| BUY LOW, SELL HIGH THE DAILY RECKONING PARIS, FRANCE THURSDAY, 26 OCTOBER 2000 * * * * * * * * * * * * * * * * * * * * * * * * * * *** Another bottom sighting...as the Nasdaq falls 5%... *** Amazon - a stock "with Madonna-like ubiquity" -
rises...for now... more "unsavoury" dot.commers... *** The bear's hot breath...is there a silver lining?
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disappointment and the reluctance of investors to give up
on the dream of easy money. *** Nortel was the latest victim of investors'
frustration. The poor company posted only a 90% increase
in sales over the last year. Investors had expected 120%.
So, the stock was punished with a 29% drop - effectively
splitting the stock, the hard way, over the last 3
months. *** The disappointment was felt first in the Nasdaq where
the dreamers have focused so much of their REM waves over
the last few years...but soon moved to the Dow...and then
to Asian markets. *** The Nasdaq lost 190 points, or about 5.5%, in the 3rd
straight loss for tech stocks. The Dow lost 66 points. *** Declining issues outnumbered rising ones on the NYSE
by a 2 to 1 margin. *** In addition to Nortel, Cisco fell $4. Broadcom fell
$21. And Yahoo lost $3. *** Lucent dropped another $1.50. It is now barely over
$20. PMC Sierra fell $37.75, or 19%. *** Conspicuously absent from the bear's victims was
Amazon.com - which reported better than expected results
yesterday. Instead of losing 26 cents a share in the
latest quarter, as it did last year, the 'River of No
Returns' stock only lost 25 cents a share. At this rate,
the company will breakeven in 2024. On the strength of
this good news, AMZN rose about 8% to almost $32. *** But while stock investors dream, bond investors are
wide awake. They've priced Amazon's bonds to yield twice
the going rate - betting that the company has only about
a 50/50 chance of survival. *** "If [Amazon.com] - with a strong brand name, 25
million customer accounts and Madonna-like ubiquity - is
poised to become the Wal-Mart of the Internet," asks
columnist Borzou Daragahi in Money.com, "why are so many
people saying so many nasty things about it?" Well, the
writer continues: "the company's market cap remains 10
times that of profitable bookseller Barnes and Noble's
and its price/sales ratio stands at quadruple Walmart's;
and the company keeps scaling back expectations." *** In the Far East, Samsung Electronics felt the bear's
hot breath down its neck. Shares fell 9%. *** It is not only on this side of the globe that dot.com
executives are 'unsavoury.' The Financial Times reported
today that executives of a Japanese company, Liquid
Audio, kidnapped a rival. They handcuffed and blindfolded
him...and eventually released him in the woods. *** This latest drop in the Nasdaq triggers another round
of bottom-searching. Investors believe that stocks tend
to register their lows in October. But Richard Russell
notes that this has not been the case in at least 17
different years since 1937. "The constant search for
bottoms," writes Bill King, "is the most pernicious
aspect of bear markets." Investors, trained to buy the
dips, keep looking for the bottom of the dip - and are
disappointed. *** Almost everything was going down yesterday - except
bonds. Gold lost $4.20 - bringing it to its lowest point
in more than a year. The XAU, the gold mining index, hit
a record low of 41.83 yesterday. Even oil went down 41
cents. And the euro hit another record low of 82.46
cents. *** Meanwhile, the GDP report will come out tomorrow. "Be
prepared for a fairly dramatic slowdown," advised Robert
McTeer, president of the Dallas Fed. *** What are these things telling us? The economy is
slowing. Stocks are erasing trillions worth of assets.
