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The Tortoise and the Hare

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Post of the Day

By DirtyDingus
January 3, 2001

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Sorry for the length it just grew...

This ante-millennium week seems like a good time to take stock and consider where things have got to. So here is the Dingus view of the world and, I hope, some thoughts that we can take with us into the third millennium (as all ratsters know the 1st day of the new millennium is 1 Jan 2001 because there was no AD 0)

The first and most basic thought is this:


Patience is a Virtue.


Just as in the Aesop fable of the Tortoise and the Hare, slow steady progress is better that rushing forward and stopping. I know I am not alone in this but a lot of posts on this board and indeed the rest of TMF recently have been about how people have lost $$$$$ in the last 6 months or so. In fact I have myself lost a bit too but as of now (Dec 29 around US market open) all but about 4 of my investments (I have some 25-30) are above water, as is the portfolio as a whole. From the heights of March I am sitting on paper losses and from this time a year ago I'm probably slightly down. BUT I've been investing for 10 years or more and over pretty much any time period that starts before Oct 1999 my portfolio is UP loads. In other words, and without getting into specifics, I made about 2 years worth of gain in 3 months so, for someone like me who hasn't sold much in the last year, the fact that on paper I was 50% richer in March is nothing.

I'm 32 years old and I'm paid enough to cause tax problems even without my investments so maybe I'm luckier than some. But from what one learns of people on this board I'm not alone in not needing my investment money in the near future. This is important: I personally don't care what the market does next year. OK so I'll feel sad if the NASDAQ drops below 2000 because that will probably mean that most of my investments are in the red BUT since I don't need them and since I'm convinced that overall they will come right this simply doesn't metter. I don't need to take the money out next year or even in 5 years time so it doesn't matter. In 5 years time I'm sure my portfolio will have at least doubled (thats an average return of just 15% per year) and by not selling I won't have to worry about taxes - if we have 5% inflation over the next 5 years then a 15% pa gain implies appreciation in real terms of over 50%, should both those numbers stay put until I retire then over that 30 year timespan my investments will be worth 15 times what they are now in real terms (and 66 times in pure dollar terms).

Sure with the benefit of hindsight I could have sold on March 10th and reinvested on December 10th, but a very large proportion of the 1/3rd value difference between those two dates would have been owed to the tax authorities of various countries (and the rest to accountants to help figure this out). My first tech investment was Nokia in 1996 or so, because I've held it so long the fall this year from $62 to $40ish is almost irrelevant when the stock cost me $5 or so (see http://quote.yahoo.com/q?s=NOK&d=my as an example). And despite the fall and despite "taking profits" and thus selling some in 1998 and early 1999 NOK is still ~10% of my portfolio. Another 10% is in NT and the majority of that was bought in October 1998, which means that it has a cost basis of about $8. In other words the drop from $89 to $30 this summer has reduced my gains in 2 years from 10 times to merely 4 times.

The same idea of patience goes in to purchases. If it really is worthwhile to invest in a company then that worth is unlikely to change dramatically overnight. So once you have identified a company that is worth buying don't allow yourself to be hurried over your Due Diligence. Real long-term buying opportunities do not change in a week or 2 so it is important to not rush that DD. My worst performer in 2000 (Sonera - SNRA) I bought on the back of inadequate Due Diligence - not that SNRA is not a fine company but it was caught up in a bubble valuation and thus was not worth what I paid for it. Chalk that one up to experience and as a useful capital gain loss. Again once you have bought a stock it is an excellent idea to ignore its price for 3 months or so. If it goes down in those 3 months you'll only be kicking yourself for not buying lower and if it goes up then restrain your enthusiasm because chances are that it will retrace a bit. If you are planning to hold the stock for 5 years then 3 months is just 5% of the timespan of this investment so you are unlikely to be able to draw a meaningful conclusion as to its wisdom in less time than that. I personally evaluate stocks after 3 months and then again as they get to about 12 months in the portfolio to see if any of the reasons why I bought the stock have changed (Sonera has been booted out after 12 months). Thereafter it tends to be roughly a yearly affair but with more emphasis on changing events that strict attention to the calendar. Note that I said ignore the price; I don't mean ignoring everything to do with the company. If you are a sensible investor you will use the internet to pull up news on the company and the market it is in and as soon as it announces results then you will go and analyse those but that doesn't mean you will pay attention to the CNBC talking heads that just tell you the price has changed without going into why.

