Take the Money You Save on Hotels and Keep It Fully Invested May 31, 2002January 25, 2017 Question: Any of you out there using MYM DOS V12 under Windows XP? Does it work OK? Do you have XP ‘Home’ or ‘Professional?’ Let me know. Thanks! GET OUT YOUR MONKEY SUIT Frank McClendon: ‘Here’s the plan. When Mark Shuttleworth (the very rich space tourist) returns from space, everybody dress in ape suits. It will only work if we all do it. Pass it on.’ ☞ It’s a great plan, never mind that Shuttleworth has been back for the better part of a month now. I expect this to be floating around the Internet, like satellite debris, for decades. And I laugh every time I get it. I BONDS Jim S: ‘I was looking at your column(s) about I-bonds, and went to the government site to see what rates are like today. Seems like they are in the 2.5% range. This is much worse than a 4.5% five-year CD rate, which is pretty easy to find. Are I-bonds a bad idea now, or did I read the rate wrong?’ ☞ Well, I-Bonds purchased today yield inflation-plus-2%, free of local income tax and sheltered from federal tax until you cash them in (or permanently tax-free if you qualify to use them for your kids’ tuition). How that stacks up against 4.5% in a 5-year CD depends on what the inflation rate turns out to be and your tax bracket. Either way, it’s great that you’re saving; neither way will you get rich. HE SAVED $600 Jeff Houston: ‘Just wanted to say thanks for letting me know about Priceline. At the last minute, we needed a Hotel in downtown Los Angeles. I had never used Priceline but remembered reading about it on your website. Asked for ‘three stars’ at $60 a night and got it! The normal price is $200. Just now we found that we needed to stay one more night, used Priceline, and got the same hotel for $60 again.’ ☞ Glad to know it worked out. As mentioned here also, Expedia can be even better. First check its published offers; then use Priceline to see if you can beat them by enough to warrant ‘going blind’ (with Priceline, you don’t know which hotel they’ll assign you) and ‘uncancelable’ (with Priceline, if your plans change, you are out the full cost of the stay – versus just $25 with Expedia). And remember that Priceline tacks on a $5.95 nightly service charge. (Remember, too, that with either of them, you save not just on the room rate – $200 versus $60 in this example – but also on what can be as much as 16% in taxes on the room rate.) ANOTHER FROM DICK DAVIS: Item 18: Why Stay Fully Invested? Most of the time the stock market moves indecisively within a trading range. It is only during relatively brief periods that the market moves up or down on a sustained basis. Studies have shown that much of the profit made in any given year, especially in bull markets, is made on the 5 biggest up days. Anyone out of the market on those days will show substantially lower results than the investor who stayed in the market for the entire year. Since the brief explosive upside moves are unpredictable, the investor must be in the market to catch them. Most of the investor’s time is spent waiting. When Peter Lynch was managing Magellan [1977-1990], he was fully invested at all times.
Kill the CFO? Put Him to Work? Boycott Exxon And Three More from Dick Davis May 30, 2002February 21, 2017 KILL THE CFO? Steve Meyer: ‘Your column Tuesday moved me to ask whether you’ve changed your mind on my ‘Wheel of Misfortune’ idea (where convicted white-collar criminals would face the random possibility of the death penalty)? Would the perpetrators of ‘aggressive’ accounting and sham deals be so keen if they knew they’d ‘face the wheel’ if what they did was found to be a crime? I rather think not.’ ☞ I think you’re right. And it is, at the least, an intriguing fantasy. Indeed, if you saw 60 Minutes Sunday, you saw guys in prison for 35-years-to-life under California’s ‘Three Strikes and You’re Out’ law for such third offenses as stealing a bicycle, stealing two double-AA batteries, and stealing a slice of pizza. If these penalties are appropriate, then perhaps the occasional lethal injection in the executive suite is, too. But I would argue against both. Maybe some intermediate punishment? Thumbscrews? IF WE DON’T KILL HIM, AT LEAST PUT HIM TO WORK? From the Progressive Policy Institute, arm of the Democratic Leadership Council: ‘Six years after President Clinton signed legislation ending welfare as we know it, which replaced the unconditional entitlement to cash aid with temporary cash aid conditioned on work, it is ironic that there is one major group in society that still gets public support without a work requirement – prisoners. While our nation has made great strides in the last few years to move welfare recipients from dependency to work, surprisingly, we’re moving in the other direction when it comes to transitioning prisoners to paid work. Fearing competition from prison labor, union and business interests have mounted an aggressive lobbying campaign to roll back paid prison labor, in spite of the fact that it can provide convicts with useful skills they can use upon release while at the same time helping to offset some of the cost of housing prisoners.’ ☞ Click here to read the whole thing. AND LET HIM WORK EVEN IF HE’S GAY Like 60% of the Fortune 500, Mobil explicitly banned discrimination based on sexual orientation – until Exxon acquired Mobil and nixed that language. As noted in this space before, ExxonMobil may thus be the only Fortune 500 company ever to have rescinded a discrimination ban. Thus the boycott of ExxonMobil, which is as simple as driving 30 yards to the competition. Is this some liberal commie plot? Yesterday, Institutional Shareholder Services recommended that ExxonMobil shareholders vote to add sexual orientation to the company’s Equal Employment Opportunity statement. As the Wall Street Journal reported, ‘ISS says…most of ExxonMobil’s competitors ban discrimination based on sexual orientation, and ExxonMobil’s failing to do so puts the company at a disadvantage [in the competition for talent] and invites possible litigation.’ In a world where shareholder resolutions rarely garner even 10% of the vote, this one scored 23.5% yesterday, up from 13% the year before. Not bad! But let’s keep boycotting until ExxonMobil restores the anti-discrimination ban and, for that matter, reinstates Mobil’s domestic partnership policy. Gas is gas. May as well buy it from good neighbors. THREE MORE FROM DICK DAVIS: Item 15: Brilliant Market Calls Many of the best known market analysts have earned their celebrity from one brilliant market call. If widely publicized, that one great call can insure fame for a long time despite the fact that it is rarely followed by another great call. Some names that come to mind include Joseph Granville, Robert Prechter, Henry Kaufman, Henry Blodgett, Howard Ruff, Jim Dines, Elaine Gazzarelli and Abbey Joseph Cohen. Others, like Michael Metz and Alan Abelson achieve notoriety because they are perennial bears and the media seek them out in bull markets to give balance to their stories. Item 16: Advice From Brokers Brokerage firms have lists of recommended stocks on their shelves at all times and in all markets. To increase your odds of success, focus on the stock that an experienced, informed broker feels most strongly about; in other words, the issue he feels compelled to buy tomorrow with his own money. I would shy away from brokers whose knowledge was limited to the research of his own firm. He or she should be aware of what the competition is recommending, of important articles in popular, market-impact publications like ‘Barron’s,’ ‘The Wall Street Journal,’ ‘The N.Y. Times,’ key interviews on CNBC – and share that information with you, even if it conflicts with the views of his own research department. No single source, no single firm has a monopoly on being right about the stock market. One caveat: when considering a recommendation, remember that the odds are against a stock going up when the market is going down. Stocks do not act in a vacuum. Item 17: What’s A Reasonable Price? It is crucial to buy a stock at a reasonable price. It makes all the difference in terms of the length of time you’re going to have to hold on to it. As obvious as that sounds, that’s how difficult it is to do. What’s reasonable? It can depend on such variables as the prevailing sentiment of investors, the visibility of future earnings, and the level of interest rates and inflation. A conservative approach is to buy when a stock is priced at the lower end of its historic range of price/earnings ratios. Or to buy when a stock is inactive, depressed and out of favor (providing, of course, that you’re convinced the bad news that’s causing its unpopularity is temporary). Buying unloved stocks is very difficult because you don’t have the support of the crowd. Investors put the most money in stocks at the highest prices and the least at the lowest prices. If you buy only amid the fever and excitement of rising prices you can go through an entire bull market and lose money. But if you buy during quiet times in a reasonable buying range, you can often avoid the interminable years of waiting that comes from buying high, riding the stock all the way down and then (hopefully) all the way back up again.
Dick Davis, Breasts, and More May 29, 2002February 21, 2017 BREASTS Michael Koltak: ‘My wife and I just returned from a vacation in Europe and it occurred to me that if Mr. Ashcroft were the equivalent of the Attorney General for the European Union – if there is such a post – he would have spent the entire GDP of the E.U. covering breasts.’ MIKE PIAZZA Thanks to Dan Cusimano for sharing this link. (I sometimes miss the Chicago Sun-Times sports page.) 1Q11.COM DOES CELL PHONES I don’t know if you’ve tried 1q11.com yet – I use it now to e-mail myself reminders, and also, when appropriate, to e-mail them to Charles. (It takes just a few keystrokes to designate who should get the reminder and when and with what frequency.) I also use it to store some stuff I want available no matter where I am, as well as some password-protected stuff I want accessible to others. But the thing that would be really neat is if it could also call my cell phone with reminders. Marc Fest: ‘It can already do that. For instance, say that my Nextel cell phone number is 305-234-5678. By sending an email to 3052345678@messaging.nextel.com, it arrives as a text message on my cell phone. 1q11 is sending my cell phone messages all the time and it works great. You may want to check out how your cell phone provider does this. I know AT&T offers the same kind of service.’ AND NOW, THE NEXT THREE (OF 35) DICK DAVIS OBSERVATIONS . . . Item 12: Investment Versus Speculation The basic difference between a quality, seasoned stock and a speculative stock is this: with few exceptions, a blue-chipper will recover from a major downtrend; a speculation may or may not. That’s a big difference in risk and comfort level. In other words, if you hang around long enough, you can depend on the quality stock coming back. It took 10 years for IBM to get back to its 1987 high of 175 but it subsequently moved to new highs. One caveat: There are some quality stocks that gradually lose their luster and fail to regain former heights – witness a U.S. Steel or Xerox, or K-Mart, but these are exceptions. Nothing is forever – although GE fans may argue otherwise. Item 13: Oldtimers Out Of Step It’s my observation that older people with long memories and conservative natures have been penalized in the stock market. They have been taught that the market punishes the greedy and that when stocks with no or little earnings sell at very high prices, its time to sell, not buy. But in the late 90’s, stocks that were unreasonably high went higher, and then higher still, and the disbelieving old-timers watched as the soaring market passed them by. Younger investors with short memories had no such restraints. It’s true that when the bubble burst, many gave back their winnings, and then some. But there were fortunes made and kept by others who had little idea they were violating any long standing rule of valuation. They simply didn’t know any better; ignorance was bliss and greed paid off – at least until the bubble burst. Those who made quick profits justified them by saying they were in harmony with the new paradigm and that the cautious veterans simply failed to adjust. Of course, the conservative approach was fully vindicated when the market collapsed, but not before a lot of easy money was made. Extreme valuations based on unrealistic optimism are eventually corrected but until they are the stock market can be unfair, frustrating and even cruel as it rewards greed rather than restraint. Item 14: It’ll Always Go Lower Forget about buying a stock at the bottom or selling it at the top. Yes, somebody does, but that elusive somebody will not be you. The truth is that after you buy a stock, it will go lower, not sometimes, but always. It is unrealistic to think that you’re smart or lucky enough to buy at the very bottom tick or sell at the very top. More tomorrow.