Gold is shriveling. And the dollar, and dollar-based
bonds, are triumphant? Are these indicators of
deflation... or the bottom of a dis-inflationary cycle
before inflation surges again? I don't know. In fact, I
don't even have an opinion. But see below for why you
don't have to have an opinion... *** "As early as 1985," writes Dr. Kurt Richebacher, "We
warned that the first weakening of U.S. economic growth
would initiate the dollar's collapse. In fact, stopping
the dollar's surge in 1985 by joint intervention actually
cost the central banks less than $10 billion of their
reserves. But to prevent the dollar's freefall in 1987,
they had to buy almost $100 billion in a single year and
several hundred billions in the following years." The
credit excesses of the 1990s, says Dr. Richebacher, and
the increasing imbalances in the financial system (i.e.
the current account balance) have made the likelihood of
a dollar collapse far more imminent today than in the
late 1980s. (see: Freefall of the Dollar - a la 1987 ) *** "Assuming the revenue prediction for 2005 provided
recently by Cisco's management - a cool $50 billion - is
met," Rick Ackerman reports, by way of Kevin Klombies,
"Cisco would likely have operating income per share,
after taxes, of about $1. Let's see...this company trades
at close to 50 times 2005 earnings. Lovely." *** "There's a silver lining in a market like this,"
writes Porter Stansberry. "The high interest rates that
the Fed is imposing and the tough conditions in the
capital markets are very healthy in one respect: they
weed out the folks that shouldn't be in business at all,
freeing up capital for those who should." Well, yes. That
sounds rational. Too bad investors are not rational. When
they get scared...there will be little money around for
any businesses, good or bad. *** "Buy me some Cisco and AMCC..." writes William
Fleckenstein, taking up the tune of 'Take Me Out To The
Ball Game', "...I'm not scared of a sky-high P/E". "The other day," he continues, providing evidence for
what he calls the 'Mania Chronicles', "after one of his
players hit a home run, New York Mets manager Bobby
Valentine said: 'It's kind of like getting in early on an
IPO - immediate returns.' Not to be outdone, Seattle
Mariners manager Lou Piniella apparently joked to one of
his players just before he stole second base, 'I told him
that the Nasdaq was down 113 and Cisco was a helluva
buy.' *** Yesterday was the anniversary of the Battle of
Agincourt in 1415. A force of 5,700 English soldiers,
mostly archers armed with longbows, defeated a French
army 4 times as large. The bowmen destroyed the heavily-
armed French as they labored towards them through the
mud. Technology is sometimes decisive in politics...but
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Here to see why some experts predict a monumental short squeeze...or call: 1-800-328-1860. * * * * * * * * * * * * * * * * * * * * * * * * * * BUY LOW, SELL HIGH There are a number of rules to successful investing. Cut
your losses. Never meet a margin call. Diversify. Invest
only in things you understand. Jesus reduced the moral laws to just two over-riding
principles: love God and love thy neighbor. Investment
rules can be reduced to a single principle too - buy low,
sell high. Most people have no problem with the first part of this
formula in their private lives. When they go to the
grocery store, they don't buy the soap packages that
advertise: "Now, one-third less cleaning power!" They
don't pick up the bottles that proclaim: "Special Bonus -
20% fewer ounces!" They don't rush to buy up the cereals
that offer "half the flakes at twice the price." Instead, they seek value for their money - more, better,
new & improved products...at lower prices. This is true of business people, too. It is a rare
purchasing agent who gets promoted for buying 'leaders in
their field,' or choosing a supplier because 'it has been
going up in price'. Even in their professional lives,
people want value for money. They shop for the best value
in their computers. They bargain with suppliers for
better deals. They will work for hours, days, weeks, to
get a small reduction in the price of their raw
materials. Buying a business is no different. If you went out to buy
the corner gas station or funeral parlor...you would want
to examine every detail and make sure you were getting
value for your money. You wouldn't rely on a stochastic
chart or media buzz. You'd want to make sure you were
getting something that would pay off. If you couldn't get
the information you needed, you'd probably pass...and go
look for another business for sale. In all these transactions, people think as individuals...
using direct, personal information and experience
(erfahrung)...and make their decisions as though 'the
market' did not exist. But most people approach investing in an entirely
different way. They are no longer interested in value for
money, because they have no idea what value is...or how
much of it a dollar should buy. Instead, they make their
investments - as if investing were voting or a team sport
- using mob-thinking and the collective knowledge
(wissen) of the financial media. Even Al Gore and David Ignatius, as well as Abby Cohen
and Henry Blodget, drive on the right hand side of the
road, close their doors in the wintertime, and avoid the
dark alleyways of S.E. Washington. I don't know any of
them personally, but I see no reason to doubt that they
are smart people...they may even have a sense of humor.
