Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
AM EST, Wednesday, April 15, 2009. You
have to start with the understanding that very few new businesses actually
succeed. Then you have to understand that the number of new businesses expands
to use the money available to fund them. Hence in a boom where money is plentiful,
Wall Street will encourage new businesses. As more are started, so the success
ratio declines. The highest success ratio, ironically, is when times are tough
and few businesses are funded, like now. But the due diligence is stronger.
The ones that get funded now are more likely to succeed.
is the stockmarket going? Richard Russell
of Dow Theory Letter
has logic and history to suggest that we may shortly test the old mid-March
low. I have no idea if he's right. My advice is "if you were lucky to
have jumped back in and are now up on paper, take some money off the table.
Start to play with the bank's money." This is what the recent market
has looked like:
last few days have been bleak:
to start with an extraordinary chart constructed by dshort.com. The chart
follows the S&P 500 through four major bear markets. The deep blue line
is the current bear market. Note that at the March 9 low the S&P had
lost 56.8% of its value. This makes the current bear market the worst since
the great bear market of the 1930s. You can see where we are in terms of
the 1930s bear market, shown on the chart in gray.
Now here is
important information. I researched every bear market since the '30s. Without
an exception, following the bear market low and the initial bull market
rally, each new bull market saw some sort of test or approach to the initial
lows (in the current case, the low would be the March 9 low of Dow 6547).
Therefore, the odds based on past performance are that the Dow will decline
to test or approach the March low of Dow 6547.
If Dow 6547
is tested successfully (in other words, if the Dow doesn't go lower), and
if the next rally surpasses the most recent Dow high (which, so far, is
8083) I would say that the odds are high that a bull market is in force.
Note on the chart below, that this bear market is, so far, the shortest
in duration of the other three, although the current bear market is already
as intense as the 1929-32 affair.
-- a strong initial advance from what appears to be a market bottom does
not guarantee that a new bull market is starting. For instance, during the
horrendous bear market of 1929 to 1932 there were eight rallies, each above
35%, with each rally followed by a new low in the price of the Dow!
thinks we've seen the bottom: Intel chief executive Paul Otellini
said yesterday that consumer computer demand is much stronger than the enterprise
and that the overall picture isnt as bleak as some feared. Otellini
said it remains difficult to predict demand. But based on a 19 percent drop
in inventory between the fourth quarter and the first quarter, it looks like
sales have bottomed out and are heading back up. Orders for new chips are
growing. Desktop chip sales hit a bottom in February and are climbing back
is now behind us, he said. Three months ago, we were sitting in
a fragile economic environment and were coming off a horrendous quarter. Three
months later, we are still sitting in a fragile economic environment, but
we have three months of trend data about demand and what segments are still
buying. That has given us the confidence to say we have seen the bottom.
others -- some economists and some CEOs -- who believe things are "stabilizing."
Georgetown speech yesterday: It's worth watching
and/or reading. Nothing new. But a good overview explanation of what he's
trying to do, and why. He's really a great orator. For the video, go to MSNBC.
For the transcript, go here.
to run your business in a recession. Don't
pull back. Introduce new products. Push your advertising. James Surowiecki
is one of my favorite business writers. He writes in the latest (April 20)
New Yorker magazine:
In the late nineteen-twenties, two companiesKellogg and Postdominated
the market for packaged cereal. It was still a relatively new market: ready-to-eat
cereal had been around for decades, but Americans didnt see it as
a real alternative to oatmeal or cream of wheat until the twenties. So,
when the Depression hit, no one knew what would happen to consumer demand.
Post did the predictable thing: it reined in expenses and cut back on advertising.
But Kellogg doubled its ad budget, moved aggressively into radio advertising,
and heavily pushed its new cereal, Rice Krispies. (Snap, Crackle, and Pop
first appeared in the thirties.) By 1933, even as the economy cratered,
Kelloggs profits had risen almost thirty per cent and it had become
what it remains today: the industrys dominant player.
think that everyone would want to emulate Kelloggs success, but, when
hard times hit, most companies end up behaving more like Post. They hunker
down, cut spending, and wait for good times to return. They make fewer acquisitions,
even though prices are cheaper. They cut advertising budgets. And often
they invest less in research and development. They do all this to preserve
what they have. But theres a trade-off: numerous studies have shown
that companies that keep spending on acquisition, advertising, and R. &
D. during recessions do significantly better than those which make big cuts.
In 1927, the economist Roland Vaile found that firms that kept ad spending
stable or increased it during the recession of 1921-22 saw their sales hold
up significantly better than those which didnt. A study of advertising
during the 1981-82 recession found that sales at firms that increased advertising
or held steady grew precipitously in the next three years, compared with
only slight increases at firms that had slashed their budgets. And a McKinsey
study of the 1990-91 recession found that companies that remained market
leaders or became serious challengers during the downturn had increased
their acquisition, R. & D., and ad budgets, while companies at the bottom
of the pile had reduced them.
