* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you will
receive Bill Bonner's DAILY RECKONING. This will help you
to keep pace with the changes in the markets. Bonner and
I agree on most things in the field of economics, so the
two letters will reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Fear Factor
The Daily Reckoning
Ouzilly, France
Thursday, August 19, 2004
---------------------
*** Schlepping and busing, toting and lifting...
*** Brin and Page pitch a googly... will Google get hit for
six?
*** The Bonners return home... only to be snubbed!
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We are still trying to figure it out. We must be missing
something...
The "symbiotic" relationship between the United States and
China...
China has a problem. It has hundreds of millions of people
for whom it has to find gainful employment. The most
gainful employment it can find is to follow the typical
Asian model: making things to sell to the rest of the
world. China, being the largest of the Asian countries, has
set out to make and sell everything to everybody.
So far, so good.
How much China can make and sell is limited to how much
other countries can buy. In this regard, China has become
the world's No. 1 beneficiary of America's great credit
boom and amazing dollar. Were it not for Alan Greenspan's
Fed and the reserve currency status of the dollar,
Americans would have had to stop buying Chinese goods long
ago; they would have run out of money. Were it not for
Americans' ability to go more deeply into debt than any
other people have ever done, there would be far fewer
Chinese products on the shelves of Wal-Mart... and far fewer
factories in China... and far fewer Chinese schlepping and
busing, toting and lifting in order to quench American's
thirst for things they don't need and can't really afford.
Having a currency that is also the world's reserve currency
has permitted Americans a degree of imprudence that no
other people in the history of the world have ever been
permitted. Who else could run $600 billion annual trade
deficits? Who else could borrow so much money with so
little hope of ever paying it back?
The Chinese are happy to make things; it brings them jobs,
profits, capital and so forth. But in order to keep the
orders coming, they know they also have to continue to
finance their major deadbeat customer - America. "They have
to buy our debt," say America's hallucinating economists.
"It's the only way to keep their people working. Everybody
comes out ahead."
We do not doubt that China benefits by financing America's
spendthrifts. It is industrializing at a pace that would
not be possible otherwise. What escapes us is how America
benefits.
Bankrupting yourself in order to help the Third World may
be a noble thing to do, but it is only noble if you do it
on purpose.
More news, from Baltimore...
---------------------
Tom Dyson, from Baltimore, Maryland...
- Readers may neither know nor care about the game of
cricket, but it is one of your misplaced British editor's
favorites. Played in the summer using a bat and ball,
cricket is to the English what baseball is to Americans.
- One of the most unplayable pitches in the bowler's
(comparable to the pitcher in baseball) arsenal is called a
googly. It appears to the batsman as if the ball is going
to spin in one direction when it bounces off the wicket,
but spins in the other, drawing the batsman into a clumsy
stroke.
- From our humble perch here at The Daily Reckoning, we are
watching Google's IPO with interest. We wonder if Sergey
Brin and Larry Page are offering "the next Microsoft" or if
they are bowling investors a googly.
- The shares start trading today... at $85 apiece, valuing
Google at $23 billion dollars. That makes Google the same
size as GM and almost 50% larger than Amazon.com, which
only has a market cap of $16 billion. For readers'
reference, Yahoo! is worth over $38 billion.
- Google's IPO has been a controversial affair right from
the get-go. Investors have been skeptical, while the press
has been outright negative...
- And the reason for the hullabaloo? Apparently Google
annoyed U.S. regulators when the founders appeared in an
interview published in Playboy magazine during the so-
called "quiet period" ahead of stock sales. Then the dot-
com company was castigated over 23 million shares and 6
million options it gave its employees and consultants.
- Now European fund managers are moaning because Google's
management couldn't find the time to fit Europe into its
global investor roadshow. The fund managers snubbed the
auction.
- "Google's initial public offering raised barely half the
amount originally hoped for after the Internet search
engine company was forced to slash the price for its shares
well below its earlier targets," sneers an FT headline.
- "I always thought they would have to cut the price," said
another analyst. "Google are doing a new thing at a bad
time with no support... this is a very bad time to have a
tech IPO. Tech stocks are heavily beaten down, we've had a
parade of bad news... then Google decided to do the IPO in a
different way, so there are two hurdles to jump. Finally
what Google is doing [using an auction] is not exciting to
the investment bankers."
- To us, it smells like a bad case of sour grapes... it
seems Google snubbed Wall Street, and now the establishment
wants retribution. This way, they make sure no future
upstart tries a similar stunt.
- "Sadly, however, dreams of a new beach house in the
Hamptons will have to wait," pooh-poohs The Economist. "The
IPO market is looking rather tired."