Who’s Looking Out for the Other Shareholders? May 27, 2002January 25, 2017 So here is last Wednesday’s New York Times with a small one-column article in the Business Section under the headline Under Cheney, Halliburton Altered Policy on Accounting. It is written by Alex Berenson and Lowell Bergman (Bergman is the former 60 Minutes Producer depicted in the movie The Insider, and a Very Great Man.) It begins: During Vice President Dick Cheney’s tenure as its chief executive, the Halliburton Corporation altered its accounting policies so it could report as revenue more than $100 million in disputed costs on big construction projects, public filings by the company show. Halliburton did not disclose the change to investors for over a year. At the time of the change – which was approved by Arthur Andersen, the company’s auditor at the time – Halliburton was suffering big losses on some of its long-term contracts, according to the filings. Its stock had slumped because of a recession in the oil industry. Two former executives of Dresser Industries, which merged with Halliburton in 1998, said that they concluded after the merger that Halliburton had instituted aggressive accounting practices to obscure its losses. The article goes on to say that the Vice President declined to comment. He may not even have been aware of this change – what’s an extra $100 million to a CEO with a huge number of stock options? But one gets the feeling that this is a guy who may have looked out for himself better than he looked out for his shareholders. As the article notes, Halliburton stock is now about where it was when he became CEO in October of 1995, as compared to the S&P 500, which is 86% higher. So for Halliburton shareholders, it’s been disappointing. But while he was there, Vice President Cheney was able to get the stock up high enough to make a fortune on his options. And then you have President Bush. Here’s what U.S News & World Report – the most conservative of the three national newsweeklies – had to say in its March 16, 1992 issue: Bush sold [his entire] $848,560 worth of Harken stock just one week before the company posted unusually poor quarterly earnings and Harken stock plunged sharply. Shares lost more than 60% of their value over 6 months. When Bush sold his shares, he was a member of a company committee studying the effect of Harken’s restructuring, a move to appease anxious creditors. According to documents on file with the Securities and Exchange Commission, his position on the Harken committee gave Bush detailed knowledge of the company’s deteriorating financial condition. The SEC received word of Bush’s trade eight month’s late. Bush has said he filed the notice but that it was lost. Now, come on. Was it just a coincidence that an insider enmeshed in all this stuff, and on the three-man audit committee, would sell out a week before the bad news hit? An SEC probe ended without charges being filed. Is it possible that the SEC might have gone easy on this guy because he was . . . oh, I don’t know . . . the President’s son? Before running for Governor, Bush obtained a letter from the SEC saying that ‘the investigation has been terminated as to the conduct of Mr. Bush, and that, at this time, no enforcement action is contemplated with respect to him.’ According to the Washington Post (July 30, 1999), “Bush took that as vindication. ‘The SEC fully investigated the stock deal,’ he said in October 1994. ‘I was exonerated.’ . . . [Then Associate Director of the Division of Enforcement Bruce] Hiler, however, was more cautious. His statement said it ‘must in no way be construed as indicating that the party has been exonerated . . .” Exonerated, not exonerated, guilty, not guilty – why split hairs? It was only $848,000. Just once I would have liked Tim Russert to ask the then-candidate – who was making fun of Al Gore for the important work Gore really did do in helping to birth to the Internet (he never said he invented it) – a question like this: ‘Governor, what about the Harken Oil insider-trading investigation, where you, as a member of the board of directors and the three-man audit committee sold all your shares a week before bad news was announced? In the months following your sale, Harken stock dropped 60%. Did you have no idea what was going in your own company? Do you understand why the timing of your $848,000 sale leaves the impression with some that you violated a very basic securities law? The S.E.C. did not charge you (then the son of a sitting President) with an offense, but also did not exonerate you as you later alleged it had. Does this speak in any way to the character issue?’ Look. No one would suggest that we spend several years and $40 million investigating Cheney’s involvement in Halliburton’s accounting or Bush’s apparent insider trading – as we spent several years and $40 million investigating the Clintons’ $30,000 investment in Whitewater. At least I hope no one would. The President and Vice President have a few more important things we’d like them to stay focused on. But neither should we use ‘the war’ to excuse or ignore egregious behavior or policies – as columnist Matt Miller persuasively argues this week. A senior fellow at Occidental College in Los Angeles, he writes (in part): It’s time to challenge the premise behind White House efforts to de-legitimize questions on everything from pre-9/11 screw-ups to Enron to the budget . . . Language matters. George Bush’s invocations of war echo Churchill stiffening English spines during the Blitz. But we are not in such a war. In such a war an entire nation mobilizes against daily and massive threats to its survival . . . Bush has issued no such call for sacrifice, because none is presently required . . . Instead, we face a frightening new era in which terrorism, and the fight against terrorism, can be expected to be a permanent feature of American life . . . It is a ‘struggle,’ a ‘fight,’ a ‘battle,’ a ‘showdown,’ a ‘clash,’ a ‘conflict,’ filled with ‘combat.’ But it is not a war. If this is a war, then . . . investigating Enron’s ties to the White House, and the firm’s influence on Bush’s energy plan and his neglect of California’s costly power crisis, are unpatriotic distractions. Don’t these carpers know there’s a war going on? If there’s not a war, however, everything is different. If we’re in for decades of fending off terrorist threats via improved intelligence and targeted military action, then assessing flaws in our current intelligence process isn’t a diversion – it’s indispensable. . . . And if it’s not ‘war,’ but something different, then Bush and his surrogates can’t hide behind the flag to shield scrutiny of their business giveaways and near-perfect fealty to the wishes of the wealthy. As Gretchen Morgenstern reported in Sunday’s New York Times (click here for the whole thing): In a speech last Wednesday before the United States Chamber of Commerce, Representative Michael G. Oxley, a Republican from Ohio and chairman of the House Financial Services Committee, said: “By coercing large sums of money from brokerage firms, actions like those undertaken by the attorney general will seriously weaken the ability of American companies to raise funds in the capital markets.” American investors who lost funds in the capital markets clearly come second to Mr. Oxley. The large sum coerced out of Merrill – $100 million – is less than one-third of the amount the firm paid for office supplies and postage last year, $349 million. It is no surprise that Mr. Spitzer is being dogged by Mr. Oxley, who has received $235,103 from political action committees tied to financial and insurance concerns this election cycle. That is 60 percent of his P.A.C. total and more than five times the receipts from his next-biggest industry donor. The defenders of those companies that were publicly promoting securities that they privately labeled ‘crap’ would like to see these matters removed from the hands of folks like Eliot Spitzer and placed in the hands of S.E.C. Chairman Harvey Pitt, whom Bush/Cheney chose for the job knowing his long history of opposing the S.E.C. It is, as I’ve pointed out before, a grand time to be rich and powerful in America. Wednesday: Dick Davis, Breasts, and More
Dick Davis – Items 8-11 May 24, 2002February 21, 2017 But first . . . Catherine Hogan: ‘I live in Seattle and a doctor friend of mine has been advocating the use of marijuana for medicinal purposes. He works with AIDS patients. Apparently Mr. Ashcroft has taken an interest in my friend to the extent that he sent DEA agents who have questioned his patients as they were leaving his office and asked them if my friend had prescribed marijuana and in addition if they had had sex with their doctor (for heaven’s sake!!). Obviously I can’t use my friend’s name, yet, but I thought it was an interesting tidbit.” ☞ To those of us on the left and in the middle – or even the moderate right – it is sobering to think that Republican Senate Minority Leader Trent Lott and Republican Majority House Whip Tom DeLay could soon be our ‘checks and balances’ on John Ashcroft and Clarence Thomas. (Speaking at the First Baptist Church of Pearland, Texas, last month, DeLay said that God is using him to promote ‘a biblical worldview’ in American politics.) And this . . . Anonymous: ‘Even BOREF doesn’t claim that they have a motor that is 30% more efficient. They claim that it reduces the wasted energy by 30%. Since the average 10hp electric motor wastes 10% of it’s energy to heat, they are saying that they reduce this amount by 30%. In other words, they are 93% efficient versus 90% efficiency of a conventional motor. Real numbers, but not necessarily ones that make economic sense.’ And now . . . back to Dick Davis: Item 8: Do It Yourself Investing A popular slogan on Wall Street has been ‘Investigate, then Invest.’ That’s okay for some, but it’s not realistic advice for most of us who have neither the time, the inclination nor the academic skills to totally understand balance sheets, profit margins, book-to-bill rates or chart formations. I believe the time spent conducting your own research would be better spent checking out the track records of professional advisors. After you choose, give him discretion and let him do the research. You may have just as good a chance of being right as the pro when it comes to one, or even a few decisions, but over the long term, the professional with a good track record is likely to do better, and is worth his fee. There are some individuals who do have the talent to do their own research. They are the exceptions, and I expect a good number of them are in this audience. One caveat: Being personally involved gives retirees something mentally challenging to do with their time, another common interest to share with friends, something stimulating to discuss at gatherings and on the athletic field. When we pick winners and ‘beat the system’ it makes us feel good and validates our self-worth. These social and psychological benefits of do-it-yourself investing can be even more valuable than profit, though that may be a stretch. Item 9: Any Approach Can Work The perverse nature of the stock market precludes hard and fast rules. In fact, you can do the exact opposite of almost any rule providing you stay with it, and achieve the same results. Some look for bargains, others (momentum buyers) look for active stocks making new highs, in hopes of selling them still higher. Some investors look for value, others for growth. If you don’t try to time the market’s shift from one investment style to another (which is very difficult to do because it’s never clear cut) and you remain loyal to your focus, your day will come. The 2 keys are being consistent and letting enough time pass to let your consistency work. Item 10: Negatives Of Being Totally Informed The worst thing that can happen to a long-term investor is to be instantly and totally informed about his stock. There is always news on a stock. It is rarely as bad or as good as it sounds when first released. It is usually quickly forgotten and produces, at most, a squiggle on a long-term chart. But a sudden, sharp price move triggered by news and reported by an animated broker can create a sense of urgency, a call for immediate action. The result is a buy/sell decision based strictly on emotion. The truth is that it is only the passage of time that puts news in perspective. Such knee-jerk reactions are better made when emotions have had a chance to subside and reason a chance to prevail. Unless you’re a trader, it is simply not healthy to be too close to your stock. Just like your spouse needs space, your stocks need room to perform, down as well as up. Being hyper-informed about a stock can lead to a premature separation. If you’re holding quality merchandise, the best thing you can do is to take lots of vacations and stay healthy. Like the commercial says, ‘It’s your future – be there.’ Item 11: Advice To Family Use restraint in giving stock recommendations to family and friends. Invariably, the loved ones you want to help most are the ones you cause to lose money. Perhaps you try too hard, or you’re too anxious or too cautious or too eager. Whatever the reason, some awkward situations can result. Resist trying to be a hero and you will avoid having to be a bum.
