The Daily Reckoning - The Fortune Of Loss (Dan Ferris)

verfasst von Firmian, 15.06.2004, 21:45

--><font color=#008000>Bitte nicht für Anlageentscheidungen verwenden, die auf kurzfristige Gewinne abzielen ;-)</font>

The Fortune Of Loss

The Daily Reckoning

London, England

Tuesday, 15 June 2004

---------------------

*** Oh la là... the big boom was a big scam - more
evidence...

*** Crash coming? Trade deficit hits new record...

*** Gold falls. Dreading a vacation? The Grand Prix
d'Hermes... and more!

---------------------

Ronald Reagan deserved better. A likable and decent man, he
should have been carried off by six jolly cowboys and bid
farewell by honest drunks and tearful remembrances.

The nation should have sent him off with a soft heart, in
other words. Instead, its head turned to mush; his
obsequies and eulogies were as full of solemn humbug as a
national election.

We are told that the Gipper set off a huge economic boom in
the land of the free. He cut marginal tax rates. He helped
get the government off our backs. America raced ahead of
its competitors. The Chinese were so impressed, they
decided to loose the dogs of capitalism; now they are
nipping at our heels and stealing our food. The Soviets
were so discouraged they decided to give up being soviets;
now, they are Russians or Lithuanians or Khazaks.

Of course, the West was probably better off before it had
to compete with 3 billion now-liberated entrepreneurs and
consumers. The price of oil rises... soon, it will be the
price of beef.

But if America got so much richer, why did real wage rates
not rise? A man sweats, humps, busses, totes and schleps
today, on average, for about the same wage he got before
the Reagan revolution fired its first shot. Go figure.

And now, from today's International Herald Tribune, comes
more evidence that America's great boom was a scam.

"More than two-thirds of older households - those headed by
people 47 to 64 - had someone earning a pension in 1983,"
says the article."By 2001, fewer than half did..."

"New evidence suggests that the waning of the pension has,
imperceptibly but surely, stripped older workers of an
immense store of wealth - much more than they probably
guessed..."

And here's the money paragraph:

"When the holdings of typical households are traced...
today's near-retirees turn out to be a little poorer, in
constant dollars, than the previous generation was when it
approached retirement in 1983."

Edward Wolff, an economist at NYU, looked at 18 years of
household financial data from the Fed. Somehow he retained
his sanity long enough to discover that"the net worth of
the median older household... declined by 2.2%, or $4,000,
during the period [1983-2001] to $199,900."

We look upon that fact in shock and awe.

How could it be, dear reader, that after the biggest
explosion of wealth-creation in the history of man, the
average man is not richer, but poorer?

We ask the question again, merely to be impertinent. We
recall the Carter years: the nation was at peace. Despite
inflation, Americans were still getting richer. Wages were
rising. The country still enjoyed a positive balance of
trade... and the rest of the world still owed it more than
it owed to foreigners.

But in 1980, stocks had been going down for 14 years... and
bonds had been in a bear market that began in 1945. With
eyes in the back of their heads, people must have looked
out and seen nothing but trouble. The Vietnam War was still
in the near background. And Richard Nixon. And Jimmy Carter
himself. Americans were discouraged, we are told; they had
lost confidence in themselves.

Then, along came Ronald Reagan with a message of hope,
optimism and something-for-nothing. The supply side, the
Laffer Curve - suddenly it seemed possible to spend
more... and still have more! Government could cut taxes -
and get more revenue, said Laffer. Forget the deficit; it
will take care of itself. Somehow. The average man figured
he could do the same: borrow more... and he would get rich.

Pensions were out. Free people could look out for
themselves. They could set up their own 401k plans... and
make money in common stocks. All you had to do was buy the
companies you liked, said Peter Lynch.

And the companies themselves no longer had to worry about
their employees. Managers could focus on cooking the books
to give the impression of 'maximizing shareholder value.'
America soon became 'Shareholder Nation'... a whole country
of capitalists, all getting rich in the freest, most
dynamic economy the world had ever seen.

Now we see that the whole thing was a monumental fraud.
Employees never quite got around to putting money into
their 401k plans - they were too busy trying to keep up
with the credit card bills. And managers soon realized that
maximizing their own incomes - with stock options, bonuses,
and rich retirement plans - was more rewarding than looking
out for shareholders.

The shareholders themselves - the millions of lumpen
pseudo-investors who owned mutual funds - couldn't tell the
difference. They had neither the time, the money, nor the
training to be real capitalists; they were merely chumps
for Wall Street.