- "Its rich valuation - probably above $100 a share - has
put off individual punters," continues the magazine. "Along
with institutional investors, they may also have been put
off by its Dutch-style auction for pricing shares."
- While Google may still be an overvalued tech company
trying to join the ranks of Amazon, Yahoo! and eBay, but
here at The Daily Reckoning, we love the fact they tried to
scorn Wall Street. And we think that all the negativity
surrounding the auction is bullish.
- On Wall Street, yesterday's action was bullish. Stocks
soared. The Nasdaq climbed faster than a bouncer delivered
from a West Indian fast bowler on a hard Caribbean wicket.
It gained 2%, or 36 points, coming to rest at 1,831. The
Dow knocked up a century, scoring 110 runs in the session,
taking the scoreboard to 10,083. The S&P had a good innings
too; it gained 1.24%, to 1,095, by tea.
- And all this despite the unfavorable batting conditions
for stocks resulting from further gains in the oil price;
yesterday, oil charged to record highs again, and is now
looking like scoring a maiden half century. The black goo
moved above $47 a barrel, to $47.27 by the end of the day's
play on the NYMEX in New York. Oil has now gained 27% in
the last six weeks.
- "Is Google a buy?" asks our favorite columnist Alan
Abelson. "Frankly it just isn't our kind of stock. The
problem with paying 40 to 50 times next year's earnings, or
any comparably astronomic multiple for a stock, is that
we've never figured out when you sell it. Which is why we
don't have $4 billion, we guess."
---------------------
Meanwhile, back in France...
*** "Oil Hits Record on China, India Demand," says Reuters.
*** Yes, we are back at home.
"Oh, it's so nice to be back," said Maria.
We all enjoyed our sojourn around the United States. But
some of us enjoyed it more than others. Maria likes to be
home. Jules likes to be away from home. Henry doesn't seem
to care. And Edward doesn't seem to know.
"Are we still in America?" he asked yesterday.
"You little dope," Jules answered. "We left America two
days ago."
But there are nine hours of jet lag between Vancouver and
Paris. We have come to admire visitors from California; the
adjustment is not easy.
"Daddy! Come quick. Edward's outside, wandering around in
the dark!"
Maria woke us up last night. For a moment, we couldn't
remember where we were either. We had a flash: Edward was
sleepwalking toward the rim of the Grand Canyon... or
wandering the streets of Vancouver at 3 a.m.
When we came to, we looked out the window. There in the
yard was a white quilt lit up like a lantern... moving
slowly across the yard. It was as if we were being visited
by extraterrestrials who came all the way from Mars in
translucent bedcovers.
"Edward?"
"Yes, Dad."
"What are you doing?"
"I'm just getting something out of the car... I can't
sleep."
*** "France is boring," said Henry, offering a counterpoint
to Maria's view.
What makes France boring is that its people are much less
eager to experiment. In the Old World, people follow
tradition more slavishly. That is what makes Europe so much
more attractive, of course. People are more careful about
what they build, what they do... and what they say.
"The Duboises aren't coming to our party," Elizabeth
explained. "They have never gotten over our snub."
What they never got over was a casual response made to an
invitation. "No, we can't come over right now... Bill has to
work this evening... " Elizabeth had told them. But that was
several years ago, before we realized how sensitive French
social relations can be. Socializing is no casual matter,
at least not in this part of rural France.
"We [Americans] are too busy," wrote Michael A. Ledeen, in
his book of delusional praise, "to master the old rules of
etiquette, and we are far more inclined to overlook boorish
behavior than are members of more traditional societies.
Even today, failure to address a member of the European,
Latin American or Asian upper classes in precisely the
proper way can end all hope of friendship or even a good
working relationship."
Elizabeth, ever eager to improve us, has organized a large
party. Tout Paris will be there. Except the Duboises. But
the poor French are in for a shock: American country music.
Your editor is going to perform his favorite Johnny Cash
songs.
What makes America less boring is that people will do
almost anything. They do not mind making fools of
themselves, nor do they embarrass easily. America is
delightful for its baroque exuberance... its inventive
energy and its trashy casualness. These qualities do not
make Americans superior; they are prone to the same errors,
weaknesses and sins to which all flesh is heir. But it is
more fun watching them.
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---------------------
The Daily Reckoning PRESENTS: Dan Ferris advocates a profit
strategy that makes most people cringe... and you don't even
have to eat cockroach sandwiches!
FEAR FACTOR
by Dan Ferris
"I will tell you the secret of getting rich on Wall Street.
You try to be greedy when others are fearful, and you try
to be very fearful when others are greedy."
