Maybe They Should Hire the Scientists from the Tobacco Institute September 18, 2002January 24, 2017 THE CHENEY QUOTES Bill Marris: ‘On today’s column, you know those quotes from Dick Cheney are not real, right? I am afraid people will go to your site, read them, and not click on the link to find out that they are part of a satiric article. I am a reasonably intelligent person, and the only reason I clicked on the link was because I wanted to see where that quote came from, because I just couldn’t believe it was real.’ ☞ Sorry. It never occurred to me that anyone could believe it was real. But that may be because I’m familiar with the Borowitz Report, which I have quoted here before. Other recent breaking items from the same source (they are not real, either): SADDAM DEFENDS PURCHASE OF ALUMINUM TUBES Says They Are For His Aluminum Tube Collection KATIE COURIC DEMANDS THAT ‘TODAY’ START AT NOON Would Allow Host to Sleep Late, Go to Gym U.S. ATTEMPTS TO LURE OSAMA WITH AD IN PERSONALS Evildoer Has Not Had a Date in Months, CIA Believes David Smith: ‘What exactly was the purpose of adding the Borowitz report nonsense to your page today? The Administration has acted brilliantly in bringing world pressure to bear on Iraq. I think the Bush Administration deserves immense credit.’ RESISTANCE Dana D. Dlott: ‘What I have never understood is this business of ‘resistance’ when the Dow gets near benchmarks. Newspapers say the Dow was approaching 9000 but then it encountered resistance and slipped back to 8900. Most trading is not buying the Dow so how can this happen? Do traders say to themselves, I would sure like to grab some GE at $27, It’s a bargain, but if I do that the Dow will break 9000, so never mind?‘ ☞ I think when people feel the overall market is high and likely to drop back, they hold off buying individual issues. At least some people do. But it’s true that a lot of this talk of resistance may simply be ascribing ‘motives’ to what are in fact largely random short-term movements of the market. DIDN’T YOU LEAVE ‘ERIN BROCKOVICH’ ROOTING FOR PG&E? Excerpted from THE WASHINGTON POST Sept. 17 – The Bush administration has begun a broad restructuring of the scientific advisory committees that guide federal policy . . . In the past few weeks, the Department of Health and Human Services has retired two expert committees before their work was complete. One . . . which was rethinking federal protections for human research subjects, had drawn the ire of administration supporters on the religious right, according to government sources. [Another] committee, which had been assessing the effects of environmental chemicals on human health, has been told that nearly all of its members will be replaced – in several instances by people with links to the industries that make those chemicals. One new member is a California scientist who helped defend Pacific Gas and Electric against the real-life Erin Brockovich. I would link you to the complete archive, but the Post seems now to be charging even for yesterday’s content.
Dick Davis #33: The Market Has Its Own Agenda September 17, 2002February 21, 2017 BREAKING NEWS From the Borowitz Report: September 17, 2002 Breaking News IRAQ AGREES TO WEAPONS INSPECTIONS; CHENEY BEGS THEM TO RECONSIDER Don’t Make Any Hasty Decisions, Vice President Urges Saddam Just minutes after the government of Iraq agreed to the unconditional return of U.N. weapons inspectors, Vice President Dick Cheney urged the Iraqis to reconsider their decision. Mr. Cheney added that accepting weapons inspectors back into their country was a ‘big decision’ and encouraged the Iraqis to ‘sleep on it.’ ANCHOVIES Chris Williams: ‘Only brine shrimp can live in the Great Salt Lake. It’s too salty for anything else. The entire lake region, including the nerve gas storage facilities to the south and the Air Force bombing range to the west, was once under a huge inland sea many thousands of years ago. It became separated from the ocean and largely dried up, leaving the salt behind. The deserts to the south and west are salt, not sand. BTW, that water you saw is at 4200 feet above sea level.’ DICK DAVIS #33 Item 33: The Market Has Its Own Agenda Because the media fosters the myth that whatever happens to a stock or the market on a particular day is linked to news, there is the perception that the market follows the news. Actually, it’s the other way around. The market is the leader and the news follows. There is always good and bad news on a stock. Let’s imagine the good news is listed in Column A and the bad news in Column B. If the stock goes up, we use Column A to explain the move; if it goes down, we go to Column B. In 1987, there was no ‘trigger’ news, none, to explain the market’s 22% collapse on one day, October 19. But there was no shortage of negative stories cited after the fact. The obvious exception to the irrelevance of news is when the news is a surprise, in which case it can trigger an immediate, if not lasting, response. So if it’s not ‘news’, what are the overriding forces that influence the market’s behavior? It’s my view that the market has its own needs and that whatever course it must take to satisfy those needs, it will take. Following a bull market, for example, its primary need is to allow enough time to pass to heal the valuation excesses of the previous cycle. Or it may need enough time to pass to allow earnings to catch up to unreasonably high prices. Or it may need enough time to restore the confidence level of investors. In the present market environment, for example, the combination of a bear market, a recession and September 11 has created a deep wound that is likely to take more time to heal. The market’s malaise has caused us to go from a ‘buy on weakness’ to a ‘sell on the rally’ mentality. It is only the prolonged reinforcement that comes from seeing the market go up, hold its gain, and then go up some more – from seeing that ‘buying on dips’ works, and then works again and again, that will restore investor confidence. Or the market may simply have a need to be true to its perverse nature by doing whatever it has to do to make the majority of people wrong. In any event, the market will play out its role, independent of the news, analysis and speculation swirling around it. Yes, news of earnings, the economy, interest rates and inflation are major long-term influences but, in terms of priority, the market will satisfy its own needs first. It will not be deterred from its own agenda.
A Further Point About Points September 16, 2002February 21, 2017 Juan: ‘I think that it is OK to pay points when you take out a mortgage if you finance them (i.e., they become part of the mortgage). This way, you put the cash you would have paid for points to use in another investment at the same time as you get to enjoy the lower interest rate you got for paying the extra points.’ ☞ I disagree, at least for most people. Here’s the thing: the only difference financing the points (or other closing costs of your mortgage) makes is that you now are paying them plus interest. Let’s say, after-tax, the effective interest rate on your mortgage is 4%. By adding the $6,000 in points (say) to the principal amount of your mortgage, you are just borrowing that much more ($306,000, say, instead of $300,000). So for someone who can easily make more than 4% on his money after tax, you’re right: financing the points makes sense, and can make paying extra points in order to secure a lower interest rate marginally more attractive (but only marginally). For someone who will make less than 4% after tax on their money, financing the points actually raises their cost. (And, of course, for someone who makes exactly 4%, financing the points is a wash.) Well, you may ask, how is it possible for anyone to make less than 4% after tax on his money? And I would suggest that in a bank you will make less, in short-ish-term bonds you will make less. And if you go for the stock market or long-term bonds, there is the chance (if interest rates rise) you will make much less. In short, I’m not sure that financing the points really does make them appreciably less costly for most people (and could actually make them more costly). Which brings us back to the straight calculation: Will the cost of the points be justified by the lower annual interest rate? And that, I think we agree, depends on the factors I cited. Sometimes the points will be justified, sometimes they won’t. Whether to finance them or not is a separate, less important question. It simply depends on whether you will earn more on that money than it costs you to borrow it. QUESTION FOR YOU I was just in Salt Lake and learned that it is ten times saltier than the ocean. Is this where anchovies come from?
Good News, Macro and Micro September 13, 2002February 21, 2017 It’s always good to be upbeat on Friday the 13th. MACRO Good. So the weapons inspectors will go back in and we will not invade Iraq. Or, worst case, we’ll go in with the backing of the United Nations. This is a big improvement. MICRO There was this poor, abandoned baby boy named Sasha, who deserved to be happy like any other baby boy, but seemed to have no chance. But then . . . well, it’s the ‘My Turn’ column in Newsweek. Click here. Have a great weekend.
