Author: A.T.

Apologies to those of you who may already have read this in my book, but I hereby give myself permission to reprint this excerpt. If only I had had the brains to read it before I shorted stocks that – had I bought them instead – would have landed me on the Forbes 400,000.

Anyway, here’s the excerpt:

David Dreman, author of The New Contrarian Investment Strategy, writing in Barron’s, made a good case against random walk [the idea that stock prices always reflect all available information about a stock, and that, thus, their future moves can’t be predicted]. He pointed out that stock markets have always been irrational and concluded that a rational man could therefore outdo the herd. “Market history gives cold comfort to the Random Walkers,” he writes. “‘Rational’ investors in France, back in 1719, valued the Mississippi Company at 80 times all the gold and silver in the country – and, just a few months later, at only a pittance.”

It is true, I think, that by keeping one’s head and sticking to value, one may do better than average. But it’s not easy. Because the real question is not whether the market is rational but whether by being rational we can beat it. Had Dreman been alive in 1719, he might very reasonably have concluded that the Mississippi Company was absurdly overpriced at, say, three times all the gold and silver in France. And he might have shorted some. At six times all the gold and silver in France he might have shorted more. At twenty times all the gold and silver in France he might have been ever so rational – and thoroughly ruined. It would have been cold comfort to hear through the bars of debtors’ prison that, some months later, rationality had at last prevailed. A driveling imbecile, on the other hand, caught up in the crowd’s madness, might have ridden the stock from three times to eighty times all the gold and silver in France and, quite irrationally, struck it rich.

I am not calling you a driveling imbecile. And I am not saying the Internet is a scam – it is the future – even though, by coincidence, it may indeed be valued at 80 times all the gold and silver in France. (Gold and silver were more important in France, and France more important in the world economy, in 1719 than they are today.)

The point is simply that just because I foolishly short stocks from time to time doesn’t mean that you should make the same mistake. It’s far, far safer to buy puts. The problem is, puts on crazily valued stocks are, understandably, crazily expensive – and I am too cheap to pay the premium. So I often go short rather than buy puts, and, nearly as often, twist myself into knots of self-loathing as I watch the nightmare unfold.

Pieter [writing last week]: “Calton (CN) is up 48% today! What happened? Yes, I’m still holding on to this (thanks for the tip). Is there still a lot of upside here, or is it time to cash in on this sudden spike?”

I don’t know what happened. There may be upside, but I am cashing in. Here’s the background:

As you know, I’m more prone to provide recipes in this space than stock tips. (Cooking Like a Guy™ Recipe #3 is almost ready. I call it: “Salad.”) But two summers ago, I couldn’t resist. With I-hope-appropriate caveats, I told you about Calton Homes. The stock was then 50 cents. It was $2.75 yesterday. So far as I know, it is NOT something to buy here. But the story illustrates that the stock market may NOT always be rational, and how, in spotting pockets of irrationality, the rational – and patient – investor may find opportunity.

Just as it did not seem rational to me a couple of weeks ago that Yahoo! was valued at more than Ford, GM, Dow Jones and the New York Times Company, combined (so I shorted some), so it did not seem rational to me a year and a half ago that CN would be valued at less than the cost of a used corporate jet (so I bought some).

CN was selling for about 50 cents a share, down from much higher; there were 28-or-so million shares outstanding; and the company’s founder had returned, after retiring, to see if he could rescue it. My thinking was that he had managed to build the company once, and that he had 11 million reasons to try to rebuild it (because his family owned 11 million shares).

So that was possible irrationality #1.

Shortly after my writing about it here, it was announced that a large company would assume all CN’s liabilities and buy all its assets for $48 million — about $1.70 a share. Calton would be left with three employees, an American Stock Exchange listing, $48 million in cash, and a four-year “consulting contract” of $1.3 million a year — enough to pay all the remaining shell’s expenses.

I assumed the stock price would jump pretty close to $1.70 – maybe even go a tiny bit higher – but it quickly settled in at around $1. So you could, effectively, buy $1.70 in cash (well, near-cash) for $1. Not bad!

