Investor's Edge
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Below you will see the front page of a recent issue of Investor’s Edge ®. Below that are just the first paragraph or so from representative issues since 1998. We think you’ll agree that we have predicted a number of trends, like the dot-com implosion, the housing-based recovery, the subprime fiasco and more, as much as a year before the rest of the investing community caught on.
That doesn’t mean you need to read Investor’s Edge ® to benefit from those insights. Because our principals are frequently asked to speak and write about investing, economic and geopolitical issues, you may well see our articles quoted on numerous sites online or in print. For that reason, we have held the line on pricing for Investor’s Edge ® But while you may see some of our buy recommendations elsewhere (after they have appeared in Investor’s Edge ®), we reserve two additional resources solely for subscribers: we tell you how much to buy so you can construct a mirrored portfolio and we tell you when we are selling from our Model Portfolios.
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In 1998 we set the stage for our new Model Portfolios by waxing philosophic about the theory and practice of investing writ large. We try to carry on that tradition at least once each year…
December 1998: “WHAT MAKES AN INVESTOR SUCCESSFUL?”
Know thyself.
As Socrates noted, "The unexamined life is not worth living." Sun-Tzu wrote, almost as succinctly, "Know yourself and know your enemy and win 100 battles."
I'd like to invite you to join me on a journey in which you can win 100 battles. The research I've done over the past few years leads me to the inescapable conclusion that timing and asset allocation decisions are even more important than stock selection…
In 1999 we warned of the coming showdown/slowdown in the dot-com boom with this article about a stock that subsequently plunged from 106 (split-adjusted) to just 14 a year later…
December 1999: “THE AMAZON (AMZN) FLOWS BETWEEN
A ROCK AND A HARD SPOT”
And here you thought that Scylla and Charybdis, the original rock and a hard spot (in the form of a whirlpool, according to Homer's Ulysses,) were in the Mediterranean, did you? No, they are on either side of an ever-constricted AMAZON.COM (AMZN).
Before you consign me forever to The Land of Fuddy-Duddy, let me point out that I love the Internet. Use it for just about everything these days in terms of research, purchasing, strategic alliances, etc. I embrace the Brave New World gleefully. But if the Emperor has no clothes, somebody's got to step up and say so. There's a difference between liking a company's business plan and liking their valuation level. The former is an absolute necessity before I look further; the latter can cause me to wait and advise re-entry at a lower price…
In 2000 we continued to warn of the dangers of the dot-com darlings…
October 2000: “AOL IS ABOUT TO GO AWOL”
In December (1999) I panned AMAZON.COM (AMZN). It has fallen like a rock. Virtually every other Wall Street analyst was singling its praises. Turn your attention next to — and your portfolio away from — AMERICA ONLINE (AOL.)… The days of competitive advantage for them are history. They still have deep pockets. But they have their hands full today and I believe they are going to have their pockets emptied in just a few short years.
How can this happen, you ask? After all, with more than 24 million subscribers, AOL is the world's #1 provider of online services…The problem, in a nutshell, is that AOL charges money in a free world.
By 2001, even a few others were beginning to agree we were in a dot-com bubble. We moved on to other topics and investments (mostly energy firms) with this story:
May 2001: WILL THE LAST WHINY DOTCOMMER TO LEAVE THE
MARKET PLEASE TURN THE LIGHTS OUT?
Are you as bored as I am with the spate of articles about the plight of shrill Twenty-somethings who were great programmers with good ideas -- but dunce-cap businessmen?
Did it occur to any in this Brave New World that business acumen comes as a result of something called “experience”? …The investment world has not come to a grinding halt just because yet another crop of "the world owes me a billion dollars because I'm smart" entrepreneur wanna-be's went bust. And, while I personally believe there is way too much complacency for the bear market to have run its course, I never invest based upon what I, another advisor, Alan Greenspan, the Bull Channel, or Jo-Jo the Wonder Dog thinks "the market" is going to do…
If you thought it was lonely predicting the dot-bomb, we were REALLY lonely in predicting the end of the bear that followed in 2001 and 2002 – with this story:
December 2002: “DING! DING! DING! THE BELL ANNOUNCING THE END OF THE BEAR”
I hasten to add that the end of the bear doesn’t mean unmitigated boom times with Nasdaq ash and trash roaring ahead 85%. But my most reliable indicator of undervaluation reached a point in November that confirmed the indicators that led me to tell you to buy on October 7. The actual low for the bear market was reached on October 9.