And now, here we are, nearly a quarter-century since Reagan
won the White House: at war, with the biggest trade deficit
(April hit a new record, $48.3 billion... edging up towards
$600 billion per year), the biggest federal debt, the
biggest financing gap, the lowest interest rates in 45
years, and the most consumer debt ever. In real terms, the
average man earns less than he did in the Carter years. And
the typical household approaches retirement poorer than it
would have been in 1980.

But, since 1980, stocks and bonds have gone up. Americans,
still pining over the Reagan era, have never been more
confident... more optimistic... or more delusional.

Over to you at Eastern Standard Time, for more news:

---------------------

Eric Fry, from Downtown Manhattan...

- In April, for the 320th consecutive month, Americans
consumed more goods and services from abroad than they
exported, setting a new record in the process... Bloomberg
News called the record-setting trade deficit,"unexpected."
Here at the Daily Reckoning, we did not expect America's
titanic consumption to set new records in April, but
neither were we surprised by the news. For us, everything
is unexpected, but nothing is surprising, least of all
America's record-setting consumption.

- Shortly after the Commerce Department's"unexpected" news
crossed the wires, the stock market unexpectedly tumbled.
The Dow dropped 75 points to 10,335 and the Nasdaq slumped
30 points to 1,970. Meanwhile, the bond market buckled
under the weight of rising inflation expectations, as the
yield on the 10-year Treasury jumped from 4.80% to 4.87% -
a new two-year high. Bond investors, evidently, are eager
to do what Greenspan is not: raise rates in line with
inflationary expectations. The dollar slipped about half a
percent against the euro to $1.207, while the gold price
retreated one dollar to $383.55 an ounce.

- The monthly U.S. trade deficit widened in April to a new
all-time high of $48.3 billion, demonstrating once again
that dollar debasement is not the miracle cure its
proponents claim. Didn't Treasury Secretary Snow and the
other disciples of 'Deliverance through Debasement' assure
the nation that weakening the dollar would reverse the
trade-deficit trend? And hasn't the dollar's value sharply
declined over the last three years? Yet, the massive trade
deficit persists. Indeed, it is growing... some things -
like an octogenarian in a string bikini - just aren't meant
to be.

- The growing trade deficit testifies to the stupidity of
managing an economy by mismanaging its currency. The
deficit also highlights the infamous American propensity to
reap where it does not sow and to gather where it scatters
no seed. America is privileged to gather from wherever she
scatters her dollar-denominated debts.

- But some day, theoretically, Americans will have
scattered one Treasury bond too many. At that point - if we
may mix parables - her bonds will land on the rocky soil of
international disdain. On that day, foreigners will become
less eager to lend money to us at the prevailing rates of
interest and will demand a higher rate before agreeing to
advance additional funds. They might also demand repayment
in a currency other than U.S. dollars.

- What, therefore, does America's worsening balance of
trade - not to mention its growing fiscal deficits and the
tendency of its citizens to borrow a whole bunch of money
and to save almost none - portend for the U.S. dollar?

- Nothing good, we would imagine. Even Alan Greenspan,
supreme protectorate of the dollar's value, acknowledges
the possibility of a sizeable exchange rate"adjustment."

-"We, in the United States, have been incurring ever
larger trade deficits, with the broader current account
measure having reached 5% of our gross domestic product,"
Chairman Greenspan observed one month ago."Yet the
dollar's real exchange value, despite its recent decline,
remains close to its average of the past two decades.
Meanwhile, we have lurched from a budget surplus in 2000 to
a deficit that is projected by the Congressional Budget
Office to be 4.25% of GDP this year. In addition, we have
legislated commitments to our senior citizens that, given
the inevitable retirement by our baby-boom generation, will
create significant fiscal challenges in the years ahead."

- Even so, the Chairman asserts, America's superior
"relative rates of return" should continue to attract
"super-sized" portions of the world's savings.

-"So the foreigners send us their merchandise," observes
Jim Grant, editor of Grant's Interest Rate Observer,"and
we send them our dollars, and everyone - approximately - is
happy. But not forever. 'At some point,' [Greenspan notes],
'international investors, private and official, faced with
a concentration of dollar assets in their portfolios, will
seek diversification, irrespective of the competitive
returns on dollar assets. That shift, over time, would
likely induce contractions in both the U.S. current account
deficit and in the corresponding current account surpluses
of other nations.'

-"So," Grant concludes,"add another possible cause of the
future dollar bear market to the list: Portfolio-balancing
sales of dollars in dollar-denominated securities by
America's now-faithful foreign creditors."

- And while you're at it, dear reader, add another possible
cause of resurgent inflation and rising interest rates to
the U.S. stock market's lengthening list of"Risk Factors."