So that was possible irrationality #2. Indeed, barring something pretty bizarre, this seemed to be all but a “gimme.” Even though I already had a lot of shares, I bought some more. So did some of you. So did the guy with the 11 million shares.

The company announced it would use some of its cash horde to buy in stock below book value. That would make the remaining shares more valuable. (To illustrate: say the company managed to buy in half the shares using a third of its cash. Result: Two-thirds of the cash would remain to be divided over half as many shares. Bravo!)

At the same time, it said that it would explore other businesses to invest in. (Uh, oh! What if they do something dumb with all that money?) But that if it didn’t find something else to do with it, it would distrubute the cash to us shareholders within 18 months.

Today, about 12 of those 18 months have passed. The company has bought in some stock and has made a small Internet investment, which is now branded as eCalton.

Will the company burn through its cash hoard and wind up worthless? Perhaps, but as I say, the founder and his wife have 11 million reasons not to screw it up (13.5 million, actually, now that they’ve bought more shares).

So what happened last week? Who was buying millions of shares? And taking the price as high as 2 7/8? The company says it has no idea.

It’s possible the stock will zoom from here, simply because speculators may notice the volume and the stock’s big move and “like the chart” and like the very low p/e ratio, and – not having any idea what the company does, just that it has a lot of cash, no debt, and a small “dot.com” component – take a flier on it. This would be irrational, in my view – but when has that ever stopped a stock from rising in this market?

Or it’s possible that in a few months the company will distribute its cash and close it doors, leaving the people who paid $2.75 a share with a modest loss.

Or perhaps Calton will allow itself to be acquired for a modest premium to today’s price by some company that wants to “go public” the easy way – by acquiring an already-public company.

Anyway, I would not be amazed to see the stock go higher – and I naturally hope it does, because I still own a lot – but, based on what little I know, I’ve already begun selling.

Tomorrow: Why, Overpriced As I Think It Is, You Should NOT Short Yahoo

Ray: “I am 62 and do not need my IRA money to live. Is there a formula/guidelines on when/how much to remove each year, considering growth tax-free, tax at withdrawal, inheritance tax etc.?”

Ideally, you’d delay beginning withdrawals until the year in which you turn 70-1/2 . . . and then withdraw the IRS-mandated minimum each year. (There’s a formula, but you have 10 years to learn about it and it may change.)

Also, if you plan to give some money to charity at death, you should do it by naming that/those charities as the beneficiaries of your IRA. Otherwise, your heirs will have to pay income tax on the withdrawals AND estate tax. Give your heirs “regular” money from outside your IRA instead — money on which income tax has already been paid. To the charity it won’t make any difference (charities don’t pay taxes); but to your heirs it will.

(One small drawback: with a charity as the beneficiary, you might be required by IRS regulations to withdraw money from the IRA faster, once you turn 70½, than if, say, your spouse were the beneficiary, thus exposing more of it to taxation.)

Tomorrow: Our Little Stock Quadrupled

Dr. King.

Thank God it’s Friday. If all goes well, I am in a “foreign land” as you read this, and was out of touch yesterday, in case Amazon acquired Sears (damn — and Quickbrowse was so close to getting it!) or Canada invaded Maine (I repeat: it is the unexpected that moves markets, and would we really go to war over Maine? Sure, Portland or Ogonquit or Bangor or any part of Southern Maine or even Bahaba – but that stuff way up at the top?).

So if something big happened, I don’t know about it. I am using this occasion to catch up on some odds and ends:

FREE SHIRTS

Lucy Tompkin: “Thanks for recommending the Paul Frederick site, and mentioning the Free Shirt promotion. I ordered one for my husband, (“Black Glen Plaid with Varsity Spread Collar and Button Cuffs in Egyptian Cotton Broadcloth – #960blk”), and it arrived just a few days later. The shirt is quite nice, comparable to those we buy at Nordstrom, and entirely satisfactory, especially for only $7.50 for shipping! What a deal! I will probably order from them again, based on the high quality of their merchandise.”

The limit is one free shirt per customer, first-time customers only, but the promotion seems still to be going.

