required.

Gary Wimsett: ‘How about a plug for http://www.corante.com/ (tech news filter)? It’s free, it’s informative, and it’s free.’

☞ Well, if it’s free and informative and free . . .

Alan Rogowsky: ‘After reading your column of some time ago plugging Hamilton Jordon’s book, No such Thing As a Bad Day, I immediately bought the book & sent it to a very dear friend in Baltimore who is suffering from a recurrence of colon cancer – with the admonition that she should make an effort to read it (under the circumstances, even this is difficult for her). Received a letter from her today saying that it has had an amazing effect on her. It has inspired her to be more positive about her health and future – and, significantly, to continue her very difficult chemotherapy. This has made a HUGE and positive difference for her. I suppose you must sometimes wonder to what extent you touch the lives of your readers. Here is a case where you have a made a difference.’

☞ It’s Hamilton Jordan, of course, who has made the difference – but this is great to hear.

A WALK IN THE WOODS

I am having so much fun reading – well, listening to the author read me – A Walk in the Woods, by Bill Bryson. I downloaded it with audible.com and am reading it as I walk. You may prefer to listen on cassette as you drive to work, or on the Stairmaster. Or I suppose you could just read it. In a word, this guy, Bryson, set out to walk the 2,150-mile Appalachian Trail. Far better him than us. If you don’t laugh out loud every minute or two, or grin broadly at the wonderful way he expresses himself (‘Daniel Boone not only wrestled bears, he attempted to date their sisters’), it will only be because all talk of bears reminds you of the stock market, and all thought of the stock market makes you feel flu-ish.

SAVE THE WORLD – CHEAP!

Ed Bessman: ‘Eleven-watt CFLs are only $3.95 at IKEA, Baltimore, MD.’

$END CA$H!

Not original with me (why don’t people take/give credit for these things?!). Thanks to Steve Sapka for spotting it:

Dear Dad,
 
$chool i$ really great. I am making lot$ of friend$ and $tudying very hard. With all my $tuff, I $imply can’t think of anything I need, $o if you would like, you can ju$t $end me a card, a$ I would love to hear from you.
 
Love,
 
Your $on

Dear Son,
 
I kNOw that astroNOmy, ecoNOmics, and oceaNOgraphy are eNOugh to keep even an hoNOr student busy. Do NOt forget that the pursuit of kNOwledge is a NOble task, and that you can never study eNOugh.
 
Love,
 
Dad

YOUR DOT COM 1040

Click here.

I’d like to tell you we’ve hit bottom, and that’s always possible, but remember that the Dow was at 6,500 or so when Alan Greenspan first floated that phrase ‘irrational exuberance’ in 1996, I think it was. Today, we’re shocked at the prospect of its retreating below 10,000.

In those intervening five years or so we’ve all worked hard and grown the country and its assets some, so what might have seemed irrational in 1996 with the Dow at 6500 (and the NASDAQ around 1250) may not now be so irrational at all. We may have grown into those valuations.

But that would still mean the Dow’s slipping another 3,500 points and the NASDAQ dropping another 40% or so.

I am not predicting these things, vouching for much accuracy, nor forgetting the fact that Greenspan’s remark was based on the Japanese experience, not explicitly presented as Greenspan’s opinion of U.S. stocks at the time.

So this is all very vague, and we may not need to see the markets fall that far, let alone farther. Indeed, yesterday may someday be looked back on as the all-time low for this century!

But I doubt it.

Sure, AIG, a terrific company that I own, is down from 104 to 78. But it’s still selling at 34 times trailing earnings – and its brilliant, tough-as-nails CEO is 74 or 75 – will his successor be able to justify a multiple like that? Maybe, maybe not.

So the first thing to say is that there’s a possibility that it will take many years before we get a great stock market again. (Or it may not – I don’t claim to know.)

The second thing to say is that, happily, you escaped a lot of the misery, because you had dumb little stocks like CN, which sells for about half its cash, and which actually went up a penny yesterday. (I’m not recommending anyone buy it here. But neither would I sell $7 of cash, which is roughly what the company holds, for $3.50, which is roughly what the stock is selling for.) Or A&P preferred G, suggested here in early January at $12 – it was up a nickel yesterday, to $19.70. (Again, don’t buy it here just because it got a lot more expensive.)

You were too smart to own Amazon or Priceline or any of that – let alone on margin – because you saw that the relative values were just nuts. Likewise Juniper or Cisco. ‘The truth is,’ you read here last October, ‘Juniper may one day be valued more highly not just than GM, Apple, Amazon, and the New York Times Company, combined, as now, but more highly than all those plus (are you ready?) Federal Express, Ford, AT&T, Kodak, Yahoo, and the entire U.S. airline industry. Why not? Cisco already is.’

This is not to say some of these aren’t fine companies. There may come a price at which Cisco and Juniper and Yahoo and Amazon are a steal. Maybe we’re already there. You could start to nibble. But they were wildly overpriced — and I’m not sure they’re screaming bargains even today. That’s important, because markets often go to extremes. If we’re headed for the gloomy extreme, we may have a way to go.

One Internet company I don’t own that one day I might, because it stands out from the others, is eBay. Down 75% from its high, eBay still sells at 200 times earnings and sports an $8.5 billion market cap. Too rich for my blood. But eBay is a monopoly of sorts – because everyone wants to sell or buy where everyone else is selling or buying – and monopolies have a unique advantage.

If you’re in the market, don’t rush to sell now, just because stocks have fallen so much. But neither should you assume that a few months from now the Dow is going to be back at 13,000 or the NASDAQ, anywhere near 5000. My guess is that we have a long row to hoe.