Dollar-Cost Averaging, Again September 12, 2002February 21, 2017 Harry S, who first learned of Priceline from us: ‘I went into Priceline, bid $84 on a 4-star, and got Sofitel in Beverly Hills. I called Sofitel, just to see and was quoted $329/night as a special!’ ☞ Just be sure not to use Priceline if you might have to change or cancel your trip – the rooms are nonrefundable. And hotel rooms are the only one of the things they sell I can vouch for. Have never tried any of the others. Quanta: ‘Dick Davis, Item 31, Dollar Cost Averaging made no sense to me: << If the market is unpredictable, a dollar-cost averaging approach makes a lot of sense>> … and then he says << For example, if you invested $500 every month in the S&P 500 Index during the 5 years, 1997 through 2001 when prices went way up and then came way down, your gain at the end of that 5 years would have been negligible.>> So what’s the point?’ ☞ Ah, but if prices had gone way down and then come back up, instead of the reverse, your gains would have been substantial. Over time, if you buy more shares when prices are low and fewer shares when they are high, you will come out ahead. Do the math with a hypothetical stock and you’ll see it. Buy $1,000 a year of a stock that starts at $10 a share, goes down $2 a year for three years and then back up $2 a year for three years so ends at $10. Have you broken even? No. Because $1,000 bought you more shares when it was lower, you wind up with a big profit. You invested $7,000 in this example – buying shares at $10, $8, $6, $4, $6, $8, and $10 a share – and wind up with 1032 shares of stock, or $10,320 worth once it’s back up to $10. Of course, not all stocks that go down for three years do come back. But barring something truly catastrophic, ‘the market’ as a whole will. So this strategy with a broad index fund is awfully sensible if you have a truly long time horizon. Eat right, walk lots, and wear your seat belts. Coming Soon: Citibank Branch 007
BULL, Says Less to the Bears September 10, 2002January 24, 2017 BUT FIRST A QUICK POLITICAL NOTE: Apparently, the Jeb Bush attack ad on Bill McBride noted here yesterday had an unintended effect. Click here for Miami Herald star columnist Carl Hiaasen’s amusing report. I guess we’ll know in a few hours whether Jeb inadvertently put McBride over the top. AND SECOND AN APOLOGY: I promised yesterday to be ‘briefer’ the rest of the week. That apparently will not include today. AND NOW BACK TO THE BULLS AND BEARS: Joe Devney: ‘Your quote from John Mauldin included a reference to a ‘secular bear market.’ This is one of those terms that I come across that is never explained. What does ‘secular’ mean in this context?’ ☞ It means ‘really long-term, with occasional interruptions.’ Those interruptions, in this case, would be characterized as rallies or little bull markets within the overarching bear market. Of course, you could describe our economic history as just the reverse – a magnificent truly overarching secular bull market, with little bear market interruptions. John Hook: ‘Bill Gross avers that ‘at least 50% of the earnings growth over the past 40 years has been earnings of the ‘mystical’ kind – pro forma, operating, phonied up.’ Yet total net income of U.S. corporations as reported to the IRS in 1980 was $239 billion and in 1999 $929 billion. This is an annual rate of increase of 7.02% per year by accounting whose goal is legally to minimize net income.’ ☞ John goes on to note that GDP growth is probably not phoney. GDP increased from $352.4 billion in 1952 to $10,371 billion today, 50 years later. That’s a 7% annual rate of increase, which suggests that profits would have increased at about the same rate (albeit by considerably less that 7% after netting out inflation). But let’s give the last word (or the last substantive word, anyway) to our friend Less Antman, who found a lot to disagree with in the Bill Gross ‘Dow 5000‘ rant: Stocks may or may not decline further over the short-term [Less writes], but that won’t remove the arithmetic, logical, and historical errors in legendary bond investor Bill Gross’ article. At least Warren Buffett is modest enough to stay away from areas he doesn’t understand. Among the gross (sorry) inaccuracies in his piece are: (1) A tripling of P/E ratios over the century would NOT explain 2.0% of annual market returns. Anyone with a calculator and the ability to press the equal key 100 times can determine that a 2% return over a century would require PE ratios to multiply more than 7 times. A tripling of the PE ratio adds only 1.1% to annualized returns. At least this has settled a question that has bothered me for years: now I know who calculated the stock returns of the Beardstown Ladies. [Less here adds an emoticon to signal us that he is kidding. But try it. If you ask your calculator what $1 growing to $3,000 over a century works out to, your calculator will tell you: 8.34% a year. Triple that end result to $9,000, and now your calculator will tell you your money has grown at 9.53%. All this before taxes and inflation of course. But is 9.53% two percent more than 8.34%, as Gross argues? No, says, Less, it is more like 1.1% (or, if my own sharp calculations are to be believed, 1.2%). The difference between 2% and 1.2% sounds trivial, but you won’t feel that way 100 years from now.] (2) There is little evidence to support the view that P/E ratios in 1900 were as low as Gross has implied. For one thing, financial statements were not required and generally accepted accounting principles didn’t exist at that time. For another, in those days before income taxation, substantial dividends were expected from companies, and the typical company distributed