FREE SNEAKERS

Last month WebMD was giving away free sneakers. Feeling tip-top, I popped over to the site just long enough to enter my address and click – no credit card info required, no charge for shipping – and sure enough, last week a brand-new pair of seemingly $59-ish sneakers arrived. I don’t know what I did to deserve this, but I know it will ultimately be very profitable for someone to have sponsored this promotion.

FREE MONEY

Steven Coultas: “If you open an account with X.com, a new online bank, they put $20 free into your bank account. No costs, no minimums. I’ve just been trying this out, and it works quickly and easily. You can also transfer your $20 instantly into money market funds or mutual funds, all of which seem to be excellent deals. The bank is FDIC-insured. A review of the service is available from http://www.bankrate.com/brm/news/ob/20000111.asp.”

Well, I couldn’t resist, so I signed up. I think I may be $20 richer, and that by clicking Steven’s link, I may have made him $10 richer as well. I cannot vouch for this outfit in any way, although – not being a complete fool – I have imbedded my referral code in this link so that if you sign up for your free $20 I may be $10 richer as a result.

You can see how this could quickly get out of hand, which may be why, when I went to transfer $1 to a friend, as a test, X.com told me I had $20 in its bank (the twenty it had given me) plus a $200 credit line – yet not enough money to cover the $1 transfer. And it also may be why, when I clicked to summon live on-line customer service, I didn’t get any. My guess is that they are just swamped with all this . . . and that people everywhere are sending $1 to friends, in order to get $10 referral fees back. (If your friend is not already an X.com account holder, he has to become one to collect the money you tried to transfer. If he doesn’t sign up, the money never leaves your account.)

Time will tell, but if accounts can be opened automatically for $30 each – the $20 free to the account-opener and the $10 referral – that’s a lot less than miost banks pay to win new customers.

It may be a while before I’d do any serious banking or investing on X.com. But hey: $20 is $20.

(And, what – you never heard of Bahaba, Maine? Maybe you just don’t recognize the spelling. It’s pronounced: Bar Harbor.)

Every so often I try to attack the piles that sit atop other piles, and discover something fun.

Here’s a fax I’m yet to deal with that someone sent me on August 4th . . . 1993. It’s a copy of a Forbes article entitled Bearish on America (July 19, 1993). The large-type summary above the title reads: “Are you willing to invest a good part of your money in countries like India and China? If you’re not, says Barton Biggs, you will have to settle for a lousy return on your investments over the next half-dozen years at least.”

The next half-dozen years . . . hmmm, well, that would bring us up approximately to the present.

As Morgan Stanley’s chief investment officer, Biggs was recommending in July 1993 that clients cut their exposure to U.S. equities to just 18% of all their assets.

His reasons?

• He thought the U.S. stock market had gotten way ahead of itself, with the Dow at 3500

• He thought that opportunities were better abroad.

• And, finally, Forbes reported, “[he didn’t] take seriously the Administration’s assertion that its tax increases and so-called spending cuts will shrink the federal budget deficit by anything like the half-trillion dollars Clinton claims. Once the markets understand that the deficit is going to be staggeringly high, [they will all come tumbling down].”

Nor was he alone in doubting the Clinton/Gore economic plan – not a single Republican voted for the budget. But in hindsight, the last half-dozen years have not been bad at all.

A year later, James Davidson — a newsletter writer who is so much smarter than almost anyone else, and who is so much better plugged into the truth, and so disdainful of those who disagree with him — headlined the July 20, 1994, issue of Strategic Investment, his newsletter: “IT’S OVER.”

“Strategic Investment has repeatedly warned that the dangers of deeper depression remain,” concluded the piece. ” . . . It was fun while it lasted, but anything that can’t go on forever will come to an end. The plunging bond market and plunging dollar tell us it is over.”

Of course, it’s dangerous to laugh at these things. It’s just when you do that you’re the one who’s made to look silly with hindsight. (“The day after Tobias mocked Davidson’s long-wrong dire predictions, the stock market collapsed, deflating consumer confidence and leading to the worst recession in living memory. It was not until the summer of 2011 that a recovery really took hold, pulled out of despair by the Scandinavians, whose Nokia and Ericsson behemoths had become the engines of global growth.”)

And I do worry about the stock market, or at least some parts of it.