From today on, I continue to believe we’ll bump and stumble our way forward rather than backward, mostly up rather than mostly down. Among the indicators I use is the ratio between the market value of all US publicly-traded stocks (an earnings- and sentiment-indicator) and the Gross National Product (a measure of all goods and services). When market cap is low relative to GNP, as it was in the 1940s, you can expect a pretty good market to follow, as happened in the 1950s and 1960s...
Another philosophical piece about market seasonality for 2003…
December 2003: “STRANGE YEAR (GREAT YEAR!!) -- KEY LESSONS WE SHOULD LEARN”
The market has had a great rally this year. Of course, the indications of future market direction were mixed earlier in the year, as they always are. What did we, as investors, know early on and what have we learned since? We knew, going into 2003, that the third year of the presidential election cycle is usually a great year for the market.
We knew from history that when there is a war in the third year of the presidential election cycle, it is an even better harbinger of a strong stock market. And we could see, from rising commodity prices for basic metals, energy, and other raw materials, that inventories had been drawn down and price hikes were likely to result in better earnings.
We also knew from historical observation and trend analysis, however, that in most good years the market will move more smartly ahead in the first quarter, take a breather somewhere in the second and/or third quarter, and then move smartly ahead in the fourth quarter…
And a reminder about the critical need for intelligent asset allocation from 2004…
March 2004: “ASSET ALLOCATION RULES!”
I use the last word in the headline above as a verb, not a noun. That is to say, while there may be plenty of good "rules" about asset allocation, I mean it in the sense certain teenagers with limited vocabulary and imagination, but boundless enthusiasm, use the word "rock" and "rule" interchangeably, as in "Seniors rock, man," or "Pi Alpha rules, dude!"
I want it crystal clear that, of the three components of successful portfolio management - cyclical market timing, asset allocation, and stock selection - asset allocation rules, dude.
Let me tell you why. Clearly, you need all three components to be truly successful. Market timing has gotten a bad rap of late as one incarnation of it has been bandied about in the uninformed press ("Hedge funds accused of market timing! Read all about it!") But we all "time" the market. Every time we make a decision to buy or sell a stock, we are saying, "I think this is a good time to buy," or "I think the time is right to sell." Further, I am not among those timid and pompous money managers who intone, "Buy and hold. No one has ever timed the market successfully, so why try?” Nonsense…
In 2005, fresh from the devastation of Hurricane Katrina, it was a time for a slightly different perspective…
October 2005: “ECON 101: WHAT’S GOOD FOR NATURE
IS GOOD FOR BUSINESS”
Some people subscribe to the notion that there is something vaguely left-coast about tree-huggers and snail-darter-savers who stand in the way of the business of America, which is business — a notion which couldn’t be more wrong. What’s good …the environment is ultimately good for business, the economy, the health of the country, and the individual health and well-being of every American. Responsible stewardship of the land and the health and safety of one’s neighbors is not namby-pamby, tree-hugging, or un-American. Indeed, it is very American and very good business. No lawsuits, no boycotts, no EPA fines -- sounds like good business to me.
… Hurricane Katrina showed clearly that destroying the natural barrier wetlands and reshaping the Mississippi to make it easier to bring goods downstream saved some businesses maybe $5 or $10 billion over the last century and brought maybe another $5 or $10 billion into the Louisiana (Florida, North Carolina, etc.) tax coffers, so it was good for business, and therefore good for America, right? No. Estimated costs for cleaning up the toxic mess look like they’ll be right around $200 billion. That’s just bad business...
By 2006 we were getting distinctly uneasy about the whole subprime, second mortgage, treat your house like an ATM mentality…
January 2006: “WHO CARES ABOUT CALIFORNIA REAL ESTATE?”