most of its earnings every year (since the average investor DIDN’T trust the corporate executives and robber barons of the day). Using the 4.2% dividend yield cited by Gross (which appears to be correct) and a payout rate of 70%, an earnings yield of 6% probably existed at the time, meaning PE ratios averaged nearly 17. (3) It is not true that starting valuations have to be reasonable for stocks to outperform bonds. Since stocks have outperformed bonds during 90% of all historical 10-year time intervals, it would be more accurate to say that bonds cannot beat stocks over any reasonable time period unless bonds are radically underpriced at the start of the period, which doesn’t describe an environment in which 30-year treasuries are yielding 4.9% (with no protection against inflation) and short-term bond yields are competitive with mattresses. Had the stock market in 1900 been obscenely priced at DOUBLE its actual level at the time (with dividend yields of only 2.1%), its gain over the century would have been reduced from 6.7% to 6.0%, still battering the 1.6% return on bonds. [This is one of the reasons I suggest in a forthcoming PARADE piece a couple of weeks from now, that it’s OK to stocks here for the really long run, especially if you plan to ‘average down’ if and as the market drops further . . . but only with money you can afford to tie up for a long time. Money you might need in a year or three might do great in the stock market, but it might not. If you will need it, you can’t afford the risk.] (4) If unusually high valuations in the year 2000 and unusually low valuations in 1900 explain the 6.7% real return on stocks during the 20th century, how do we explain that both Siegel and Ibbotson, whose studies go back 200 years, found approximately the same real return during the 19th century? (5) Gross has suggested that a dividend of 4.2% explains most of a 6.7% return. Apparently he forgot what he had mentioned elsewhere in the article, that 6.7% was the real return after inflation, while the dividend rate was the nominal, not the inflation-adjusted, return. In fact, nominal stock returns were around 10%, and the dividend yield explains less than half of the total return. (6) Although dripping with sarcasm, Gross did concede that cash distributions resulting from stock repurchases and cash mergers did constitute actual transfers of money from corporations to shareholders, and generously allows the reported dividend yield of 1.7% to be increased to 2.0% to account for these. The only problem is that DMS, from which Gross quoted extensively, included a chart Gross failed to reference that indicated the total dollars distributed from stock purchases by corporations, which were statistically insignificant as recently as 1981, now slightly EXCEED the total of reported dividends, so that the 1.7% reported yield is actually around 3.5% right now, and is quite competitive with current, historically low, bond yields. And if the 2.0% yield conceded by Gross leads to a fair value of around Dow 5000, the corrected 3.5% yield suggests a Dow fair value of 8750, close to its current level. (7) Even if none of the above errors applied to Gross’ analysis, they do not lead to the conclusion that one should remain out of stocks and invested in bonds until the Dow drops to 5000. The stock market might well simply grow at a slower pace while still substantially exceeding bonds (given the historical 5% superiority, even a much-diminished equity premium would be a premium). And the investor will still be sitting with everything in Gross’ bond funds waiting for his signal that it is safe to leave him. Of course, even a perma-bull on stocks such as myself should remind investors that the market could still drop substantially from its current level, even below Dow 5000. In 1931, the stock market was clearly underpriced after a devastating 75% drop, but the Dow still managed to drop another 50% from that level before taking off. The extremes of short-term fear cannot be expected to end at rational and predictable levels, and an intelligent investor cannot wait for a signal that is safe to go into the stock market. It is never safe to invest in stocks, nor is it safe over the long-term to accept returns that will probably be near zero after taxes and inflation in bond investments. This is why it is critical for a stock investor to be thoroughly, globally diversified (a broad domestic index fund and a broad international index fund, as suggested in The Only Investment Guide You’ll Ever Need, makes tremendous sense to me), and why only long-term money belongs in equities. For a globally-diversified all-stock portfolio, 5 years was enough to bring investors back to even if they foolishly put all their money into the stock market in 1929 or 1972 (or for a Japanese investor who did that in 1989). For a US-only investor without international holdings, it can take as long as 20 years to get back to even, but since we are talking in September 2002 and not March 2000, it is pointless to discuss investing at market peaks, since we are 2 1/2 years beyond the latest one. I’d be willing to bet my entire net worth that someone who put about half his portfolio into US stocks and the other half into non-US stocks over the next 10 years will trample the 4.1% available on a 10-year treasury note, or the 2.3% real yield on 10-year TIPS. Come to think of it, I already have made that bet. ☞ And now you see why I generally refer to Less as ‘the esteemed Less Antman.’ (Or in today’s feisty mood, esteamed.) Randy Wolff: ‘Running in a marathon until your kidneys bleed is no way to live to 100. Neither is running five marathons in a row. That is a good way to live to 54.’