Dick Davis – Item #7 May 23, 2002February 21, 2017 But first . . . Have you been following Borealis? Long-time readers know I own a ton of shares in this ridiculous speculation, and that they will either go to zero (how can they not?) or else to the moon. It got a little more interesting when Boeing expressed its interest a few months ago, and when an elevator-motor manufacturer signed a joint venture deal, but the stock is still in the $4-$5 range where it usually is (leaving aside the day it briefly hit $11), giving the whole company, with its 5 million shares outstanding, a market cap of about $25 million. I have friends with houses that cost more than that. Well, one of the three main assets Borealis claims to have . . . it has not one impossible blockbuster but three separate ones (could there be any more red flags?) . . . is a solid state chip using some sort of revolutionary quantum physics that turns heat into electricity. Cool Chips, they’re called. And recently, shares in that Borealis subsidiary began trading under the symbol COLCF. (Go to pinksheets.com to get quotes on stuff like this.) It traded a mind-boggling 2,400 shares Tuesday at an average price of 11 – $26,000 change hands! – giving Cool Chips, with 7.3 million shares outstanding, a market cap of about $80 million. The Cool Chips subsidiary seems to have generated some interest at a Nanotechnology conference you can read about on the Borealis website. Borealis (BOREF) owns 71% of COLCF, or $57 million worth at the $11 price. And it owns the other two alleged blockbusters, as well – an electric motor that’s 30% more efficient than everybody else’s electric motor, and a gigantic iron ore deposit on the edge of Canada, within three paces of a deep water port. Because Borealis has 5 million shares outstanding and owns 5.2 million Cool Chips shares, each Borealis share more or less owns one Cool Chips share. So on Tuesday you could buy a Cool Chips share directly for $11, or indirectly by buying a Borealis share for $4.50 (and get the rest of the company ‘for free’). As nutty as it may be to buy BOREF for $4 or $5, it seems at least a little less nutty than to buy Cool Chips for $11. I am having so much fun with this. I’m guessing it will be several years – if ever – before Boeing is actually using Cool Chips to reduce the weight of its planes or Dell is using them to cool the inside of my laptop. Same for the Chorus electric motors and all that iron ore supposedly sitting off Bamff or wherever it is (I like saying ‘Bamff’). But the fun is in the anticipation. Actually winning the lottery, if one were ever to suffer that misfortune, brings with it all sorts of psychological problems I may not be ready to confront. And now back to Dick Davis (at greater length tomorrow, I promise): Item 7: The Income Buyer It’s been a difficult time for those who depend on their investments for income. After being spoiled by double-digit returns, yields have been declining for years, especially on the short end. Similar to the decade of the ’90s when greed often paid off, many bond buyers who reached for yield in longer maturities and more speculative paper, profited as yields came down. The more conservative investors were penalized. However, more times than not, higher return means higher risk. I believe that in most cases, the income buyer who, for example, reaches for a marginal 8 to 9% yielding utility or corporate bond or preferred or REIT will do better total-return wise by buying the higher rated, lower yielding security and making up the difference in appreciation. Mutual fund maven Michael Lipper says, ‘Being yield-hungry is possibly the worst disease you can have, especially coming out of a recession.’ Last year, because the stock market had a down year, most holders of fixed income securities did better than stockholders. But generally speaking, bonds are used as a vehicle for income, not capital gains. To make money in bonds, you need to predict interest rates which means you need to be nimble and lucky. The best known guru in the field, the bond market’s answer to Peter Lynch, is William Gross, whose PIMCO Total Return is the nations largest bond fund. One caveat: Income buyers looking for higher yields can take some solace in the common perception that yields have likely bottomed and should be headed higher as we come out of the recession. A ‘Barron’s’ cover story says, ‘It’s time to lighten up on bonds. The 20 year slide in interest rates is just about over.’ The yield on the 10 year U.S. Treasury bond when this story appeared 3 months ago was 5%.
Dick Davis – Part 2 May 22, 2002February 21, 2017 Thanks to Jon Bakke for forwarding this review of Kevin Phillips’ new book, Wealth and Democracy: How Great Fortunes and Government Created America’s Aristocracy. (To read the whole book, click here.) And now, back to Dick Davis (as introduced yesterday), with the first handful of his 35 ‘items.’ Item 1: What’s A Reasonable Return? What kind of return should we expect in today’s stock market? The 5-year period 1995 thru 1999 spoiled us. Both the Dow and Nasdaq registered their biggest successive gains on record, the Dow up an average 25% during that period, Nasdaq a hard to believe average of 42%. Expectations the past 2 years, however, have dropped sharply. Robert Farrell, the highly regarded 40-year veteran commentator for Merrill Lynch (and my favorite), says, ‘Virtually everything the market represented in the past decade is unlikely to continue in the years ahead.’ Farrell looks for less active markets, lower volatility and profits that will be modest and harder to achieve. He believes investors will need more patience and that goals are likely to change from the maximizing of stock returns to the preservation of capital. In the past, professional advisors would shoot for an average annual gain of some 15% – usually a lot more in some years and a lot less in others. As for the over-all market itself, for the 70 years prior to 1995, the average annualized total return (dividends plus appreciation) was 10 1/2%. Today even that number may be high. Famed investor Warren Buffet has said he expects returns in the stock market to average 7 to 8% over the next 10 years. Item 2: Groups Will Return To Favor An individual stock that was once popular, may or may not return to favor. But an industry group that is unloved will, at some point, recover. Not sometimes, but always. It may take a long time but eventually it will once again have its day in the sun. That doesn’t mean that every stock in the group will participate. Less seasoned or marginal stocks may not join the group’s revival – a compelling reason to invest in industry leaders. Item 3: It’s Never That Urgent When reading or listening to the hype that often accompanies the recommendation of stocks, keep in mind that no one stock has to be bought. There’s always another stock and there’s always another day. Item 4: The Durability Of Major Trends Well entrenched trends, whether they apply to the overall