Update--Third Quarter 2000
The Eternal Virtues Of Prudence and Patience

Guess I've been identifying with Dilbert lately. A recent cartoon showed him setting in a business class. The instructor has said, "Speed is they key to success," to which Dilbert replies, "Is it okay to do things wrong if we're really, really fast?" The instructor replies, "no." And the fellow sitting beside Dilbert says, "Now I'm all confused, thank you very much."

For the past year, most financial advisors and the financial press have counseled that the key to investment success is to invest heavily in very expensive technology stocks but to trade them very quickly. And I've been "confusing" people by saying it will be difficult to profit financially or spiritually from crashing technology stocks by tacking on lots of trading costs, especially as we may miss decent values in real estate investment trusts and bonds, as well as conservative utility, insurance and financial stocks from around the world. I guess I've preached that boring sermon so much that Executive Wealth Management, the firm that clears securities for Gary Moore & Co as well as over one hundred other independent investment advisors, asked me to deliver the opening meditation at our annual conference.

I knew that about one-half of the advisors are young brokers who have never experienced a bear market and believe that success is achieved by rapidly trading tech stocks. I also knew that few would listen if I quoted the wisdom of Solomon that "if you're in a hurry to get rich, you're going to be punished." So I decided to quote Peggy Noonan, who was President Reagan's favorite speech writer. By coincidence, or divine timing, the Dilbert cartoon appeared the very morning of my meditation and helped me to further lighten my sermon. That lighter touch was needed as that morning's business headlines said that Intel, the only remaining icon of the "New Economy" after Microsoft's earlier fall from grace, had shocked investors by falling 22% the previous day. It had set a one-day trading record as many of the once faithful denied they had ever known the stock.

Few investors want to trust their hard-earned money to an inexperienced and imprudent broker who believes he can succeed if he will only be impatient as well. But many investors unknowingly trust just that kind of mutual fund manager. For example, a major mutual fund company that we've never utilized at Gary Moore & Co was invited to make a pitch at the conference. Its rep began by explaining that the average Fidelity manager is 36 years old, has about 3 years of experience and has managed his or her fund for about a year and a half. He went on to explain that his company's managers are experienced and prudent pros. He then put up a chart describing one of its most popular funds. He was most embarrassed that the largest holding, by far, was Intel. He assured us that it would recover quickly. It is now down more than 50% from its high.

Even the most conservative investors are making such mistakes. Only days after the conference, a senior widow sought my counsel. She was basically unimpressed that the August 21st edition of Morningstar said that despite its weak performance relative to tech heavy growth funds over the past three years, the Templeton Foreign fund remains one of its very top choices for investors seeking a little more sanity than the U.S. market has exhibited lately. She had been told the Gabelli Growth fund would be a solid core holding as it is relatively conservative but has produced almost 30% annual returns over recent years. When I asked what the price/earnings (p/e) ratio of the fund was, she essentially asked what a p/e ratio was. When I checked the most recent Morningstar report, it said the fund's largest holding was Intel, at a p/e ratio of 55. The p/e ratio of the fund as a whole was 38. (The p/e ratio of the major Templeton funds is around 15.) I could relate many very similar, and even worse, stories about senior widows that I've come across in recent months.

The average p/e ratio for the market since the Great Depression has been 14 and anything near 25 has signaled that a major bear market was in the making. But Morningstar described the risk the widow was about to assume as "average," perhaps as the p/e ratio for the technology dominated Nasdaq peaked at 245 in February. It's still over 100. In addition, the Gabelli fund is typical in that it has traded all its stocks about once a year on average during the past decade. While such churning can still cost a broker his or her career, few care when fund managers do it. My point is that prudence and patience, along with most other virtues, are now very relative matters that every person has to discern on his or her own as absolutes no longer exist in modern America.

While avoiding that old virtue of self-examination, the rep had a point about Fidelity--a word that once implied absolute trust--as well as Janus and the other funds that trade expensive tech stocks quite rapidly. While Fidelity's new advertising slogan is "We help you invest responsibly," it apparently remains the only top fund company that has chosen to avoid any policies regarding social responsibility. Notice that its ads actually redefine being responsible as fidelity to one's self and one's family, not to one's creator and one's neighbors as the great spiritual traditions have. That diminished consciousness of neighbor may be one reason many heavily advertised Fidelity funds are loaded with tech and Fidelity has just created two new tech funds while the August 21st Morningstar commented: "Fidelity Fifty [its aggressive fund that invests only in what it considers its most timely ideas] has gone from technology bull to bear in the blink of any eye...manager John Muresianu had eliminated Fifty's entire technology stake as of June 30. After taking the helm at Fifty in January 1999, Muresianu bet [notice the choice of word] heavily on technology stocks. He stuffed the fund with large positions in Internet companies and built the fund's overall tech weighting to 46% of assets within five months of his arrival." Morningstar added that such rapidly changing bets "puts it in the worst-performing 2% of all large-blend funds." And a Journal article was recently headlined, "Fidelity Performance Slips And Investors Back Away."