Yes, Yahoo is down from 500 to 360 in the last six trading days — a 28% drop. But is that the bottom? That could be as deep into the bargain basement as it will ever sink. But I will hold onto my reckless short a bit longer. (REPEAT: DO NOT TRY THIS AT HOME.) Because according to the Market Cap Scale you can access from the menu bar at the top or bottom of this page, Yahoo is still valued at more than the New York Times Company, a powerful brand respected around the world.

Plus Apple! (which is also a pretty hot, and solidly profitable, brand these days).

Plus FedEx! (which will deliver many of the e-commerce Internet shipments).

Plus General Motors! (which for all its problems did manage to earn a $6 billion profit last year and pay out about $1 billion in dividends, or about five times as much in dividends as Yahoo had in sales).

Put YHOO on the left side of the scale (by clicking the “Add” button and following the instructions) . . . and put NYT, AAPL, FDX and GM on the right side (by clicking the check boxes to the left of their names) and . . . when you click “weigh,” the scale goes THUNK! As YHOO hits the ground, leaving the other four lightweights, combined, suspended in mid-air.

My friend Joe Cherner is even more skeptical than I am. He writes: “Computer manufacturers are in the best position to be portal owners. Eventually, when you buy a computer, you will plug in the electrical cord and the phone cord. There will be a button on the keyboard marked Internet. When you press it, you will go to a portal (via free Internet access). The company that sells the computer will decide which portal you go to. Yahoo would be dead.”

I’m not sure he’s right. I think Yahoo will find a way to prosper. But that doesn’t make it worth as much as Apple, the New York Times, FedEx and General Motors, combined.

But I have digressed! Did you notice that? One minute I’m talking about Barton Biggs and the next I’m weighing stock symbols on a virtual scale. Soon I will be talking about hit TV dramas.

I did have a point, and that point is this: It is SO hard to call the market.

Barton Biggs is a very smart, wise man. He was so wrong. My friend Joe and I are not total idiots, but we have lost more than a dime or two with our laser-like intellects.

So you? Should you beat yourself up for buying too early or selling too soon? No. Should you trade actively in order to beat the market? No. Active trading will eat you alive in transaction costs and taxes.

Should you play this game at all?

Well, not if you can’t afford the fun. For game-playing I recommend computer Scrabble. And on Wednesday nights at 9pm on NBC: “The West Wing.” Do not miss it.

But for your money, I would eschew the Investment Casino, exciting though it certainly has been of late.

I would put into stocks only money you truly won’t need to touch for many years. And that money, unless you have an exceptional talent for this, I would put into two or three no-load, low-expense, low-tax index funds.

Especially for younger readers, the best approach is to invest $250 a month or $2,500 – whatever you can comfortably afford – and just keep doing it, through ups and downs, all your working life. The hard part is making the money, investing it methodically, and having the discipline not to “play” with it.

Discipline is hard, but not as hard as beating the market.

Some of you know I have an interest in Quickbrowse, which is getting better and cleaner and easier by the week. The latest version went up last night. Usership is growing. We are thinking of acquiring Sears.st interface went up last night. New users are beginning to sign on at an ever increasing rate. We are thinking of acquiring Disney.

OK, so we are not yet public. Nor have we revenue. But we are not thinking about Disney or Viacom or NBC, whom other, more established new media companies covet. We do not propose to jostle Yahoo’s investment bankers with our own (once we retain some). But Sears is the sort of backwater old-economy company we just might be able to swallow and reenergize. We will even let current management run the combined company for a while, while we hire an ad sales staff and an accountant.

Seriously: Hats off to Steve Case and crew. I use AOL all the time. I think AOL needed Time Warner more than Time Warner needed AOL – that Time’s shareholders are getting too small a slice of the proposed pie (we plan to be more generous with the shareholders of Sears) – but there’s no denying a good fit here. There’s also no denying the trend toward just a handful of global giants in most fields, which makes me nervous.

A long time ago, I wrote an article called “The Day They Couldn’t Fill the Fortune 500,” for New York Magazine. Almost seems as if it’s coming true.

Jim Fowler: “I would like to receive your daily column via email. Is this possible?”

