In Today's Daily Reckoning:
*** Seeking the family roots in Ireland...
*** Dow's worst day in two months... AMZN beats
expectations
*** No more freebies from Napster...
*** As you know Bill's floating with his family on a
painfully slow ferry somewhere between Cherbourg, France
and Waterford, Ireland. I'm told by his son Will, who's
still with me here in Paris, that the family's off seeking
distant relatives in the Irish town where Will's great
grandfather lived... before he fled to the more stylish
digs of a Pennsylvania steel mill.
*** In the meantime, here's what I propose: I'll run the
numbers for you briefly, then treat you to another rousing
edition from the vast supply of Daily Reckoning Greatest
Hits, 1999. Sound good? If you're interested, stick around.
If however, you've got more important things to do...like
wash the family cat... this is your cue: skeedaddle.
*** Mr. Bear took the day off from sunning himself at the
beach when he heard yesterday's earnings reports: "Stocks
Punished for Disappointing Results" is how a Reuter's
headline scribe phrased it. The Dow fell 183 points... a
loss of nearly 2%, and its worst day in two months...
finishing the day at 10,516. Down 8.5% for the year.
*** Less than impressive earnings in the semi-conductor
industry are being blamed for the losses. But one analyst
in the Reuters article thankfully stated the obvious for
readers of the Daily Reckoning, at least: "Everyone is
suddenly realizing that the last couple of years of profit
growth we have seen cannot last forever." Really.
*** That startling revelation weighed heavily on the
Nasdaq, too. The great incubator of optimism and New Era
exuberance gave up 41 points to close just over 3,987.
*** 1363 shares advanced, while 1474 declined on the NYSE.
*** The S&P 500 also fell 22 points to 1,452.
*** Bad news for Will and his CD burning friends, too.
Napster, Inc. - the website where young techno-wizards have
been congregating to pirate music from their favorite rock
bands - was ordered shut down by a federal judge. No
worries though, Will assures me, once I get my own
"burner," I'll still be able to find plenty of Grateful
Dead bootlegs out on the 'net absolutely free, gratis... no
cover charge needed.
*** On the other hand, reports filed by Amazon were
optimistic. Although Bezos and crew are now losing 91 cents
a share - double the 43 cents/share loss reported a year
ago - they're not losing as much money on each sale as
analysts had predicted. Good news. Still AMZN fell... down
nearly $4 in after hours trading to settle at $33.
*** Meanwhile, "if you can show a monthly income of as
little as $1,000...or $2,000 from investment income... you
could retire next week," writes Kathy Peddicord from
Belize. A law recently passed there allows you to
"virtually retire," live better than you ever have - even
pay no taxes. (see: Mick and Lucy's Oasis in the Jungle
http://www.dailyreckoning.com/body_headline.cfm?id=277)
*** On this day in 1866, Cyrus Field helped usher in one of
the "first order" innovations of the communications age.
After two failures, he succeeded in laying the first
underwater telegraph cable between North America and
Europe.
*** Look for GDP numbers... they come out tomorrow. We
expect more fuzzy logic and hedonic measures.
(see: Instant Gratification Trumps
http://www.dailyreckoning.com/body_headline.cfm?id=278)
*** Allright then... onward and upward: "Rolling The
Dice... and The Proof of God" below... was written over the
course of several days during the first week of August,
1999.
Thanks for sticking around... Bill will be back soon - I
promise,
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$217,355 and watched it grow into a $41 million fortune.
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"Never invest on a level playing field," Doug Casey told
me.
This advice came back to me as I read Peter Bernstein's
book, Against the Gods. It is a history of the mathematics
of probability. And one of the first things we learn is
that toting the odds on anything is not a simple
matter...and that figuring out investment probabilities is
particularly difficult.
Even when the odds are even, for example, it is not
rational for you to play the game -- at least, not from a
strictly financial viewpoint. This is because of something
known as the Petersburg Paradox developed by Daniel
Bernoulli in the early 18th century. His cousin, Nicolaus,
had proposed an idea which is the equivalent of the
principle of declining marginal utility of money. That is
"the utility of any small increase in wealth will be
inversely proportionate to the quantity of goods previously
possessed. "
This insight led to the realization that when you win at a
game of chance...the amount won will be worth less to you
than the equivalent amount lost. You can see this by
imagining yourself with $5 million. In a single hand of
liar's poker you have the chance -- with even odds -- of
either winning another $5 million, or losing the $5 million
you already have. It would be great to win another $5
million. But it wouldn't change your life very much. On the
other hand, going from a net worth of $5 million to a net
worth of $0 would be a major change. Ergo...it is
irrational to play the game. If you win...you win big. But
if you lose...you lose bigger.