Bull or Bear September 9, 2002January 24, 2017 BUT FIRST A QUICK POLITICAL NOTE: Being a DNC officer, I am neutral in Democratic primaries, and thus wish both Janet Reno and Bill McBride – and the very impressive Daryl Jones, for that matter – all the best in tomorrow’s Florida gubernatorial race. But it was with a real sinking feeling that I caught one of those stereotypical negative TV ads ripping Bill McBride to shreds, making him out to be dishonest and all the rest, which, from all I have heard about McBride, is just terribly unfair. (Much the same sort of stuff that was done so effectively to assassinate Al Gore’s character, little or none of which was true, much or all of which was deeply cynical and dishonest itself – yet all of which, when taken cumulatively, had its intended effect.) And now here was this ad ripping Bill McBride. Janet, Janet, I thought, watching it. How could you let your campaign consultants talk you into this? You? And then, because I watch these things closer than most, I saw in the fine print in the ad’s waning second or two, at the bottom of the screen, that it was paid for not by the Reno campaign, but by that of Jeb Bush. Yech. Yes, one might say (before you all e-mail me to say it) that Gray Davis, hoping to run against Bill Simon instead of Dick Riordan, did the same thing to Riordan. But I would reply that, in the first place, that doesn’t necessarily make it right. And that, in the second, the Riordan snippets I saw were about issues, not character assassination, and it seems to me that’s quite different. AND NOW: My apologies to those of you who missed Friday’s column – Dow 5000 – because I posted it late. For those who did catch it . . . if you thought Bill Gross’s comments were depressing (‘stocks stink’), how about these, from John Mauldin, released a day later? Mauldin notes, among many other gloomy things, that: It is not inconsistent to project a slowly growing economy and a secular bear market. The US economy grew at almost exactly the same rate from 1966-1982 as it did from 1982-1999. The stock market was flat in the former period and up over 10 times in the latter. The big difference in those two roughly 16- or 17-year periods, of course, was that interest rates rose dramatically in the first period, to a peak of about 15% on the Treasury’s 30-year ‘long bond’ in 1981 or ’82, and fell dramatically in the second. (Today the long bond yields under 5%.) Another difference was that most of the young money managers had no personal memory of a long, grinding bear market to make them cautious (they do now). So it’s possible that we are now three or so years into 16 or 17 tough ones. Or not. I’ll never forget all the gloomy predictions of The Coming Bad Years, by one hugely best-selling author, in 1979, just as things were about to get a heck of a lot better . . . followed shortly thereafter by his Survive and Win in the Inflationary Eighties, published in 1980, the start of what would be remembered as the disinflationary Eighties. I have a whole shelf full of these kinds of books – let us not forget Ravi Batra’s The Great Depression of 1990, presciently foretold in 1987 . . . except that the Great Depression of 1990 never came. So in the first place, we can say with some assurance: no one knows. In the second, it is always worth remembering that the gloomsayers are rarely the only ones who see the problems ahead. There are some awfully smart central bankers and finance ministers around the world who see them too, and have considerable power, though admittedly nowhere near complete power, to change course. So, sure – we might be headed for catastrophe if we never did anything about it . . . but often we do do something about it. My