Post of the Day
January 27, 1999
Kua`aina Partners Folder
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
Subject: Re: Remember the Rimpinths
Rimpinths in post 746:
I am lurking around here and I'm very honored that you all have coined a phrase after me. ("Remember the Rimpinths" -- ROFL.) It's nice to see that you are being a little more cautious about your investment decisions, but I don't think that you still the see The Big Picture that I'm trying to communicate.
Glad that we could bring a smile to your face, and please, don't worry about creating turmoil on this board -- post all you want, and we'll gladly read. It's a little too easy for all of us to get caught up in the euphoria of a bull run, and your well-written posts help us to keep perspective.
Regarding The Big Picture, I think many of us see it, but you have to remember from where we're coming. I've been invested in the market since 1995, Panit's been in it longer than me, and I think several other people on this board have been in it for years. In 1995 when I bought shares of DELL with a pitifully small amount of money I had saved from mostly minimum wage jobs over the previous thirteen years, I was advised by person after person to avoid DELL -- that its valuation was too high, that DELL's stock would come crashing down to fundamentals, et cetera. Over the last four years of holding DELL, I have heard the arguments over and over and over again -- in fact, the thing that would make me worry now is if everyone relented, and agreed that DELL was fairly priced.
Similarly with AOL -- except perhaps after the 75% AOL crash in 1997, I don't think there's ever been a time when AOL has been considered "cheap." Wait, not even then -- I remember people declaring that AOL would go lower still, that it would go bankrupt, even in 1997. Heck, up until recently, AOL wasn't even turning a profit -- and now that it is, many analysts are suddenly extolling AOL's virtues, despite a trailing P/E of 500. Something's amiss here -- these people should be deriding the entry of anything with a trailing P/E of 500 into the S&P 500. Worse still, I hear rumors of adding AOL to the Dow.
Similarly with MSFT -- throughout the 1990s I remember people saying how MSFT shares have been overpriced. But does a trailing P/E of 80 really seem terrible to you when revenues have grown 73% over the same quarter last year, and net margins have risen to over 40%? Naw, you'd say it only meant that MSFT was expensive then, and this P/E just provides a sliding window that keeps it expensive now.
Back to DELL. If I listened to the bears from 1995 through now, I would have missed out on five stock splits. Five stock splits. If I listened to the bears, I would have missed out on something like a 6000% return (I don't know the exact number because I've sold some shares and bought some new shares since then -- I never really calculated it). If I listened to the bears, I'd be feeling very very very very stupid right now. You can imagine my caution in listening to the bears even now -- since the runup has been so much in four years, I am quite reluctant to pull the trigger before I have ample evidence of a crash. I need to witness 20%, 30%, 50% losses in DELL before I could even consider it.
But wait, even a 50% loss in DELL might not inspire me to sell, either. If I had held AOL in 1997 and sold after the 75% drop, I would have missed out on the roughly 2000% runup since then. AND paid capital gains taxes for the privilege of doing so.
So you can see my reluctance here. The market sends mixed signals all the time, and the scare tactics that analysts and the media send us are just as likely to be bear traps as not. The only way to know you're living through a bubble correction is after it's over, and by then it's too late.
Rimpinths, you say the mania is going to end this year. Don't manias need an catalyst to end? Where is the impetus here? A slowing U.S. and world economy? People were singing that song to us in 1997 and 1998. The Y2K problem? Again, more scare tactics -- where's the grounding in reality here? Or how about the threat of deflation? We're to believe that there's nothing the Fed, the IMF, and all the richest and most powerful people and institutions of the world can do about this? Or are you saying that this is the sweetest scam of all time, to bilk all of our money out of us, since the rich and the powerful will surely get out before we do? I suppose it's possible.
Let's go back to DELL again. Am I deceiving myself when I look at the fundamentals of this company?
1. Dell is the largest direct sales PC manufacturer in the world, listed at 125th in the Fortune-500 and 343rd in the Global-500 of top companies.
2. Dell has $16.8 billion in sales over the last 4 quarters. This puts Price-to-Sales at roughly 6.
3. Dell only keeps 6 days of inventory, and doesn't have to pay its suppliers until 8 days later -- in essence, Dell gets paid before it assembles the product paid for!
4. 83% Return on Equity. 62% Year over Year sequential growth. Let's break that down by product.
5. During the third quarter and first nine months of fiscal 1999, enterprise unit sales increased 112% and 165%, respectively, compared to the third quarter and first nine months of fiscal 1998, and increased sequentially 13% over the second quarter of fiscal 1999.
6. Notebook unit sales increased 141% and 123% in the third quarter and first nine months of fiscal 1999, compared to the same period of the prior fiscal year, and increased sequentially 16% over the second quarter of fiscal 1999.