Like everyone else, they are not likely to be drawn into
a store that advertises: GOING OUT OF BUSINESS...PRICES
MARKED UP 50%! And yet, collective thinking turns them all into
jackasses. This is not a matter of opinion - it is simple
fact. Gustave Le Bon explains (courtesy of Marc Faber): "The reasoning of crowds is always of a very inferior
order...however great or true an idea may have been to
begin with, it is deprived of almost all that which
constituted its elevation and its greatness by the mere
fact that it has come with the intellectual range of
crowds and exerts an influence on them." Crowds think like they act - like morons. Even smart
people, when they rely on that primitive little part of
the brain responsible for collective thinking, become
very stupid. Carl Jung made the point: "A crowd of a
hundred influential people together make up one
blockhead." The bigger the crowd, the lower the common denominator of
intelligence descends. That is part of the reason that
the financial media has been dumbed down in recent years
- it is playing to a much wider audience. Collective thinking is difficult to resist. It is so much
more fun to worry about what 'we' should do about public
health ...or how 'we' can improve 'our' schools...than it
is to actually do some exercise, stop eating like a pig
and help your children to learn something. And what a
thrill it must be to start a revolution and call each
other 'comrade'...and have the pleasure of robbing and
destroying 'our' enemies... Collective thinking is what keeps CNBC in business.
Investors, cut off from any direct knowledge of the tech
industry, for example, and hearing almost every day about
how people are getting rich by investing in tech stocks,
find it almost irresistible to 'get in the market'. 'The
Future is Technology' they've been told. Who wants to be
left out of the future? And so they pile into expensive stocks like teenagers in
a Volkswagen - and drive off as though they had somewhere
to go. But resisting collective thinking is exactly what is
required for good investing. And it is especially
important at those moments in market history when the
great mass of investors are about to suffer the
consequences of their own collective delusions. It is all
very well to go along with Napoleon on his march to
Moscow...but the trip back will be a nightmare. How do you do it? How do you just say no to crowd
thinking about investments? Well, you have to approach investing as a private buyer
would. You don't want to 'get into the market' or 'invest
in stocks'. You just want to find a decent business. So,
you have to do what Warren Buffett does. Ask yourself,
would you buy the entire business if you could? Ask
yourself that question of General Motors or Philip Morris
and the answer might be 'yes'. Ask it of Cisco or
Amazon...well, you can decide for yourself. You might also pretend that 'the market' did not exist.
Suppose you would have to sell the stock as though you
were selling a used car. You'd have to convince a private
buyer that the shares represented good value for the
money. Again, you might be able to get rid of your GM
shares...but you might have to send your AMZN shares to
the junkyard. And what about gold, bonds, antiques, real estate? You
cannot know whether prices are going up or down. Every
day, in the Daily Reckoning, we try to understand what is
going on in the world...and often guess about which way
prices are likely to go. But you don't want to base your
investments on those guesses. You need to stick to the
rules - and buy only what makes sense as a good value,
such as the 'Darned Cheap Stocks' I mention from time to
time in these letters. Then, you don't really care what
happens to the collective 'market' - you have investments
that you are happy with. Does this sound too 'straight and narrow'...too dull and
boring...too Calvinist? Perhaps it is. But it doesn't
mean you can't take some of your money and bet on a tech
stock...or on the crap tables in Las Vegas. You don't
want to take money too seriously, or you'll end up stuck
in the eye, unable to get into heaven. But it's a good idea to understand the difference between
investing and entertainment - just as you understand the
difference between sin and wickedness. There's a time and place for everything. Your preachy correspondent...still trying not to be a
Calvinist sourpuss, Bill Bonner | 