We all should care. For my subscribers living between the Sierra Nevada Mts. and the Appalachian Mts., a vast region where many people own their homes free and clear and most of the remainder have a solid fixed-rate loan: I imagine you scratched your head when I advised in June that real estate prices would be coming down in over-heated areas. …at Lake Tahoe, where I live, on the barely-sane fringe of the loopy Left Coast, there is an overhang of homes for sale; prices have declined; and realtors are engaging in cock-fights to see who gets the rarer and rarer new listing.
So why should residents of Omaha or Tishimingo care what happens in Income Village, Nevada; New Yawk, New Yawk; or LA-LA-land, California? Because... I concluded page 10 last month with the words “It’s all about flow of funds and the wealth effect” …as I write these words, bonuses are being handed out, Social Security checks have been increased, jobs are being created, and raises are being granted. That means people have more money in their pocket (cash flow) and a feeling that they are better off this year than they were last year. (It’s called “the wealth effect.”) But what if? What if housing prices decline?
The short answer is: nothing good…
Clearly we were riled up about the following – but we recommended some great companies as a result of it!
June 2007: “WHEN ENVIRONMENTAL CHIC DISINTEGRATES”
The highest-margin business for many a beverage company (and many a food company, as well) is…(drum roll, please:) water in a plastic container made from oil. And yet, for all we know, that 89 cent bottle of “bottled” water came out of the tap next door. It has been shown in many independent tests that most American municipalities’ tap water have less pollutants and such than most bottled water.
In New York City, I was recently offered Voss, “glacial water from Norway,” for just $8 a bottle. The offering went something like this:
“Welcome to Tres Snootez. I am Jacques. (I hail from Rapid City but I’m really an actor, not a waiter, and I’m working on my French accent, so) I will be providing you wiz tonight’s delectable meanderings from Chef Michel, who may deign to allow you to say you touched one of his extravagant LEE ovairpriced amusees. Would Monsieur care to begin by clearing his paLAHT with a Perrier from France, a Pellegrino from Italy, Fiji water from an aquifer deep below Fiji, or Voss, glacial runoff from the Norwegian fjords?”
OK, snootez’s of the world. I lived many years in Norway and, yes indeed, they do have some truly marvelous water. I drink it from the streams, and the taps, whenever I am there. I have actually been to Voss and dined at the Hotel Fleischer, arguably Voss’s most upscale restaurant. And I have never seen a bottle of Voss on the tables. Now they’ll dust one off if you’re some tourist who asks for it, but the truth is that tap water in Norway tastes exactly the same and has the same chemical composition as the water in a Voss bottle: H2O and nothing but H2O.
But here’s an even bigger rub: all that fancy imported water (in plastic bottles made from oil) has to be transported to Your Town, America. Water weighs about 8.3 pounds per gallon. And how many gallons of carbon-emitting jet fuel or ship’s diesel do you think it takes to transport 8 pounds of water from mountains in Norway to mountains in Colorado?
In 2008, when most were “hoping” their portfolio wouldn’t “change” any more, we were advising that defensive issues in energy, metals and agriculture were the place to be…
August 2008: “THE TWIN I-BEAMS OF
OUR FUTURE”
A sea change has taken place in the US and world markets this year. Most people see the current pullback as an interruption in the pleasant dalliance of making money on borrowed money, whether on margin, from their home equity, by buying other essentials on credit cards, or whatever, as markets, US and foreign, went ever-skyward. I’ve been out of sync with that group as I declared the onset of the bear in our October 2007 issue and have never wavered in that analysis.
Now that most others are in reluctant agreement that we are in a bear market, they are anxious to “get on with it.” Their attitude by and large seems to be “let’s shake out the weak sisters, finish the bear, and go back to the much more enjoyable business of making money.” The debate already seems to be focused on “in which month will the market turn?”
I submit to you, however, that this is one of those rare turning points where the entire game has changed. …The dot-com bubble and the housing bubble are pikers — the bubble bursting is The Great Debt Bubble of the past quarter-century. It’s bursting will create massive opportunities for the aware — and will wipe out fortunes for those who don’t understand the new rules. This is a long-term problem that will change the investing landscape for years to come….
And in 2009 – well, for 2009 it’s easier just to show you 4 recent front pages in the drop down box above.
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