---------------------

Bill Bonner, back in London...

*** Gold fell yesterday - to $384. Still a buying
opportunity, in our opinion. And still little sign of any
inflation.

*** In case you missed this little note from Mogambo:

"Arch Crawford publishes the Crawford Perspectives, which
tracks the astrological influences on the market. He says
'Sometime between mid-August 2004 to March 23, 2005, we
think that the market will crash again' and that this is
due to a Mars-Uranus thing that happens every two years.
The Wall Street Journal reporter, who wrote this up, notes
that 'It doesn't guarantee a crash - but it has been
evident during every crash for the last 100 years.'"

"Whether or not you believe that the stars and planets
influence your life doesn't matter. Enough people DO
believe in it, people who will sell on that basis alone,
and then it WILL happen, just like he said. And I note that
there isn't a newspaper on the planet that does not have a
horoscope section - even the home page of my Internet
server has one. And they are there because people want
them, and may even believe in them. So, it ought to be an
interesting time, to say the least."

*** This weekend Maria was invited to attend the races at
Chantilly... the Grand Prix d'Hermes. Her report:

"Oh Daddy, you wouldn't believe it. It was so elegant.
There were women there with hats bigger than they
were... with what looked like whole flower gardens on them.
The men all wore white pants, ties and blue blazers.
Everybody looked so good. It's amazing how good people can
look when they make a little effort. Not at all like those
people you see wandering around Paris in their awful
outfits... you know, shorts and running shoes..."

"I know, I know... they just want to be comfortable. But you
know what they say... you have to suffer for beauty. Well,
you do. And it's worth it in my opinion."

"You know, you need a special invitation from the Hermes
family to get in. This boy I know, well, his family must
know them... so he invited me as his guest."

"Everybody has a picnic on the lawn. But it's not a picnic
with hotdogs and potato salad. They spread out elegant
tablecloths and come with these great wicker hampers of
food. And no one uses plastic forks and knives.
Noooo... they bring their best silver. And there are even
waiters going around. You can order champagne... or get
lunch from them too."

***"You have too many relatives," said Elizabeth last
night. The distaff side of the Bonner household is
concerned about our up-coming 'Grand Tour' of the USA.
"We're not going to have enough time to do all the things
we need to do."

The trip is scheduled to begin in just a couple weeks. We
will spend 6 weeks crossing the nation... from Maine to
California.

"Why are you doing it," asked Michel at lunch last week.
"Elizabeth doesn't want to. You don't like sightseeing. The
kids would rather do something else. It will be hot and
disagreeable. You won't be able to get a decent meal. Why
not just stay in Paris? Why not just save yourself a lot of
trouble?"

"You don't understand," we replied."There are certain
things a man's just got to do, whether he wants to or
not... such as taking a vacation..."

---------------------

The Daily Reckoning PRESENTS: Do you want to get-rich-quick
by investing in the stock market? Think again... and read
this no-nonsense look at the only true way to beat the
market in the long run.


THE FORTUNE OF LOSS
by Dan Ferris

"People who cannot know what will make them happy tomorrow
might be unable to resist short-term oriented investment
strategies today."

- Seth Klarman, Annual Letter 2003, Baupost Limited
Partnership

"Well then, what do you want!?"

My father's words were not so much spoken as barked. And
they have been etched upon my memory ever since.

We were driving through the parking lot of the Jolly Roger
amusement park in Ocean City, Maryland. My parents were in
the front seat of our enormous old green Ford station
wagon. My three sisters and I were in the back seat.

Dear old dad's impatience with dear old mom had reached
bursting point.

I can't remember my mother's answer, but it was a classic
American family vacation moment of indecision and flaring
tempers. It could be seamlessly written into any one of a
dozen films. Whatever my father had proposed for that
particular outing wasn't what mom wanted. And yet, she had
had no idea what she really wanted, as far as I can
remember.

I doubt my father knew what he wanted out of that vacation,
either. As for me, I probably wanted to get away from
everybody, which - living in a three-bedroom house with 8
other people - is all I ever wanted at the time.

Harvard psychologist David Gilbert studies a question much
like the one dad barked at mom so many years ago, posed in
a more academic fashion: How good are people at predicting
how future events will affect their happiness?

Gilbert studies something called"impact bias." If you
think getting a big pay raise will make you very happy for
a long time, and it only makes you marginally happy for a
few hours, your impact bias is large. If you do not expect
a raise and don't get one, your impact bias is zero.

For most people, Gilbert concludes, impact bias tends to be
rather large. In other words, most people simply don't know
what they want.