One way to
read these studies is simply that recessions make the strong stronger and
the weak weaker, since the strong can afford to keep investing while the
weak have to devote all their energies to staying afloat. But although deep
pockets help in a downturn, recessions nonetheless create more opportunity
for challengers, not less. When everyone is advertising, for instance, its
hard to separate yourself from the pack; when ads are scarcer, the returns
on investment seem to rise. That may be why during the 1990-91 recession,
according to a Bain & Company study, twice as many companies leaped
from the bottom of their industries to the top as did so in the years before
fortunes in the Great Depression are a classic instance of this. Chrysler
had been the third player in the U.S. auto industry, behind G.M. and Ford.
But early in the downturn it gave a big push to a new brandPlymouthtargeted
at the low end of the market, and by 1933 it had surpassed Ford to become
North Americas second-biggest automaker. On a smaller scale, Hyundai
has made huge gains in market share this year, thanks to a hefty advertising
budget and a guarantee to take back cars from owners who have lost their
jobs. Those gains may turn out to be temporary, but in fact the benefits
from recession investment are often surprisingly long-lived, with companies
maintaining their gains in market share and sales well into economic recovery.
are companies so quick to cut back when trouble hits? The answer has something
to do with a famous distinction that the economist Frank Knight made between
risk and uncertainty. Risk describes a situation where you have a sense
of the range and likelihood of possible outcomes. Uncertainty describes
a situation where its not even clear what might happen, let alone
how likely the possible outcomes are. Uncertainty is always a part of business,
but in a recession it dominates everything else: no ones sure how
long the downturn will last, how shoppers will react, whether well
go back to the way things were before or see permanent changes in consumer
behavior. So its natural to focus on what you can control: minimizing
losses and improving short-term results. And cutting spending is a good
way of doing this; a major study, by the Strategic Planning Institute, of
corporate behavior during the past thirty years found that reducing ad spending
during recessions did improve companies return on capital. It also
meant, though, that they grew less quickly in the years following recessions
than more free-spending competitors did. But for many companies recessions
are a time when short-term considerations trump long-term potential.
This is not
irrational. Its true that the uncertainty of recessions creates an
opportunity for serious profits, and the historical record is full of companies
that made successful gambles in hard times: Kraft introduced Miracle Whip
in 1933 and saw it become Americas best-selling dressing in six months;
Texas Instruments brought out the transistor radio in the 1954 recession;
Apple launched the iPod in 2001. Then again, the record is also full of
forgotten companies that gambled and failed. The academics Peter Dickson
and Joseph Giglierano have argued that companies have to worry about two
kinds of failure: sinking the boat (wrecking the company by
making a bad bet) or missing the boat (letting a great opportunity
pass). Today, most companies are far more worried about sinking the boat
than about missing it. Thats why the opportunity to do what Kellogg
did exists. Thats also why its so nerve-racking to try it.
or full screen? I'm racking my brain as I
scanned Amazon for DVDs. Which should I buy? Answer: Only widescreen.
is the movie in widescreen. This is the way it was originally shot.
is the movie in full screen format. The movie s truncated so it can fit an
absurdly shaped 4 x 3 format, old-style glass TV. For a full explanation,
mutual funds, it's not the return that counts. Part 2. A smart
Wall Street observer once remarked, "The only way to make money with
mutual funds is to own the mutual fund company." See
yesterday's story on Mario Gabelli, who paid himself $46 million
At 92, Wally married Anne, a lovely 25 year old. Since her new
husband is so old, Anne decides that after their wedding she and Wally should
have separate bedrooms. She is concerned that her new but aged husband may
overexert himself if they spend the entire night together.
After the wedding
festivities Anne prepares herself for bed and the expected 'knock' on the
door. Sure enough the knock comes, the door opens and there is Wally, her
92-year old groom, ready for action.
They unite as
one. All goes well, Wally takes leave of his bride, and she prepares to go
to sleep. After a few minutes, Anne hears another knock on her bedroom door,
and it's Wally. Again he is ready for more 'action.'
Anne consents for more coupling. When the newlyweds are done, Wally kisses
his bride, bids her a fond goodnight and leaves.
She is set to
go to sleep again, but, aha you guessed it..... Wally is back again, rapping
on the door, and is as fresh as a 25-year-old, ready for more 'action.' And,
once again they enjoy each other.
But as Wally
gets set to leave again, his young bride says to him, 'I am thoroughly impressed
that at your age you can perform so well and so often. I have been with guys
less than a third of your age who were good only once. You are truly a great
embarrassed, turns to Anne and says: .......'You mean I've been here already?'
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
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