Even when the playing field is tilted in your favor, you
can still lose. A remarkable experiment proved this. A
group of PhDs were given $1,000 in play money and asked to
play a game in which they could bet whatever amount they
wished...with a 60% chance of winning each time. Despite
the huge advantage, only 2 out of 40 of them had more money
than they started with when the game was over. They bet too
much. Betting $10 each time would have resulted in about
$1,200. But even though they had a 60% chance of winning
any individual bet, it was only a matter of time before a
series of games went against them...from which it was hard
to recover.
I have opined that investors don't understand the game they
are playing. They think that because they are "investing"
and because "stocks usually go up" that the odds of success
are in their favor. In fact, they are wrong on both points.
First, the activity they are engaged in could scarcely be
called investing. It is much more like gambling. But it is
gambling in a casino where the people you are gambling
against are accomplished card counters, the decks are
stacked and the drinks are $20 each.
I sat next to a woman on an airplane recently who advised
me to buy stocks. It was the ticket to wealth, she
explained. She was a member of an investment club and had
become the group's oil and energy expert. She recommended a
particular oil company (I can't remember which
one...unfortunately I didn't write it down...I'm sure it
was a winner) because she had noticed that "they seem to be
opening new gas stations all over the place." It must be a
growth company.
This level of analysis could hardly qualify a stock
purchase as an investment. Similarly, anything that
involves a guess about the future -- whether it is the
future of the Internet or the future of the gold price --
is not really an investment. It's a speculation. A gamble.
But it's far from a 50/50 bet. The "house" in the Wall
Street Casino takes a huge cut. Someone has to pay for the
brokers' yachts...the homes in the Hamptons...the SEC...the
lawyers...the accountants...and the people who call you at
dinnertime and ask you if you want to give Warren Buffett a
run for his money.
Warren Buffett, Graham & Dodd, and countless others have
found that if they work hard enough -- doing enough
research and study on individual companies -- they can tilt
the playing field a very little bit in their direction.
That's the idea behind Buffett's margin of safety. And
that's exactly what Mark Hulbert discovered when he
analyzed the investment returns of newsletters. Most don't
do better than the market. But a very few do a little bit
better.
Another way to tilt the playing field is the way Doug Casey
does it. He's worked for many years to become an expert on
a particular industry...and a particular type of
speculation. He's become an industry insider, with a well-
developed sense of not only where and how the money moves
around, but also the psychological influences on the
market. In fact, in his most recent issue, he quotes Keynes
on this point. "My success in the market was in recognizing
that the critical issue was not the business or economic
cycle, but the psychological cycle."
This insider's knowledge of the mining industry and the
psychological forces that drive mining stock speculation
raises Doug's end of the playing field just enough to give
him an edge.
In either case, whether it is Graham & Dodd analysis or
insider-style knowledge, the key to success is to exploit
the small advantage over time. This is just like betting
$10 each time in a game where you have a 60% chance of
winning. Eventually, your winnings add up to big money and
people come to think you are a genius. This is far
different from what most "investors" do.
But what should investors do...when they have no edge in
the market?
Well, here's what I propose.since you can't know whether
the stock market will go up or down...you are in a position
not too different from Blaise Pascal when he tried to prove
that God exists.
Ultimately, there was no way to know. But there were, like
the difference between bull and bear markets, only two
answers -- either God exists or doesn't. So, Pascal looked
at the costs of one decision or the other. If he believed
that God existed, and he led his life accordingly, he may
be disappointed. But if he led his life as though God
didn't exist...and it turned out he was wrong...he would
surely roast in hell. Since the latter cost was higher than
the former...and the odds were 50/50...he had little
trouble deciding the issue.
The hope of heaven is the hope that people will get what's
coming to them. Maybe the market will go up...maybe it will
go down. But I see a lot more to lose than to gain. Even at
the fantastic rate of 15% upside profit...there's a lot
more than that on the downside.
And even if it were a 60% probability that the market would
go up rather than down, as we saw in the example of the
gambling Ph.Ds, you would be crazy to put all your money in
stocks. But that is exactly what people are being urged to
do.
Surely, if there is a God he will make sure that the people
who urge you to put all your money in stocks roast in hell.
Your correspondent,
Bill Bonner
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