friend and B-school classmate John Hook sends some of us his sophisticated weekly market review, from which I excerpt this gripping set of hands (which we might nickname ‘the one’ and ‘the other’). Some of the jargon may not be familiar to you, but most of it becomes more or less self-evident from the context. John summarizes . . . The bear argument is that: 1) Valuations are very high 2) There was no capitulation; 3) Sentiment is too optimistic; and 4) Valuations revert to below the mean in bear markets. The bull response: 1) Yes, most valuations are very high. But reversion toward the mean will probably occur more from profit increases than from stock price decreases because there will probably be no oil shock, depression, or war defeat to further crash the markets now that the economy is recovering. 2) There was capitulation. Implied volatilities soared to crisis highs and reversed back down. Volume went to record highs. Interest rates fell to forty and sixty year lows. P/Es relative to interest rates fell to 1960 to 1970 levels. Bearish sentiment exceeded bullish by 50%. 3) Sentiment can recover quickly. This is not the 1930’s Depression nor the 1970’s two OPEC Embargoes that quadrupled and then tripled oil prices. 4) Valuations did not revert to below mean in the 1962, 1969-70, and 1990-91 bear markets. Bear response: 1) Japan had six bull rallies in its ten-year bear market [which appears now to be in its twelfth year and not yet to have ended – A.T.]. Consolidations after burst bubbles take sixteen (1965 to 1981) to twenty-three (1929 to 1952) years. 2) Mutual fund liquidation has been as yet small. Ditto for foreign investment. These liquidations will occur and crash the markets. 3) Capitulation only occurs when everyone gives up. This has not occurred. 4) Valuations revert to the extreme lows after burst bubbles: in the 1930s and progressively in the 1970s until P/Es were at 7 by 1981. Bull response: More important that the fact that a bubble burst is the state of the economy. This is not the 1930s Depression or the 1970s stagflation. We have low inflation and moderate growth. There is no reason for the capitulation and sentiment pattern of the 1930s and 1970 to appear. The better analogy is to 1962, 1969-70, and 1990-91 when P/Es gradually came down as stock prices increased not quite as fast as profits. Brave prognosticator that I am, my guess is that the true answer could lie somewhere in between: that we could be in for a bunch more rough sledding . . . but that – potentially at least – our technological advances and increased experience and safeguards since the 1930s (things like Federal Deposit Insurance, for example), and even since the 1970s, could keep things from being terrible. Let us not forget that Moore’s Law has been broken . . . (but in the most remarkable way! Computing power is no longer doubling every 18 months, as Moore’s Law prescribed – how could that possibly continue, after all? – but rather every twelve months now, or so I have read) . . . and that technological advance is a key driver of productivity growth . . . and that productivity growth underlies profit and prosperity. So the truth is, no one knows. But it is not a time to buy stocks on margin or to buy stocks thinking they must all be cheap because the market is ‘so low.’ The market is not so low. Much of it is still quite high; and even if it were not, markets tend to ignore ‘fair value’ in both directions. We know we’ve had the euphoric over-reaction on the upside. It’s not clear whether we’ve had the despairing over-reaction (also known as the ‘capitulation’) on the downside. Or whether it’s inevitable that we must. I promise to be more upbeat the rest of the week. And briefer.
