Contributed by Bill
Publisher of: The
Fleet Street Letter
MONDAY, 13 AUGUST 2001
*** Successful Investing according to Aesop - "a bird in
the hand"...and the return of your capital...
*** Plunging wholesale prices, energy, interest rates...is
it time to say: "sayonara"?...
*** What's the "Money Honey" to do?...Geneva - "City of
Peace," but where are the Swiss?..."theory of ignorance"
|*** "The formula for valuing all assets that are purchased |
for financial gain," says billionaire investor Warren
Buffett, "has been unchanged since it was first laid out by
a very smart man in about 600 B.C. The oracle was Aesop and
his enduring though somewhat incomplete investment insight
was 'a bird in the hand is worth two in the bush'."
*** Today, in honor of it being Monday, we take a break
from our usual "negative drivel" to report some positive
news...and dispense with a smidgeon of advice.
*** First, the news: last week - the same week Cisco
announced profits dropping 84% - Buffett's Berkshire
Hathaway announced 2nd quarter net profits 21% ahead of last
*** "Aesop's investment axiom...is immutable," says
Buffett. "It applies to outlays for farms, oil royalties,
bonds, stocks, lottery tickets, and manufacturing plants.
And neither the advent of the steam engine, the harnessing
of electricity nor the creation of the automobile changed
the formula one iota - nor will the Internet."
*** "What people forget," says Money.com's Walter Palgrave,
"is that what you earn on stocks and even the return over
very long periods depends in part on what you PAY for
*** "[Buffett] merely buys what is a good buy - at the
time," says Lynn Carpenter, of The Fleet Street Letter.
*** Carpenter's advice: "Start with the assumption that the
market could do the worst possible thing - it could drop
60% across the board - and take it from there."
*** Eric, what's happening on Wall Street?
Eric Fry reporting from New York:
- What a novel idea...investors appear to be picking up on
the Buffett theme and are favoring companies that produce
profits over those that do not. The Dow gained 117 points
Friday while the Nasdaq lost 6. For the week, the Dow shed
less than 1% while the Nasdaq tumbled more than 5%.
- Of course, a week does not a trend make.
- Wholesale prices fell 0.9% in July, according to the
Labor Department's latest PPI report - their biggest
decline since 1993. Energy prices also plunged 5.8% during
the month, the steepest drop in 12 years. The wags on Wall
Street, in turn, have proclaimed that inflation - like
polio or the Bubonic Plague - will never afflict us again.
- With wholesale prices and energy and interest rates
plunging faster than a Pamela Anderson neckline...could it
be that inflation is not our problem at all?
- "Those soothsayers that have been screaming 'deflation'
because the Fed is too tight exhibit impaired reasoning,"
say Bill King. "Yes, deflation is a concern, but the Fed
has been the diametric opposite of too tight. This is
backward reasoning: 'I see deflation, therefore the Fed is
too tight'...It's simply not correct, as Japan - and now
the U.S. - is proving."
- Greenspan is both lowering interest rates aggressively
and boosting the money supply - the two main tricks of the
trade he has used to combat prior slowdowns. But neither
corporations nor consumers are increasing their borrowing
- "Business loan activity has fallen drastically in recent
months, and is now below the levels of late 1999 and early
2000," writes Andy Kashdan of grantsinvestor.com, citing a
report from ISI. "[Meanwhile], consumer credit fell last
month for the first time in four years."
- In fact, this may be our worst nightmare - a consumer who
doesn't consume. He may even be turning into a "saver"...
ugh ...and a stock-phobic saver, at that: "Just $36 billion
has gone into all equity funds [this year], down from $233
billion over the same time last year," calculates Charles
- Echoing an oft repeated phrase here at the Daily
Reckoning, Biderman notes that "during hard times,
investors become more concerned about return OF their
capital then return ON their capital..."
- Pull out your hankies and dry your eyes, Individual
Investor will publish no more. A classic case of live by
the bull, die by the bull, Individual Investor was nothing
if not bullish, especially about tech stocks. The magazine
was created and run by Jonathan Steinberg, who is more
famous for being the spouse of CNBC's "Money Honey," Maria
Bartiromo, than for his own adventures in publishing.
- Fred Hickey reminds us of the Individual Investor legacy.
"Maria Bartiromo titled her August 2000 column in her
hubby's Individual Investor magazine: 'Ready for a
Rebound.' Column subheadings were: "Nasdaq 6000?" and
- "'In the Nasdaq 6000?' section, Maria cited Morgan
Stanley analyst Mary Meeker, who was then claiming that the
Internet sector had bottomed...Maria noted that Meeker
liked Yahoo, Amazon.com, eBay, Cisco Systems, Broadcom, Sun
Microsystems, Lucent and Motorola..."
- With the exception of eBay, all of Meeker's
recommendations lost 70% or more in the ensuing months. "My
purpose is not to embarrass Mary Meeker or Maria B.," says
Hickey, "but to make the point that you'd better not hop on
the train just because the Wall Street touts are telling
Back to Addison Wiggin, in Paris...
*** "There are 5 regions of the world," said the
philosopher Tallyrand, "Europe, the Americas, Asia,
*** Over the weekend, my wife Jennifer and I traveled to
Geneva for her birthday. It happened to be the final
weekend of the annual Fete de La Gen�ve - an enormous week-
long festival in which the entire city participates. The
highlight? A 2-hour musical fireworks display set to the
music of Wagner, Puccini, Verdi...and Run DMC (among
*** Geneva, the so-called "City of Peace," is the first of
the world's great melting pots. "Tolerance" being a major
theme since Calvin brewed beer there in the 1500s, Geneva
now plays host to residents from 157 countries. As if to
prove the point...we stayed in a "French" hotel run by
Koreans, ate Thai noodles served by Philippine women and
savored Portuguese pastries while watching throngs of Arab
women in full veil wander by...we wondered "Where are the
Swiss?" on more than one occasion.