market, stocks, interest rates, inflation or the economy, are exceedingly difficult to reverse. They usually not only last longer but they go further than we expect. The stock market went from Dow 769 in 1982 to Dow 11,722 in 2000, an 18-year bull market. Inflation dropped from 13 1/2% in 1980 to 1 1/2% in 1998 and its not much higher than that now. Again, that’s an 18-year downtrend in inflation. Interest rates declined from 14% in 1981 to 3 3/4% in 1998, an almost 17-year bull market in bonds. The economic expansion started in 1991 and ended 10-years later last March. Of course, these were not straight line trends. There were corrections, some quite long, along the way. But the overall primary trend prevailed. It was powerful and amazingly durable. It traveled a long way for a long time. And the longer the existing trend is in force, the more likely it is to remain in force. The 60 year old male with a life expectancy of 80, once 80 is expected to live another 8 years and then another 5 after that. If you learn to trust the durability of the primary trend and not let false countermoves shake you out, you will increase your odds for success. Awareness of this phenomenon also makes it easier to put into proper perspective the daily onslaught of news and opinion. One caveat: Typically, bear markets do not last as long as bull markets. Item 5: Face It, It’s History If a stock has collapsed from 50 to 5, people often ask, ‘Should I hold or take my loss?’ The answer is, ‘You’ve already taken your loss. It’s academic whether you sell or not. The loss is history. Write it off mentally, if not actually, and go on from there. The odds favor that whatever money is left can be better used in a better situated stock. If you decide to hold and the stock beats the odds and comes back, that’s gravy, but don’t count on it.’ Item 6: The Role Of Market History Sometimes, stock market history reveals recurring patterns of behavior that can help put the odds in your favor. For example, Presidents tend to focus on unpopular initiatives in the early years of their administration, saving the best stuff for the period before the next election. That may or may not be the rationale for this finding from Robert Farrell of Merrill Lynch: He says, ‘There has been a very consistent 4 year cycle over several decades in which stocks have made their most important lows in the middle of a Presidential cycle rather than at the beginning or end. Important lows were made in 1966, 1970, 1974, 1978, 1982, 1986 (1987), 1990, 1994 and 1998.’ This would suggest that a low may occur this year, the 2nd year of the current 4 year term. Then again, it may not, but it’s certainly a pattern worth noting. Incidentally, offsetting this pattern of important lows being made in the 2nd year of presidential terms is this intriguing fact: if the market ends lower this year, it will have to do something it hasn’t done in 70 years – namely go down three years in a row. The only time that’s been done is back in 1929 thru 1932.
Who’s Dick Davis? May 21, 2002February 21, 2017 For some time now I’ve been promising you the wisdom of Dick Davis. More than a few of you have written back: ‘OK – who’s Dick Davis?’ Well, to begin with, he went to my high school, Horace Mann, in New York, where his classmates included James Schlessinger, later Secretary of Defense, Sy Newhouse, head of the Newhouse Publication empire and Saul Zabar. (If you’re a New Yorker, you know Zabar’s.) Dick worked for Merrill Lynch and a couple of others, and long had a syndicated newspaper column and Miami radio show. He was responsible for the creation of PBS’ ‘Nitely Business Report.’ His Dick Davis Digest investment newsletter was widely read and well regarded. It’s still published even though he’s had no part in it since its sale and his retirement in 1989. ‘He was my role model in the 1980s,’ writes Humberto Cruz in the South Florida Sun-Sentinel, ‘an inspiration to perhaps some day become a financial columnist. The stock market was a big mystery to me then, but I could already appreciate Dick Davis’ uncommon common sense.’ Cruz was reporting on an encore lecture Dick had just given to 350 people at Boca West Country Club this past winter. (The first time, a couple of weeks earlier, 488 people had shown up for a 450-seat theater.) With his kind permission, I’m going to share it with you over the days to come. Houselights, please . . . Good Evening: The subject tonight is a serious one. When you’re talking about people’s money, you’re talking heavy stuff. But not everybody thinks so. In fact, there are some who discuss money in a much lighter vein. Milton Berle says, ‘Money isn’t everything, but it sure keeps you in touch with your kids.’ Henny Youngman says, ‘The best way to make a million dollars in the stock market? Start with $2 million.’ Woody Allen: ‘I’ve never been in a situation where having money made it worse.’ And Alan King, discussing the uncle he has on Wall Street says, ‘He used to have a corner on the market. Now he has a market on the corner.’ It would be presumptuous of me to appear in front of an educated audience like this one and pretend to be an ‘expert’ on the stock market. We all know there are no experts. The stock market is not a subject that lends itself to a ‘This is what to do,’ ‘This is how you do it’ and ‘This is what will happen’ approach. No one knows the answers – and certainly not with consistency. For every conclusion about the market there is a qualification; for every rule there is an exception; for every professional opinion there is a directly opposite viewpoint by someone equally knowledgeable. Not only are there always conflicting opinions, but there are times when no-one is right. No-one, for example, correctly forecast how unbelievably high the stock market would go, both Nasdaq and the Dow, before the long, powerful bull market finally peaked in early 2000. Alan Greenspan referred to the market’s ‘irrational exuberance’ on December 5, 1996. The Dow Jones Industrial Average almost doubled after he made that remark, the Nasdaq quadrupled. The market always goes to extremes – but no-one anticipated such an extreme extreme. In like manner when the bubble of the ’90’s finally burst, the bear market that followed came as no surprise. But no-one anticipated the degree of punishment – a Nasdaq crumbling from 5100 to 1400 or a Cisco collapsing from 82 to 14, a CMGI from 163 to 60¢ and on and on ad nauseum. And more recently, no-one, and I mean no-one correctly forecast that within 8 weeks after the worst terrorist attack in U.S. history, all 3 major stock market averages – the Dow, Nasdaq and S&P would be trading at levels higher than they were the day before the attack – just as if it never happened. And which group led the vigorous, straight up recovery? The much maligned, beaten down technology stocks that were supposed to be dormant and out-of-favor after their collapse – their resurgence coming despite poor earnings and absurdly high multiples. Go figure! If indeed, the market is