Dow 5000 And Dick Davis #32: When to Sell September 6, 2002February 21, 2017 I am sorry to be the one to point you to this, if you haven’t already seen it. And I hasten to add that, as smart as Bill Gross is, he’s not infallible. And your stocks, if you pick individual stocks, may be the undervalued ones that do just fine, even if he’s right. I’m certainly not selling all my stocks. Still, you could have done worse than to click the Bill Gross link I offered last year. And where I thought Dow 36,000 was just a lunatic book title, I see nothing at all lunatic in ‘Dow 5000,’ the title of Bill Gross’s September Outlook. Bill Gross is so smart! I got to interview him for a PBS series years ago, and he just blew me away. Here’s what I wrote about him in this space on December 11, 1997: Bill Gross manages $90 billion or so in bonds, which has to be really boring until you realize that he somehow manages to squeeze an extra 1% return out of his portfolio year after year-an extra $900 million. But the image that impressed me even more, as we looked from his Laguna Beach living room out over the Pacific, was of a 53-year-old man determined to live to 100, getting it into his mind to run from Carmel to the Golden Gate Bridge-five back-to-back marathons over five successive days. On the last day of this run, his kidney ruptured. Blood was running down his leg. But he hadn’t reached the bridge, so he kept running. Only when he finished did he allow the ambulance to whisk him away. Smart, tenacious people with blood running down their legs can be wrong. But not just because we hope they are. He writes: My message is as follows: stocks stink and will continue to do so until they’re priced appropriately, probably somewhere around Dow 5,000, S&P 650, or NASDAQ God knows where. Now I guess I’m on somewhat of a rant here but come on people get a hold of yourselves. Earnings have been phonied up for years and the market still sells at high multiples of phony earnings. Dividends and dividend increases have been miserly to say the least for several decades now and you’ve been hoodwinked into believing the CORPORATION should hold on to them for you so that they can convert them into capital gains and save you taxes. Companies have been diluting your equity via stock options claiming that management needs incentives of millions of dollars just to get up in the morning and come in to work. Then they pick you off by trading on insider information, selling shares before the bad news hits and you have a chance to get out. If you try to get a hot IPO you find all the shares are taken – by Bernie Ebbers. Come on stockholders of America, are you naïve, stupid, masochistic, or better yet, in this for the ‘long run?’ Ah, that’s it, you own stocks for the ‘long run.’ We bond managers may have had a few good relative years but who can deny Stocks for the Long Run? Not Jeremy Siegel, not Peter Lynch, maybe not even Bill Gross if you stretch the time period long enough – 20, 30, 40 years. But short of that, stocks can be, and often have been poor investments. The return on them depends significantly on their beginning valuation and right now valuation remains poor. Dow 5,000 is more reasonable. Let’s see why . . . [it’s the first link on the Pimco home page] CHEER UP – THERE’S ALWAYS SOMETHING GOOD ON TV At least, with TiVo there is. Michael Adberg: “I was surprised that your reader seemed to have a broken Series 2 unit – we’ve only seen one of those so far and it was a bad hard drive, not a modem. But for those older units with bad modems, we now have a way to replace a bad modem with an external modem. It’s here. This is an easy way to get it working again without having to send your TiVo anywhere. You also get a much hardier modem in the process and are much less likely to ever have a modem problem again.” ☞ It ain’t cheap, but it sounds as if it could be the simplest solution if cost is not your first priority. (I know: bite my tongue.) And now back to our regularly scheduled, depressing programming . . . SO – SHOULD I SELL? I don’t know. But the Bill Gross piece is, I guess, the more or less perfect lead-in to Dick Davis’s pre-ante-penultimate item, #32: Item 32: When To Sell The most difficult of market skills is knowing when to sell. There is no definitive answer, no formula that applies in all situations. Some investors believe good quality stocks should be held indefinitely and eventually passed on to heirs. Their rationale: “No one can time the market; there’ll be ups and downs but the long term trend will be up.” It’s a painless approach, no monitoring and no decision making. Others believe every stock, regardless of quality, is a sale at some point. Their reasoning: “No one can sell at the high but the stock’s price/earnings multiple history will indicate a reasonable price range to sell. Why ride a stock up and then down and then wait, sometimes for years, until it recovers to new highs?” A case can be made for either position. In my view, the temperament of the stockholder is the crucial factor. Which situation can you handle better? A repeated cycle of seeing a stock rise, seeing the gain erased and then waiting for it to rise to new heights again? OR seeing a stock rise, selling it at a profit and then seeing it go up, perhaps substantially, after you sell it? You can buy a stock at 40 and sell it at 48, comforted by the old saying, “you never go wrong taking a profit,” especially in trading range or narrow moving markets. But for some, the comfort quickly disappears, if the stock continues to climb to 100. Some of us by disposition, can have closure and not look back; others hang on emotionally. “Know thyself” is the key. One caveat: in deciding if and when to sell, keep in mind that once a trend is firmly established, the odds favor that trend continuing. The trend these days in not up. To keep from going nuts with this stuff, I try always to look at “value,” hard though that is to establish. If a stock seems to be undervalued, regardless of where the broad market is, or is trending, I like to hold it. I will often foolishly buy more as it sinks further. If a stock seems to be overvalued, regardless of the trend of the broad market, I will often foolishly hold on, to avoid the taxes. But in my saner moments – even knowing an irrational market could take it higher (or that it might go higher for reasons the market “understands” and I don’t) – I sell. In late 1999 and early 2000, my saner moments were all too few and far between. Have a great weekend.