*** Before leaving on Sunday we toured Lake Geneva by boat.
The sun was pleasant and warm. Sailboats were out in
force...On one side of the lake we passed by the Baron von
Rothschild's enormous 19th Century chateau. On the other,
almost directly across, we passed the little villa Lenin
inhabited in 1914 while plotting the Russian Revolution.
The irony, I think, was lost on our skipper, who spoke with
a perfect British accent.
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The Daily Reckoning Presents: A DR Classique originally
broadcast on April 19, 2001
TRAFFIC ACCIDENTS or The Theory Of Ignorance
By Bill Bonner
"Skepticism, like chastity, should not be
relinquished too readily."
A website offers us an opportunity to "Vote for the
Dumbest e-Business Moment."
The first contender is the "summer of 1970" in which
"Kajsa Leander is born in Lund, Sweden...several
months later, Ernst Malmsten is born, also in Lund.
Together, they go on to found an ill-fated
multinational high-fashion e-tailer called Boo.com."
The site lists a number of bizarre and amusing
events in the life of the dot.com bubble -
confirming both my faith in man's ability to delude
himself with visions of grandeur...and my new Theory
Noted, of course, is Dec. 16, 1998, when Henry
Blodget predicted that Amazon.com would go to $400 a
share. He was not joking - it did. But shares in
Amazon.com can now be purchased for just a little
over $10. And don't be surprised if they are
And there is that day in June 1999, when Mark
Beier, CEO of Beyond.com, appeared on CNBC's
Squawkbox dressed only in his boxer shorts. The gag
was designed to underline the fact that you could
buy everything you needed over the Internet -
dressed only in your underwear. Of course, it might
have been taken as a forecast of what would happen
to Beyond.com's shareholders. They have lost
their shirts...and maybe even their pants...as the
stock has dropped to 28 cents. This week's issue of
Barron's has it listed as one of the companies
scheduled to run out of operating cash this month.
"One of every three publicly traded 'Net outfits'
stands to run out of cash within the next 12
months," says Barron's. "And that does not count
those that already burned out."
"The remaining 214 companies," continues the report,
"had negative earnings before interest, taxes,
depreciation, and amortization of $2.29 billion,
substantially higher than the negative $1.37 billion
EBITDA in the previous quarter."
What a sad end to such a magnificent delusion: The
Internet Age. The dot.coms have lost a total of
About $1 trillion in value since early 2000.
But there is something magical about big, dumb
ideas. In any specific application, they may be
The "boo crew", for example, as the 450 employees at
Boo.com were known, spent money as if, well, it was
not their own. Expensive offices in London, New
York, Paris, Munich, Stockholm...$5,000 a day to
fashion consultants just to perfect the look of
"Miss Boo" on the website.
This was a company with almost no sales...whose
managers were burning through $135 million, with
almost nothing to show for it.
Who in the rag trade would spend his own money that
way? No one. The actual experience of doing business
and having one would weed out such incompetents...to
But it was a New Era...and people believed in the
Big Ideas behind it. Even when they didn't work in
practice, people still had faith in the theory.
That is why the War on Drugs continues too. Hundreds
of thousands of people are sent to jail. Billions
are spent on "law enforcement." Otherwise harmless
drug users are driven into a world of crime and
sordid company. No, I don't mean politics, I mean
You can make something illegal, but you can't make
it unpopular. In the movie "Traffic," the daughter
of America's drug czar begins using illegal drugs
while her father is away in Washington waging war
The perverse irony of the film is sure to appeal to
Daily Reckoning readers. Nothing quite works out as
it is supposed to. And in the end, the nation's drug
czar realizes that his problem is at home, not in
some distant command post, directing a phony war.
The Theory of Ignorance maintains that people know a
whole lot less than they think they know. But as
someone has observed, it's not what they don't know
that gets them into trouble, but what they think
they know that ain't so.
When a man drives down the road, he makes thousands
of decisions every minute - any one of which could
be fatal. But he knows what will happen if he turns
the steering wheel in the wrong direction and
usually ends up where he intended to go.
But his ignorance of cause and effect increases as
the subject of his decisions gets farther and
farther away from his immediate, personal
experience. In fact, like the intensity of heat, it
diminishes by the square of the distance from the
At a far enough remove from his own experience, the
same man who drives himself down the street without
accident sees no road signs, no white lines, no on-
coming traffic. He drives his tractor trailer
straight into a concrete wall...and seems genuinely
surprised when the results are fatal.
Thus do investors buy shares in companies that do
things they would never do in their own businesses
and support big dumb ideas - population control and
the War on Drugs, for example - which offer no
identifiable benefits to anyone.
Also on Barron's list of dot.coms running out of
cash is Theglobe.com. It is trading at 20 cents and
scheduled to run out of money in August or
September. But every dog has its day, and
Theglobe.com enjoyed one brief day of imbecility,
when investors paid $97 for the stock - a price
equal to 350 times the revenues per share booked in
the entire life of the business. Was there a single
person in the entire world with business experience
to justify such a price? No, of course not. It only
made sense within the context of the New Era theory.
Finally, in May 2000, the deadly duo from Lund
called it quits..."It's easy to say that we spent
$135 million on Concordes and Champagne," Malmsten
tells the NEW YORK TIMES, defending himself, "but we only
Raise a glass to the dotcommers. We'll miss them.
Your faithful correspondent,
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand sends it off by e-mail before most Americans
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get upnot only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early 90sopening offices in Florida, London, Paris, Ireland, and
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.