Fool.com: The Bull Is Dead, Long Live the Bull[Fool on the Hill] June 2, 2000

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FOOL ON THE HILL
An Investment Opinion

The Bull Is Dead, Long Live the Bull

By Bill Mann (TMF Otter)
June 2, 2000

Just when it seems that all hope is lost, the equity markets soar to close the week. In particular, the Nasdaq Composite zoomed upward, appreciating by nearly 20%.

And just as fast, our day-to-day oriented market wags, who had absolutely nothing good to say about anything just a few days ago, have suddenly taken their "happy pills." It's as if the steep drops from last month are as relevant as the Great Depression. What on earth is going on? We get a sliver of news that is "weaker than expected" and the market takes off like a Labrador chasing a squirrel with a T-bone tied to it.

Craziness, I tell you. But deeper, I think this is yet another nail in the coffin of Efficient Market Theory (EMT). I'd be interested to see a business case that shows CMGI (Nasdaq: CMGI) being worth $165 per share in March, $44 at the beginning of this week and $55 now. For those of you playing the home game, that's a drop of 73% over two months, and then a gain of 25% back in a period of five days. Is someone going to stand up and explain to me exactly what they're doing in Andover, Massachusetts from a business perspective that would make these market moves seem logical?

Efficient Market Theory (EMT) holds that the public markets are efficient in pricing every piece of information that every investor has at the same time that it becomes available. As such, the current price for a stock accurately represents the true intrinsic value of the company at that time. So the market was efficient on March 10, when the Nasdaq stood over 5000 and the Dow was at 9700, and it is now, less than three months later, with the Nasdaq off 37% and the Dow up 11%. EMT has a great deal of merit to it, but it misses two key issues: private information, including those influential analyst recommendations that may or may not be "on the level"; and emotions, which effect even the most stalwart investor at times.

I fully believe that over the long run that the market is an accurate measure of the quality of underlying businesses. But what do these short-term moves mean? That Mr. Market's Zoloft prescription ran out?

And it's not as if CMGI is the only one. Internet Capital Group (Nasdaq: ICGE) suddenly shows life: After having dropped from $155 in March down 85% to $23 on Monday, it rockets back up 37% THIS WEEK to just shy of $36. Or, take JDS Uniphase (Nasdaq: JDSU), down 50% in three months, but up 29% this week.

There are some years that whole markets won't move 20%, and the Nasdaq does it not only in one week, but in the week immediately following some nauseating drops. So the bear is back in hibernation, the bull once again rules Wall Street. Where last week an investment radio show host was touting different bond issues at 7% yield, the same guy was back on the air today talking about how Yahoo! (Nasdaq: YHOO) is undervalued. If Yahoo! is undervalued now, CERTAINLY it was undervalued last week before it made its 19% move up.

The most sure path to investing success requires that you find a consistent investment approach that does not rely on shifting your assets as soon as the wind changes. Those same bonds from last week just don't look so good today, do they?

Hindsight is always 20-20, but I'm asking you, for your physical and financial health, not to believe the hype.

Economic conditions underlying these companies, for the most part, are no more great today than they were horrible last week. The fact that the May unemployment report (which came out today) showed that the U.S. economy is cooling off is not significant enough to justify these moves. For this very reason, as hard as it is to watch a portfolio going down, and as ecstatic we get when it skyrockets, the Foolish investor needs to tune out the noise. That's all it is. It's noise.

Burt Malkiel speaks of an exercise in which an economics class he taught at Princeton flipped a coin one hundred times and marked them as a candlestick progression. For each heads the chart went up a full point, and tails down a point. He showed the resulting chart to a technical analysis expert, who wanted to know what the company ticker was, because he saw a classic cup and handle formation. Needless to say, this colleague was none too pleased to discover that he was not looking at a company chart at all.

The point is not to single out and mock chartists. The point is that even the experts cannot accurately tell what is going to happen next. There are value investors who believe that in relation to companies such as Amazon.com (Nasdaq: AMZN) and America Online (NYSE: AOL) the market has been inefficient for the last three years. That's an awfully long time to believe that companies have been completely out of whack from their intrinsic valuation, though certain portions of these arguments are compelling.

What is probably more important to recognize is that this volatility in relation to some new economy stocks is likely to continue into the foreseeable future. I think this has something to do with some epic "bear/bull" struggles, but the central cause lies more in the fact that no one has figured out how to build reliable price models for these companies yet. B2B and other hot button industries have not yet created the efficiencies upon which their spectacular importance to the economy will be built. I have no doubt that the Internet will play an important role in altering how companies transact, but I also have no idea how the companies that are building the "trading floors" in e-commerce are going to derive profitability from their services, either.

These types of companies are among the most obvious cases of an observable condition: that there really is no price too high for a bull nor too low for a bear. And so, until the economics of these models become more apparent, the companies occupying the outer edge of commerce are going to remain volatile. Your challenge, should you wish to Foolishly invest in such companies, will be to continue to focus upon the business model, lest the market drive you crazy.

I'll close this with some wisdom from one of the greatest adventure stories of all time, the text of the Tibetan Book of the Dead. It says simply, "You will be liberated the moment you recognize them for what they are." If you recognize market events for market events and business events for business events, you will be a more successful long-term investor for it.

Narr Weiter! (Fool on!)
Bill Mann, TMFOtter on the Fool Discussion Boards

In case you missed it, Tom Gardner responded today to my recent Rule Maker article on valuation of large cap tech stocks. We're going to be dueling on this topic tomorrow on The Motley Fool Radio Show. Be sure to tune in!



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