7. Net revenue for the third quarter of fiscal 1999 compared to the third quarter of fiscal 1998 increased 46% in the Americas, 68% in Europe and 49% in Asia-Pacific and Japan. Net revenue for the first nine months of fiscal 1999 compared to the first nine months of fiscal 1998 increased 48% in the Americas, 67% in Europe and 39% in Asia-Pacific and Japan.
Looking at these fundamentals, why is it you think DELL is expensive? Priced at a premium, perhaps, but due for a 75% correction?! I don't see it. Microsoft due for a 75% correction? I don't see that, either. Nor Cisco. Nor Intel. [For those of you wondering where I got 75% from, Rimpinths' position is that the Index of the eight stocks of the BubblePort -- MSFT INTC CSCO DELL LU AMZN YHOO AOL -- will fall 75% off their collective January 11th high, and signal the end of this Internet/technology mania of the late 1990s.]
Rimpinths, can't a mania go on for years and years and years? If the BubblePort doesn't hit 500 by November 9, will the declaration of mania end? Nope -- if at first you don't succeed, redefine success. Bears have moved their targets on me and my DELL and my MSFT and my INTC and my EMC and my CSCO (which I sold in November at 65, and now it's at 100, whoops) for 4 years. And yet...
DELL shares are up 55,000% in the 1990s.
CSCO shares are up 25,000% in the 1990s.
EMC shares are up 22,500% in the 1990s.
AOL shares are up 18,000% in the 1990s.
MSFT shares are up 5000% in the 1990s.
INTC shares are up 2300% in the 1990s.
Shave 75% off these gains, and you know what? Each of these companies is still waaaaaaay up in the 1990s. Furthermore, a stock crash doesn't completely kill the momentum in their respective companies. And, it could provide many of us with an excellent opportunity to dollar-cost average -- I personally will be scrimping and saving and borrowing whatever I can if I get the opportunity to get MSFT at 40, DELL at 20, CSCO at 25, EMC at 25, LU at 25, AOL at 35, or INTC at 35. Heck, at this point, AMZN at 25 and YHOO at 75 sound like amazing deals, too, if these companies show any of the promise of fundamental earnings growth that led people to speculate in them in the first place.
The new era strategy has a strong bias for future earnings over a stable earnings record, assets, or dividends. Prices are completely disregarded as having any role in the decision making process.
This might be true for AMZN, YHOO, and AOL, but there are some very fundamental reasons to buy DELL, CSCO, EMC, INTC, and MSFT at their current prices. If these companies' stock prices stood still for a year, their trailing P/E's would be lowered to the point that they'd stand on their own against the traditional valuations of other companies, dollar for dollar.
A 25% correction? It's possible. A 50% correction? A whole lot less likely, but still possible. A 75% correction for DELL, MSFT, INTC, or CSCO? If that happens, then we have a lot bigger problem than my pitiful portfolio, and my paper wealth evaporating will be the least of the issues in my life I'll have to deal with. Remember that the money in my portfolio is not money I'll need any time in the near future -- not 3 years from now, not 5 years from now, not 10 or 15 or 20 years from now. I'm 29, and wasn't really planning on touching that money until I was 55 or 60. I have a separate savings account for shorter-term money needs, and I try to live below my means on my existing salary wherever I can.
As long as the market continues to be governed by the new era philosophy, a portfolio like the Rule Breaker port or the KARB port will continue to do well. You have done a marvelous job of selecting stocks that a new era investor would demand, which is why their prices continue to appreciate. Nearly everybody is a new era investor these days. You have figured out what is driving demand. That is why my point of view seems so absurd, because it just doesn't make any sense now.
Actually, your point of view doesn't seem absurd to me. Common stocks should return to their fundamental valuations based on earnings, dividends, and assets -- stock prices should be a discounted approximation of cash flow, I really believe it. But I also believe that many of the "new era" companies are still very much in growth mode, and so if their common stock prices lag for 1 or 2 or 3 years from their current levels, the fundamental values of these stocks is eventually going to catch up. Is that false logic?
Economics says that if you create paper wealth much faster than you create real wealth, each additional dollar of paper wealth becomes worth a little less.
On the other hand, if everyone went to their banks today and tried to remove all the money in their checking and savings accounts, the banks would go bankrupt, too, because they don't keep all that "paper money" on hand, either -- they lend it out to people and companies to buy houses and equipment and infrastructure.
