Update--Second Quarter 2000
And Now, A Little Time For Wandering In The Desert?
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"For much of the past three years, shares in Internet firms have climbed stratospherically, regardless of whether they were making any profits or even any sales. The future promised land, it was felt, was all that mattered. But now the price of Amazon.com, the most famous e-commerce pioneer of them all, has tumbled. Some investors seem to have decided suddenly that nobody will ever make any money from commerce on the web, so they are dumping almost all their dot-com shares. The truth lies, as ever, between these two extremes." The Economist -- July 1, 2000 |
About a decade ago, I published an investment newsletter that was subtitled: Managing Money With Heart, Mind and Soul. While a major brokerage firm has long experienced success with the slogan "Minds Over Money," few people understood what the heart and soul had to do with investing. The newsletter was discontinued. But hearts and souls have continued to play a very major role in investors' fortunes. On the positive side, engaging their hearts as well as their minds has helped "socially responsible" investors to produce superior returns by enriching their neighbors as well as themselves. On the negative side, the decade began with the emotion of fear tempting millions to buy t-bills and gold coins as they felt America was falling into a hellish fire of federal debt and bankruptcy. Years later, millions felt the same during the Y2K media fiasco. Yet the decade also ended with the emotion of greed tempting millions of others to invest as if technology had turned America into heaven. Notice that The Economist used the words, "It was felt" rather than "It was thought" that the promised land could be entered over the Internet. So both fear and greed caused millions to stop thinking and lose touch with the economic realities of this old world.
All now know better. But human memory is short while fear and greed are eternal. So the odds are quite good that emotion will continue to play a major role in this frothy market. Indeed, a front-page story in the July 14th Wall Street Journal said, "The Great Internet Bubble may be starting to fade from many memories, but the fallout blankets the landscape. This craze, after all, ranks among history's biggest bubbles. Investment bankers, venture capitalists, research analysts and investors big and small, through cynicism or suspension of disbelief, financed and took public countless companies that barely had a prayer of prospering." That is, a lack of belief in basic economic principles and a lack of prayer helped to shatter the souls of many Internet speculators!
Some of my friends tell me that I quote Sir John Templeton too often. But I read a dozen quality publications each month that share hundreds of insights. And I've never met anyone with a better ability to anticipate tomorrow's headlines than John. And I strongly believe that's because he's always managed money with heart, mind and soul rather than simply allowing fear and greed to dominate his world-view. When the Dow was under 3000 in the early nineties, he said it would soar and the U.S. was headed for the "most prosperous years in the history of the world." Even the editors of my book about John's world-view didn't appreciate his reasoning (mind) and deep gratitude (soul) for America's vast assets. But years later, headlines say an over-heated economy may yet tempt Alan Greenspan to do devilish things with interest rates.
Similarly, I've shared John's suggestion to short--or profit from a decline in--over-valued Internet stocks in recent Updates. In the March edition of Equities magazine, before the bubble burst, John was quoted as saying, "The present U.S. stock market is the most risky in all world history. There has never been a bubble so large as today's...Most Internet stocks don't have a p/e. They have no earnings." And once the Bloomberg e-commerce index had fallen 70% below its April 1999 high, a July 18th Journal headline read: "Reality Check: Life After The Dot-Com Crash. What Were We Thinking? Arrogance, Greed and Optimism Plus Fear of Being Left Out Blinded People to the Risks." In other words, investors weren't thinking. They were emotional. And a July 24th Forbes article headlined "From Data To Wisdom" explained how an absence of soul also helped tech stocks to get ahead of themselves: "The human soul needs time to digest, absorb and comprehend emotions and experiences. Regardless of the external pressure or coercion [of rapidly changing technologies], the soul cannot be rushed. We must metabolize events and feelings in order to fully apprehend and understand our lives. It takes time for data to become wisdom."
John is not the only wise investor who believes stocks may be ahead of themselves. Legendary investor Warren Buffet recently said that current market conditions are "as extreme as anything that has happened, probably including the 1920's...There is no question that in the past year the ability to monetise shareholder's ignorance has never been exceeded." Famed hedge-fund manager George Soros has said, "Maybe I don't understand the market, but I prefer not to have the same kind of continued exposure I've had up until now. In some ways, I think the music has stopped, only most people are still dancing!" Former Federal Reserve Chairman Paul Volcker has said, "The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings." And The Economist recently detailed why "Wall Street is, oh, about two-and-a-half times higher than it should be" but added that because "most investors have closed their minds to rational calculation about risks and returns," that is "preaching to the deaf."
Some say we've preached too much pessimism about U.S. stocks in recent Updates. (Some of the same told us that we were too optimistic ten years ago!) Yet while highly speculative tech stocks did rise until the crash, the advance/decline line of NYSE stocks peaked in 1998 and fell steadily until recent weeks. In essence, that means a significant majority of real companies with real earnings--the kind true investors prefer--have disappointed during that time. (As a result, some, like insurance companies, grew quite cheap and we bought them before they rebounded sharply.) But you could have lost more than half your money last year in a portfolio of not only Amazon.com, but AT&T, Xerox, Kmart, Microsoft, many quality banks and so on. That's not a healthy market. So with the Dow Jones Industrial Average almost exactly where it was a year ago, we need to make few apologies for preferring international stocks, real estate investment trusts and bonds. Our international stocks out-performed the S&P 500 in 1999. Shifting some of those profits into REIT's and bonds was also profitable as they've been quite strong in 2000 while the Dow has dropped 10% and the S&P 500 and Nasdaq have gone nowhere. For the first time in years, it could even be time to consider fixed-rate annuities from high quality companies as 7% guaranteed and tax-deferred could look pretty good if the gentlemen I quoted still have a firm grip on reality.
My best guess is that these investments will continue to reward as investors spend the coming months wandering in the desert trying to ascertain the next direction to the promised land. Investors from other lands may hold the compass. During the past five years, foreign ownership of our treasury bonds has risen from 15% to 38%; foreign ownership of our corporate bonds has risen from 15% to 20% and foreign ownership of our stocks has risen from 5% to 8% of a much greater number. Some of that is simple globalization. But everyone feared better numbers ten years ago. Now that greed dominates, few are paying any attention to how much money can quickly leave our markets. But it's something to think about. It might even be profitable to let it sink into our souls.