Did you get that?

People are not unhappy because they can't get what they
want. People are unhappy because they don't have a clue
about what they want in the first place. Like a redneck
surrounded by 100 shiny new pickup trucks, they don't know
which way to go in life.

The consistent failure of those who frequent the public
equity markets and other gambling establishments falls hard
upon David Gilbert's findings. It makes sense that people
who don't really know what they want can't resist short-
term, momentum-oriented"investing" strategies. Yet it's
well known that about 90% of all day traders in the market
today will be out of money within a year. It's even better
known that nearly every mutual fund manager will fail to
beat the market.

They all think buying stocks will make them very happy very
soon. An enormous impact bias awaits them.

What about those successful investors? What's their
experience like? Does their long-term investment success
feel good every step of the way? Is it made up of a series
of pleasurable short-term gains? Or does getting rich
investing in stocks require significant periods of
underperformance, and the pain of holding losses, sometimes
for years at a time?

To answer these questions, let us recall the history of the
highly successful mangers of the Sequoia Fund.

That's the fund Warren Buffett recommended to his former
clients in 1970, the year after he closed his investment
partnership. Former Ben Graham students Bill Ruane and
Richard Cunniff still run Sequoia.

The Sequoia Fund under-performed the S&P 500 in its first
four years. It has under-performed the S&P500 in 14 of the
last 34 years. That's 41% of the time.

But in the last 34 years, Sequoia has averaged 16.57%
annual returns. A $10,000 investment in 1970 is worth about
$1.8 million today versus $463,000 for the S&P 500. If
you'd pulled your money out after those first four years
and put it in an index fund, you'd have made a huge
mistake.

Think about that. Four years wasn't enough time to give a
true picture of the soundness of Sequoia's basic value-
oriented approach to investing. Nearly half the time,
getting rich felt like losing ground when compared to the
rest of the market. In some years, getting rich by giving
your money to Sequoia felt exactly like losing money.

Likewise you will find periods of under-performance in the
track records of Warren Buffett, the Oakmark Fund, Longleaf
Partners, Third Avenue Value Fund, Clipper Fund, Tweedy
Browne... all the most successful investors under-perform in
the short-term sooner or later.

If you want to get rich in the stock market, you have to
know what to expect, not merely for the next few days or
months, but for the next several years.

That's what it really takes to get rich in the stock
market, no matter what the spam in your e-mail inbox tells
you. You have to be able to stick to your guns for five
years at a clip without even beating the S&P 500. You have
to be so confident in your approach that you never waiver
from it, even when there's zero short-term success to brag
about. (Oh yes, and your approach has to be one that
works.)

Seth Klarman, in his 2003 annual letter to investors,
meditates on the inherent level of pain that keeps most
investors from learning to employ a sound strategy:

"Perhaps standing apart from the crowd, as value investing
requires, makes people feel as though they, and not just
their investments, are out-of-favor. Perhaps holding cash
for what seems like forever, awaiting the emergence of an
investment opportunity, is simply too emotionally difficult
for them. Maybe exposure to criticism or second-guessing as
a result of standing apart from the crowd is more than they
can comfortably bear. Maybe it is the continued price
erosion one can experience from buying corporate misfits
and rejects - the relentless drain of out-of-favor
securities continuing to melt away - that turns investors
off. Perhaps it is hard to sound cool or even sane at
cocktail parties when you don't own the hottest IPOs, and
when no one has heard of the unpopular and obscure holdings
that comprise your net worth."

All that unpleasantness... and still I would abhor you to
ignore anyone who promises you consistent short-term
trading profits. (It felt wonderful just to say those
words:"consistent short-term trading profits". They have
the same impact as"guilt-free sex with nubile fashion
models".)

People who promise big profits from short-term trading
strategies are either ignorant or they think you're
inexperienced enough to believe them. Obviously, you can't
afford to align yourself with either party. (The fact that
you might receive such drivel in your e-mail inbox, with my
name at the bottom, makes that painful advice to give, I
assure you.)

So, while I can't promise you consistent short-term riches
today (or ever), I can promise you two things.

I can promise you that: 1) you need rational expectations
and a long-term view to get rich investing, and 2) that a
disciplined, highly selective, value-oriented approach,
adhered to religiously over a period of many years, is your
only hope of getting rich by investing in stocks.

Maybe I should just promise you what my best friend's
father told him as a child,"Son, you get out of life what
you put into it, or a little bit less."

Regards,

Dan Ferris
for The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - The Fortune Of Loss (Dan Ferris) - Firmian, 15.06.2004, 21:45
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