But of course, Fidelity has so many managers that some will place winning bets and their funds will be advertised next year. And of course, John Bogle of Vanguard will keep preaching that such managers can never out-perform the market after the expense of trading so you should just stop thinking about wise investment principles and buy an index fund, even if it simply buys and holds equally expensive tech stocks. And I'll still be preaching that you should hire a fund manager who is as experienced, ethical, prudent and patient as you and the media would like your broker or planner to be.

One advantage of that absolute is that is has served people well since ancient times, so you don't have to bet on a different philosophy and investment strategy every year. Notice that the 1999 Year-End Update also focused on the insane buying of Internet stocks (which are now the lepers of our community); the enormous popularity of tech heavy funds like Janus (which is now also experiencing cash outflows); a Paine Webber survey which said investors expected 19% annual returns from stocks during the coming decade (many of which have moved to money market funds paying 5%); Warren Buffett saying that "investors aren't going to average 15% or anything like it in stocks" (which they certainly haven't this year); and my closing counsel to "above all, manage your expectations as investors may finally face something to be anxious about" (which they do.)

The Update--First Quarter 2000 began with a quote saying, "In a great market for Internet stocks, a day trader who is fond of them can make money--for a while. But it has always been the steadier Buffetts and Templetons who have made the big money and, more importantly, kept it." It reiterated, "Avoid the siren song of high-risk, over-priced technology stocks." It closed with my writing, "I agree with Professor Robert Schiller's new book Irrational Exuberance that with P/E ratios being one-third higher than in 1929, we should hedge our bets..." I suggested we move to conservative hedge funds that profit from a decline in U.S. stocks and only retain conservative international stocks, bonds and real estate investment trusts favored by Sir John who has called this U.S. stock market "the most dangerous in all of history" and the insurance and other conservative U.S. growth stocks favored by an only slightly more bullish Warren Buffett. Yet many ignored the ancient virtue of listening to one's elders as the November issue of Mutual Funds magazine says 52% of investors bought a technology fund during the first half of the year. Does anyone else feel that the more financial information we get, the more irrational we act, affirming ancient teachings?

My best friend recently told me that asking such questions makes me seem like a Luddite, opposed to technology and modernity in general. If I have similarly confused you, I apologize. I invested in many quality tech stocks when they were reasonably priced. I will again...when they are reasonably priced. And I've spent the summer helping to finance a private company with basic technology that can change life in the Third World. But for much of the past year, technology in our public markets has too closely resembled a liturgy for the false religion of secular humanism. Notice how often technology companies promise to put we humans "in control," which true spirituality teaches we can never be. A popular ad on CNBC even promises that we can now trade commodities on a phone from the golf course. Now that's a truly perverted sense of progress! Like all false religions, that liturgical dance was built on myths rather than reality, as summarized in a front page article in today's Wall Street Journal (10-16-00) entitled "Reality Check: Here Are Six Myths That Drove The Boom In Technology Stocks. It Turns Out Growth Slows, Business Cycles Matter and Monopolies Erode." As those realities have been with us since ancient spiritual traditions built their liturgies around the cycles of seasons and scripture, they might confess "now we remember!"

But deluded high priests have preached "it's different this time," which Sir John has long called "the four most dangerous words in the English language." For example, the November 2000 issue of Money (which has featured tech on its cover all year) now says "reigning tech guru" Michael Murphy is a law school dropout who experimented with LSD, had a personality breakdown, robbed two banks, and spent time in prison before beginning to preach the virtues of the virtual, or "New," economy. Millions lost touch with many reasonably priced stocks of the real, or "Old," economy due to what Money now terms his "kooky pronouncements."

This insanity really should cause all of us to ponder Peggy Noonan while we can. My phone rang in the middle of my writing this. Rather annoyed at the interruption of my thoughts on the sermon, I answered it. It was my wife calling from church to inform me that a very beautiful 36-year-old mother in our congregation had just succumbed to her battle with cancer. Her equally beautiful four-year-old daughter is in my wife's Sunday School class. Stunned, I sat trying to understand. I should have known better. Despite wonderful medical technology, we're not in control of such things. Still, from the perspective of God and the angels, her death might have meaning if it helps me to finally understand that dizzy tech stocks and dizzier gurus have nothing to do with anything.

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