See, I understand what you're saying, but you can't tell people those things, or you'll cause a panic, inducing a demand in people to pull their money, causing that crunch that you were predicting in the first place. If everyone remains calm, no one gets hurt. Yeah, I know, it's ridiculous to try to reason with a mob to stay calm. Luckily, I don't have to -- because what I say and do has little effect on the people and institutions who set the prices for common stocks. If the Market Makers and the Specialists and the Brokerages and the Institutions panic and pull their money, then we the individuals are screwed. On the other hand, if they keep their heads, then we're fine.
That's a big if, I admit, and that's why I remain cautious. On the other hand, if I had panicked and gotten out at any time between 1995 and now, I would have induced a tremendous opportunity cost, not only having to pay brokerage fees and capital gains taxes, but also having to pay that fee of banging my head against the wall every day while my money sits idly collecting dust. So much for the miracle of compounding interest in that sort of scenario.
So Rimpinths, I understand what you're saying, and I understand where you're coming from -- I'm just trying to show you why it's so difficult for me to pull the trigger and exit.
The "real wealth" of stocks or their "value" lies in the earnings and assets of that company, as well as the dividends that a stock pays. What other economic value do stocks have?
There's something else at play, and it's untraditional so I don't put too much faith in it, but I'll call it the "Beanie Baby" and "Magic: The Gathering" phenomenon, which is this -- limited supply creates its own demand. There are "only" 2.5 billion shares of Microsoft stock out there. Bill Gates owns 20% of it. Paul Allen owns 15% of it. The rest of Microsoft owns between 20 and 25% of it. Institutions own between 20 and 25% of it. The number of shares available to Microsoft customers -- people who like the company and want to own something cool like shares of the company they like -- is pitifully small, and creates its own demand, just like the rare Beanie Babies and rare Magic cards. Do these things have intrinsic value other than a discount of assets and earnings (Microsoft has no dividends)? No. But that makes them no different from diamonds or gold. They are only worth something because we all agree they are worth that something. Could that change? Sure. But not on its own. Something must induce that change -- there must be a catalyst. Until then, current attitudes will continue to prevail.
The problem is that you'll probably experience only one financial bubble of this magnitude in your entire lifetime, so it's a lesson that an investor only gets one chance to learn.
So far, I have witnessed the runup in gold after countries went off the gold standard, the runup in silver when the Hunt Brothers tried to corner the market, the runup in oil when everyone feared OPEC, the runup in the Nifty Fifty when everyone went for Blue Chips in the 1970s, the high-technology new-issue boom of 1983 (remember Diasonics, Androbot, Fortune Systems, Spectravideo, Whirlyball International, Stuff Your Face, or Muhammed Ali Arcades?), the Japanese real estate bubble, and of course the biotech frenzy earlier this decade. None of these crazes sent us into The Sequel To The Great Depression. Why will the Internet bubble be different? Some people will lose some money, I admit it, but where is the catalyst for an Internet bubble burst to bring the rest of the market (and the world's economy) down?
Maybe you're telling us it's flipped, that the world's economy going down will bring the markets down. But that doesn't work, either -- if the world's economies are slowing, isn't that the best time to invest capital to help companies and economies grow?
Rimpinths, you often ask us to give you a good reason as to why this time is different with regard to valuating companies. Let me reverse the question and ask you why this time will be different with regard to a speculative bubble bringing the world markets to their knees.
You say the parallels between the 1990s and the 1920s is uncanny, but I remember people running the same parallels between the 1980s and the 1920s. And they were right to some extent: at the end of the 1980s we were greeted with a tidy little recession that lasted a few years and cost George Bush his job. But you know what happened after the recession after the greatest peacetime boom in the U.S.'s history in the 1980s? We broke the record for the greatest peacetime boom in the U.S.'s history again in the 1990s. Bigger than the 1980s, bigger than the 1920s.
Setting ourselves up for a greater fall, you say? Maybe. But maybe not. I don't know. The thing I don't understand about you (or about the raging bulls, for that matter) is: how can you be so sure?
Last time I checked, the future was anything but certain. If a future of doom were certain, wouldn't everyone have pulled out by now? If a future of glory were guaranteed, wouldn't everyone have put all their money in by now? It is the uncertainty that keeps the market in flux, and it is the uncertainty that makes the market work.
We might get a bubble burst soon, or we might not. I'm certain one of the two will happen, but I'm not certain which, and I'm not certain when. As a result, I'll remain optimistic, and I'll remain cautious, and I'll not think there's anything wrong with that.
The Post of the Day may be edited for readability or length, but never for content. The opinions expressed in the Posts are those of their authors, and not necessarily The Motley Fool. We make no claim or warranty as to the veracity or accuracy of any post, and present this feature only as an example of what may be found on our message boards. Don't take the Post of the Day, or anything else here, as gospel and, as our seventh grade English teacher, Mrs. Peacock, used to say, do your own homework, and avoid run-on sentences.