unpredictable, then trying to predict the unpredictable has to be the ultimate exercise in futility. Yet we are inundated by market prognosticators wherever we turn. Most pervasive is television where we have saturation exposure to a barrage of opinions on the market, on stocks and on the economy 24 hours a day. We also get advice from security firms, individual brokers, the internet, newspapers, books, magazines, newsletters, radio and of course, always available, stock market advice from family and friends, mostly unsolicited. If we know that everyone who gives a market opinion does so with his fingers crossed, if we know that there are market experts only when the market lets them be experts and that the market itself is the final arbiter, and if we know that the very best in the advice business are wrong almost half the time (or so says Fidelity’s Peter Lynch), if we know all this, why is the stock advice business such a thriving industry? Why does the media surround us with an unending parade of gurus pontificating about the unknowable? The reason is rooted in one of the most dependable qualities of human nature: the natural urge to improve our financial situation. We all want to make money. We want to make as much as we can in good times and protect it in bad times. There is an unending search for the best way to do this – the best strategy, the best vehicle, the best advisor, the best fund. In the eternal quest for performance, investors are attracted to strong, confident, unhedged opinions. Even though the perverse nature of the stock market precludes definitive, unconditional advice, investors want something conclusive to hang their hat on. Television accommodates big time. We are deluged with non-stop, unhesitating, self-assured, no-hedge, enthusiastic opinions. Investors want to hear advisors with conviction because confidence breeds confidence. Humility is the last thing they want. Ironically, there is no subject where understatement is more apropos and less visible than the stock market. Essayist Roger Rosenblatt says, “older people are as close to perfection as human beings get.” As we get older and move closer to perfection, the appeal of stock market advice begins to fade. Frustration from repeated cycles of boom and bust, euphoria and depression wears us down and makes us skeptical of definitive opinions and those that make them. We come to realize through disappointing, sometimes painful experience that the pros can be erudite, confident, convincing – and dead wrong. So most of us come to the conclusion that we can do just as well, maybe better, using our own advice, or we decide to use a professional manager or mutual fund with a good track record, leave everything to them and keep our fingers crossed, or we decide, especially if there are big losses, to get out of the market completely, perhaps retaining bonds for income. If I had to sum up how the members of this audience feel about the stock market, a composite viewpoint, my guess would be this: “Nobody can predict the stock market. Everybody has an opinion; some will be right, most will be wrong and no-one will be right again and again. Some advisors and mutual funds have better records than others. It’s probably worth a fee to let them do the research and have the aggravation, and just hope that on the very day we start to use them, their stellar track record doesn’t come to an abrupt end. If we go it on our own, the best thing is to buy good quality stocks – the GE’s, IBM’s and Pfizer’s of the world at reasonable prices and hold on to them. No-one can time the market, so the long-term approach is the only one that makes sense.” If indeed, this is how most of you feel about the stock market, I think you’re right on target. I also believe your thinking is not typical of a more diversified group. I believe this audience is more aware, more sophisticated, more in tune with how difficult it is to make money in the market and keep it. And I believe this audience has more realistic expectations than a group that is less mature, less experienced and less affluent. That being the case, if you’re as smart as I know you are, and if I agree with your skepticism toward stock market advice, what can I add to your awareness that will make your time here this evening worthwhile? Perhaps not that much, perhaps a lot – but it’s a challenge I’ve accepted and take seriously. There are two realities I have to deal with in selecting my material. The first is that most of you are at a stage in your life where your investment decisions are either being made by someone else or, by yourself with a focus more on safety and income than on buying and selling. The second reality is that the questions most everyone would like answered – what’s the market going to do over the next year? and what stocks can I buy now to make money ? – both these questions I can answer with a confident “I don’t know.” The closest I can come to a definitive, confident opinion about the direction of the market is to observe that for the past 100 years, the stock market has had an upward bias and I expect that long term trend to continue with interruptions along the way. Not exactly going out on the limb. As for what stock to buy, the closest I can come is to confide that my favorite group has always been the drugs, or pharmaceutical or health care stocks. The first stock I bought 40 years ago for my kids’ education was a drug stock and the last stock I bought 2 months ago for my grandkids was a drug stock. The one thing I’ve always found interesting about the drugs is that in terms of quality there are more Standard and Poor A+ rated stocks in the group than any other. The best time to buy them is when they have problems and are out of favor, a period that could last a long time. This is not a recommendation to go out and buy drug stocks. Other groups will undoubtedly do better. It’s just a personal preference based on my conservative nature and a need for quality to satisfy my comfort level. That’s about as far out on the limb as I’ll go regarding the future of the market and individual stocks. Any other recommendations would be no more than educated guesses. Instead, I’m going to focus tonight, not on guesses, but deep convictions. It’s what I feel strongly about after a lifetime of reporting and writing about the market. It’s the type of advice I wrote to my own son, a letter that was featured in Forbes magazine; advice that has been updated, but with the same purpose – to help till the investment odds in your favor. That’s the very best you can do in the market – position yourself so that you increase the odds of good things happening. If you use others to manage your investments, what follows will help you to better judge their performance. My talk will be in the form of brief comments on 35 different items. I will limit my comments on each of these 35 topics to an average of a minute and a half. So now you have a sense of who Dick Davis is. In the days to come, his 35 comments, a few at a time.