Just scroll down to the bottom of this page and click the gray-and-red Q-Page button. Another fine service of Quickbrowse-Sears.

(Have your own family web page you’d like to enable others to receive by e-mail on a schedule of their choosing? Click the hyperlink just below the button. You can Q-Page your web page or fledgling web site easily and for free.)

Tom O’Connor: “I’m a student, heading to a career as an ad copywriter. I try to increase my MBA-type knowledge of how business works, and I don’t understand the grow-or-die concept as it applies to companies. Sure, it makes sense for publicly traded ones that have to satisfy analysts’ desire for earnings growth, but beyond that, why? If I’m turning a profit, why does it matter whether or not I’m growing?”

If you’re not growing when the population is, I guess you’re sort of shrinking.

And if you’re not growing, then you’re:

1. taking all the profits out of the business instead of reinvesting them (in which case you’re probably not keeping up with the competition in terms of new equipment and/or better ways of doing things); or else . . .

2. reinvesting your profits at zero return (which doesn’t bode terribly well, either).

And if you’re not growing, it’s not too interesting or exciting for the sales team and management, so you’re not likely to attract or keep the young, bright go-getters – but your competition will. And those hungry go-getters will work hard and smart to win your customers over to the competition.

All that said, I’m sure there’s a place for the charming little guest house that has its fiercely loyal repeat clientele; that never expands; that never raises its rates, except perhaps to match inflation; and that provides a lovely living for the people who run it. But, with exceptions, there’s certainly something to the maxim.

Three unrelated items:

1. Recently, I mentioned dealcatcher.com. Here are two more sites for free stuff and promo deals: thefreesite.com and deal-finder.com.

2. A week earlier, I was pointing out the good intentions but limitations of The Hunger Site. Here’s a good idea from Christopher Frizzelle: “If The Hunger Site puts a link to Amazon.com somewhere on its webpage, it can earn 5% of the total Amazon purchase that the customer made on account of the click-through. Chances are, the average Amazon shopper spends more than $10.00 at Amazon’s site — not to mention if any number of those shoppers know that a portion of their purchase is going toward battling third-world starvation — and $10.00 on this arrangement means two quarters instead of one nickel will go to hungry kids. That’s ten times more money for food.”

So keep the banner ads and the nickels, but get Amazon shoppers into the habit of accessing Amazon through The Hunger Site. Smart, Christopher. (John: What do you think?)

Alan Levit: “I’ve got a DSL connection and three computers. I didn’t read your first column on Hungersite, and now I guess I’m glad I didn’t. I’ve been merrily clicking along on two computers every morning, with my eight-year-old clicking on the third (Hungersite is bookmarked on all three). I never would have considered these nickels to be our family’s share of our just contribution to the poor, but our 15 cents a day, and everyone else’s, does seem to add up. I’ll happily keep clicking next year.”

3. Last March, Howard Ruff told his newsletter subscribers: “THE WORLD IS A BUBBLE AND Y2K IS A PIN.”

Mmmmm . . . no.

Rick Boyd: “Now that the big date has passed with remarkably few problems, I was wondering: What preparations did you make for Y2K difficulties?”

Well, a while back, I bought a generator, but largely for thunderstorm and hurricane power outages. I also bought a ton of canned/bottled food and drink, Stern-o, candles, etc. – maybe $1,500 worth. But it was in bulk on sale, and will all or mostly come in handy. So all that was “lost” was the interest on the money for a few months, as I eat down my inventory. Finally, I had more cash on hand than I usually would.

But, as with most people, my anxiety over this lessened markedly in recent months. It seems that a lot of people did their jobs well, and we owe them a round of applause.

That said, it’s always good to be prepared for an emergency, especially the unadvertised, unexpected kind. We’re all better off, individually and as communities, if we have a couple of weeks’ essentials on hand, and a way to stay warm and see in the dark, just in case.

Patient sitting on examining table, in gown, being given his doctor’s diagnosis: “Unfortunately,” says the doctor, “you have what we call ‘no insurance.’” — New Yorker cartoon, by Michael Maslin

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Brian A.: “You wrote: ‘Right now [with the stock at $475], Yahoo is valued at significantly more than Ford and General Motors, combined.’ This is probably more a matter of low investor expectations of Ford and General Motors than excessive expectations of Yahoo.”