- Warren Buffett
"If you eat this raw pig's rectum, it'll put you one step
closer to a check for $50,000."
Is it worth $50,000 to you to eat a raw pig's rectum? How
about lying in an open glass casket with live rats crawling
all over you? Or maybe driving a car off a ramp at high
speed, crashing headlong into a half acre of cardboard
boxes while you sit helpless in the driver's seat?
Not worth $50,000, you say? I don't blame you.
Perhaps you recognize these dangerous, disgusting stunts
from the hit TV show Fear Factor. Every week, young people
commit risky and repulsive acts on national TV in order to
compete for a $50,000 cash prize.
There's a much easier way to make $50,000 that's neither
difficult, dangerous nor disgusting, and which requires
very little time, talent or energy � but which most
investors are less likely to do than eat a raw pig's
rectum.
Uncomfortable as it is for most people, this simple
strategy I'm talking about is without a doubt one of the
single greatest secrets to getting rich in stocks. Rather
than telling you the secret outright, it's much more
effective to show you a pristine example...
Amazon.com's initial public offering was 3 million shares
at a price of $18 each (presplit). Bill Miller, manager of
the Legg Mason Value Trust, bought Amazon's stock at the
IPO, back in May 1997.
Miller sold that first position, later saying it was, "the
dumbest thing we ever did." Miller bought Amazon again at
$80 a share in 1999.
Amazon's stock price fell apart, just like every other
Internet stock. Miller responded by doing the only sensible
thing he could do. He bought more. A lot more. As he told
Fortune magazine, "We started [buying] again in mid-2000
when the stock was in the $40s, and then we bought it all
the way down. Our buying increased as the stock fell. If
the stock was $35, we'd buy 50,000 shares; at $25, we'd buy
150,000 shares; and at $14 we'd buy 300,000 to 400,000
shares." Miller says he finished buying "between $7 and
$8."
Miller's buying strategy goes by a name you might be
familiar with, dollar cost averaging. Dollar cost averaging
is when you spend the same dollar amount no matter what the
stock price is. If you spent $700 for 100 shares last
December, that same $700 will buy you about 139 shares at
today's prices. If you bought $10,000 worth back then,
$10,000 would buy you 39% more shares today, and so on.
Today, Amazon is around $37 a share. Miller's average cost
for the stock is around $19.69 per share. He paid as much
as $82 for some of his shares, and he's still up 88% with
the stock 55% below his initial entry price. From his
highest price to his lowest price, the stock fell 91%! And
he's still up 88%! I doubt many people can say that they've
ever made an 88% profit from a stock that fell 91% while
they were holding it.
Brilliant as Miller's strategy is... the "trend is your
friend" crowd reacts to Bill Miller's behavior like an ape
in front of an obelisk. Buying stocks that are falling in
price? Throwing good money after bad? It's sacrilege!
William O'Neill, editor of Investor's Business Daily,
advises investors to sell stocks of perfectly fine
companies if they commit the apparently unforgivable sin of
falling by as little as 8%. This is known as the use of a
stop loss. I've yet to find a wealthy value investor with a
successful long-term track record who advocates any such
thing. Eight percent is not enough of a price fluctuation
to get the attention of a Bill Miller or a Warren Buffett.
Nor should it get yours, as long as you're confident that
nothing has changed about the company's business. Better to
heed the advice of Warren Buffett, who once said that you
shouldn't be in the stock market if you're not ready to
watch your stocks fall by 50% without selling in a panic.
Bill Miller is the one and only investor who has
outperformed the S&P 500 every single year for the last 13
years. Miller manages the Legg Mason Value Trust, and he's
got $20 billion in assets under management.
And now you know how he makes more money in stocks year
after year than any other mutual fund manager. Miller's
strategy, his secret, is so utterly simple. It boils down
to a single phrase, one that he repeats to anyone who'll
listen: The long-term investor wins.
Long-term is why Bill Miller bought Amazon shares at $7
after he'd already bought them at $82. Long term is why
Warren Buffett is the second-richest man in the world. It's
one of the great secrets of success in the stock market:
Think long term. Long term is a perspective on investing
that almost no one has the common sense, character and
discipline to take; that's why long term-oriented investors
have an instant advantage over the vast majority of amateur
and professional investors alike.
Miller doesn't practice a discipline for the sake of
practicing it. He does it because he is constantly trying
to beat the market.
And the way you beat the market, the way you get rich in
stocks, is to be a long-term investor and hold the lowest-
cost portfolio you can.
Regards,
Dan Ferris
for The Daily Reckoning
P.S. I have a company in my portfolio having its best
growth year ever... a company that has grown revenues at 30%
a year for the past decade.
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