Dick Davis! September 5, 2002February 21, 2017 TIVO Kathi Derevan: ‘I just returned from a visit to a friend in Chicago who bought Tivo for her husband last Christmas (!!) and still it was not installed, (a) because they didn’t know how, (b) he was totally blasé about it and thought he didn’t ‘need’ the silly thing. While he was away for the weekend, I installed it and told him on the phone that his old life was now over and his Tivo life had begun. Oh, how he scoffed! But now, you and I know where he is every evening, and what he is holding in his hand. (By the way, the perfect combination is Tivo with a DVD recorder. You Tivo everything as usual, and what you want to save – for me, sadly, the whole Osbournes series! – goes right onto a DVD, which can then be viewed anywhere, anytime!) Dennis Hoffman: ‘I finally broke down and followed your advice. I bought a TIVO (series 2) in May. You’re right – it made life better. It’s currently in the shop (Series 2 still has the same hardware problems as the original) and TV watching is miserable. The interesting thing about TIVO is that I watch less TV. Because when I got used to being able to see what I want when I want, now I’m not willing to watch a lot of the stuff I used to watch.’ SAVE THE RAIN FOREST: DRINK THE SHADE-GROWN COFFEE Bob Fyfe: ‘Coffee grows naturally in the shade of a forest canopy. This forest supports a wide diversity of animal life. In an effort to increase coffee production, farmers in Central and South America have moved to the faster, higher producing method of sun grown coffee, where the overhanging canopy is removed (deforestation) allowing the now sunlit coffee plants to grow more quickly. The problems with this method are that it requires chemical fertilizers and pesticides, the coffee doesn’t taste as good, and the winter habitat of millions of migratory birds is destroyed. Here are two websites detailing the problem, one from Audubon, one from The Atlantic. In an effort to utilize market forces to stem the change to sun grown plantations, there is now a move afoot to promote Shade Grown Coffee. In fact, I’ve heard one environmentalist state that the one action that Americans could take that would have the greatest impact on saving the rain forests would be to stop buying sun grown coffee.’ DICK DAVIS – ITEMS #30 AND #31 OF 35 For those of you arriving late, click here and here and . . . oh, well, if you want them all, go to my archives and search on ‘Dick Davis.’ Item 30: Behind The Moves in Stocks When news comes out on a stock, it is automatically cited as the reason for the move in the stock. It makes a logical and convenient explanation. But there can be a myriad of other reasons why a stock moves that are never mentioned. These include the mood and direction of the market that day, sympathy with the action of other stocks in the group, the scarcity of buyers or sellers, the level of interest rates, tax considerations, the size of cash reserves, short covering, the pressure on fund managers to perform, technical considerations such as moving averages and resistance and support levels, and many more. The reporter may say a stock is down because it was downgraded. What’s not reported is that it was also upgraded by another firm, and that the real reason for the decline is that the company CEO sold a large block of stock to pay for his divorce settlement. Item 31: Dollar Cost Averaging If the market is unpredictable, a dollar-cost averaging approach makes a lot of sense. Investing a fixed amount of money at fixed intervals in the same stock or fund is a way of taking the emotion and guesswork out of market timing. For example, in a down market, if you leave instructions to transfer ‘X’ amount of dollars from your money market account into XYZ stock on the first of every month or every 3 months, some of your purchases will likely be made when fear is causing others to sell at low prices. The result is that you buy more shares for the same amount of money and lower your average cost. One caveat: Dollar-cost averaging requires patience and discipline and confidence that the stock or fund position that you’re accumulating will eventually go higher. Otherwise it doesn’t work. Also, if and when you decide to sell, do so after a period of rising prices. For example, if you invested $500 every month in the S&P 500 Index during the 5 years, 1997 through 2001 when prices went way up and then came way down, your gain at the end of that 5 years would have been negligible.