Really? You don’t see any problem with Yahoo earning $10 billion-a-year after taxes in a few years? That’s a third more than General Electric made this past year, and General Electric is one of the most profitable companies in the world. It’s nearly half again as much as Exxon/Mobil earned last year, and Exxon/Mobil is not a small or unprofitsable enterprise. A surprising number of Internet users buy drive cars and buy gas. Yet $10 billion in after-tax earnings is what it would take for Yahoo to be selling at “12 or 13 times earnings,” at its recent $475 a share price.

(Since last week’s column, Yahoo is down 100 points, but it’s still valued at more than twice General Motors — and could easily bounce back up another 100 points or another 1000 points – why not? At least that seems to be the attitude of some of today’s more optimistic investors.)

The math could hardly be simpler: At nearly $475 a share, and more than 263 million shares outstanding, the company was valued at $125 billion (today, a paltry $96 billion). And $125 billion is 12 or 13 times $10 billion. So with a market capitalization of $125 billion and earnings of $10 billion, the company would be valued at 12 or 13 times its earnings.

Now, you may say, “12 or 13 times earnings – for a hot growth stock like Yahoo? Are you crazy?” But I would submit that once it’s earning $10 billion a year after tax, it would be so large it might not be such a hot growth stock.

And in any event, in the meantime, there’s the small matter of getting from its current after-tax earnings — $16 million in the last 9 months — up to $10 billion.

It’s possible, of course, but how many companies today earn $10 billion a year in profit after tax? It’s really not an easy thing to do. Even Microsoft, with its near-monopoly on operating systems and office-suite software around the world hasn’t reported earnings quite that high.

I am a fan of both Yahoo and Microsoft, but there’s a difference. Though I use Yahoo every day, I’ve never paid them a dime and don’t plan to. Nor do I pay attention to any of the banner ads. They’re a lot easier to ignore than TV commercials. And if they ever did become hard to ignore, I’d just stop using Yahoo.

I use Microsoft products every day, too. (And, currently, at least, could not possibly stop.) The difference is that, between the licensing fees built into the cost of my computers plus the software I’ve purchased directly, I’ve paid Microsoft lots of money. And they’ve got hundreds of millions of customers. And still they are only now barely getting into the $10 billion-a-year profit range.

What if Pokemon or Harry Potter puts up a portal, and half Yahoo’s visitors start using that?

So give me a break.

Yes, if everything goes right, as it may, these terrific folks at Yahoo (and they are terrific) may one day, conceivably, build a company worth as much as Ford. Or even Ford plus General Motors plus Dow Jones plus the New York Times Company plus a billion or two in spare change,. That’s how Yahoo was valued for a moment on January 4, when the market-makers temporarily bumped it up to 500-1/8 in order to activate the stop-loss orders that short-sellers had entered at 500. (Or so a cynic might surmise.)

It is conceivable.

But why would anyone possibly pay that much for it today? Or even anywhere even vaguely close?

I saw Lou Dobbs on the “Today Show,” and I like Lou Dobbs, but he was giving really dumb advice, if you ask me. He was asked whether someone with $2,500 should go into the market at these prices (it was actually January 4, I think, that he was on the show) — and whether they should go into the high-flying tech stocks — and he said yes (no!) but that they should get professional advice because this is not a field that is easy for the amateur to dope out.

Well, I ask you: What kind of professional advice is a client with $2,500 going to get? And what will it cost him? If it costs even just $100, that’s 4% right there. And what will that advice be worth? A great many professionals had “buy” recommendations on Yahoo when it was selling for more than Ford, GM, Dow Jones and the New York Times Company combined.

So this is all really a little silly, even though the Internet itself is very real, and my cell phone is magic, and Yahoo is terrific, and the future is so exciting I sometimes want to burst.

For now, I’ll stay short a little Yahoo, a little Amazon, and long the kinds of stocks nobody with any sense of fashion could possibly want.

Monday: Free Stuff, Hunger, and Y2K.