Should We Make the Tax Cuts Permanent? May 20, 2002February 21, 2017 Yes . . . except (as I’ve argued before) those tax cuts that would benefit only, say, the top 5% of taxpayers. Michael Rutkaus: ‘The WSJ had a recent editorial about who pays how much taxes, complete with a chart; their point was that the richer pay more than their share. Could you explain this relative to your position? Honestly confused in Winchester Virginia . . .’ ☞ Sure, the rich pay more than others do. What’s more, they often use less in the way of government services. They tend not to send their kids to public school, yet they pay more than their share of the cost of the public school system. They qualify for no food stamps, yet pay the bulk of the cost. It’s called a ‘progressive income tax’ system (as you know), and it can be taken too far, as it was from World War II to 1980 when the top bracket was 90% and then 70% and then (from 1980 to 1986) 50%. But I thought the Clinton/Gore team found a good balance, setting it at 39.6%. Everyone prospered, most definitely including those at the top. (Remember, for those at the top, a good deal of income is taxed at the 0% tax-free bond rate or the 20% long-term capital gains rate.) The chart in the January 22 Wall Street Journal editorial you read showed that those who reported Adjusted Gross Income in the top 1% of taxpayers in 1999 accounted for not 1% but 19.5% of the total income pie. If we had a tax where everyone paid exactly the same tax rate, then these folks, having earned 19.5% of the total income pie, would have contributed 19.5% of the total tax pie. But we have a progressive income tax, where people at the bottom pay nothing (except, sales tax and Social Security tax and gas tax and cigarette tax and, in the unlikely event they own homes, property tax), while people at the top pay more than their proportionate share. This is not big news. So, as the Journal noted, even though the top 1% reported adjusted gross income equal to only 19.5% of the total income pie, they paid 36.2% of the total income tax pie. What’s I find telling is the tone with which the Journal revealed this, as if it were almost a scoop, if not an outrage: ‘Start with the richest of the rich, the top 1% of all earners. In 1999 they earned 19.5% of all adjusted gross income reported to the IRS. Yet they paid 36.2% of all federal income taxes that year. You read that correctly: The superrich pay in taxes nearly double their proportion of national income.’ All that was missing was an exclamation mark. Yet that’s what a progressive income tax is. And it’s been around for nearly a century. Only the editors of the Wall Street Journal would find this endlessly surprising, endlessly galling. Some would argue that the 36.2% share of income taxes that the 1% pay is too much, some would argue it’s too little. And some would point out that where almost everyone pays 7.65% of every dollar they earn in Social Security tax – 15.3% if self-employed – those at the top see that 7.65% drop all the way down to 1.45% on most of the income that they earn – 2.9% if self-employed. That last is fair, one should be quick to note, because Social Security benefits don’t rise beyond a certain point either. But then again, it could be noted that we’re not really using all that Social Security money for Social Security. The ‘lock box’ is being raided right and left. You can see that there are endless arguments within arguments here. Ultimately it has to be solved by compromise and good will. There is no one ‘correct’ objective answer as to what’s fair. Personally, I think there is tremendously good reason, both logical and moral, for a progressive income tax. To me, the flat-taxers are flat-earthers. Yes, I’m all for great simplifying the tax code (whatever happened to that notion?). But what makes it complicated is not having two or three different tax brackets. That takes just a couple of sentences to explain. It’s the other million pages of the tax code that get a little dense. Coming soon (really!): The Wisdom of Dick Davis
An e-String Around Your Finger May 17, 2002February 21, 2017 Want to have some fun? Free for nothing I give you this, from the same guy who gave us Quickbrowse.com – Marc Fest. If it catches on, it may ultimately cost some modest amount, as Quickbrowse now does. But for now it’s free. Just go to 1q11.com and click Help for instructions. I’m not saying 1q11 (‘one queue eleven’) will or should replace your Palm Pilot and/or whatever systems you have in place to help you run your life. Nor will it yet call you on your cell phone or make your pager beep (though it could make your Blackberry buzz). But for those who like to tinker, it could be fun to take a look. Basically: 1. You can set up e-mail reminders SO FAST. Type . . . Soccer ball! ;;m rd . . . and you will get an e-mail that says ‘Soccer ball!’ on Monday (the ‘m’) – and then repeated daily (the ‘rd’) – reminding you that you need to go buy one. 2. With another keystroke you can tell it to send this reminder to a different e-address as well (or instead) – perhaps reminding your better half about the soccer ball at the same time. (Or reminding her of tonight’s party.) 3. With 1q11 you can have many different ‘sheets,’ easily accessed with a pull down menu. One might be for your reminders, as above. Another might be a handy place to store info you want accessible wherever you are, from any computer. You’re at a cybercafe in Prague and you need someone’s phone number . . . maybe you pasted your phone book into this sheet before you left . . . it’s now accessible to you from anywhere. 4. Maybe you want someone else to have access to that same phone list. Just give that person password access to see it. One sheet could be called OUR SCHEDULE and you and your better half could both access it, from different places, and each amend it as new invitations pour in. (Don’t be modest: I know how popular you both are.) I would treat 1q11.com as a work in progress, with an uncertain future. But for those of us old-timers, who used to like to experiment with new (free!) software and suggest improvements, 1q11.com is useful fun. {CORRECTION: Yesterday’s reminder about TIPS, lifted from an earlier column, spoke of inflation-protected rates ‘above 4%.’ In fact, since that earlier column, rates have fallen. They are now “above 3%.” Sorry.}