The second thought is the same only in reverse:


Greed is a Vice, Not a Virtue.


Again our pal Aesop had this one pat as have all Casino operators from the pyramids onwards. The way to lose your money is to be try to make outrageous returns. Money does not grow on trees and no one - not Microsoft, not Qualcomm and not even optical companies - can print it forever. Making money requires work as an investor. You have to pick good targets even if "everyone is invested in X", you personally need to understand why its a good deal and decide whether you want to also be invested in it. We all want something for nothing but time and again that desire has been the hook that has allowed the gullible to be gulled into buying colored glass for the price of jewels or exclusive non-ownership of the Brooklyn bridge or whatever. This isn't just the selling of rubbish at a high price, its also the question of appropriate valuation at a given time. For example I hold stock in QCOM - bought this year at $58 because it met my price and predictions for future growth. With the benefit of hindsight I would have bought it a year or 18 months before but then I didn't see the valuation and by the time I did the price had skyrocketed to what I considered an unsustainable price. In other words that bit people spouted that valuation wasn't important was clearly stupid. Valuation is important up to a point, but it isn't worth trying to get the very last penny out of it so don't fret missing a total bottom or a total top. There have been other companies such as Cisco, which I (and many others) kept thinking were overpriced and thus hesitated to buy for far too long (some people have never owned Cisco which I consider to be almost criminally stupid if you have been investing over the last 5 years), but having a target buy price is a good way to stop yourself from buying stuff you shouldn't. Needless to say a target buy price is NOT something that is static, and it needs to be based (for a LTB&H investor such as me) on fundamental reasons such as cash-flow, revenue growth etc. The fact that that target may be near some technical level (such as a 200 DMA for example) is chance. I use a limited amount of TA to try and identify whether a company coming into my target area is worth buying but I don't rigorously tie myself to it. For example I recently bought some Network Appliance at $60.5, thinking I had a decent buy. The fact that it went down below $50 shortly after was frustrating but its since recovered so I'm only medium annoyed.

The third thought is this:


Never Make a Major Decision Under Pressure.


In other words even major emergencies can be less of an issue if you have thought about what to do in advance. Some Management Consultant of Guru said "Failing to Plan is Planning to Fail" and that absolutely applies to investing.

For example one possible emergency is that the stock you own turns out to be doing accounting tricks - if you have a rigid plan of action to follow when something like this occurs you won't be rushed into selling something needlessly or alternatively holding something that's a dog.

One rule I have is that you need to analyze by whom the accusations are made. This may be the action of a short seller or other market manipulator or it may be something more serious. In general a single article is suspect as are multiple articles containing quotes from the same people, but any official statement from the SEC (as seen on an SEC Webpage as opposed to a news service) is immediately serious.

Another rule is "does the company have a history of this?" For example Lernout and Hauspie had controversial dealings more than once before it was finally exposed whereas Emulex was clean until the press release claiming it was under SEC investigation.

A third rule is do not trust anyone else's analysis of the numbers - run them yourself (and if the company doesn't provide you with the data to help this then count that as badness) and compare them with what you expected or what numbers you had when you originally purchased the company (you did run the numbers when you did your Due diligence didn't you?) to see what has changed.

Other emergencies may include loss of job, house or other personal disaster. If you plan it right then you may be able to take advantage of governmental sympathy for your plight and save yourself taxes on stock sales etc. but there is usually a time limit so you need to know the law in advance. You may wish to have a list of investments to liquidate in the event that you need cash quickly and an order that you sell things. Note that interest rate changes and overall stock market sentiment are not usually emergencies unless it seems like the entire world order is collapsing in which case selling everything for gold may be a reasonable option (but I doubt it).

Moving on a bit from investing style...Thought 4:

The last 100 years have seen a dramatic change in worldview for the average Westerner*.

(*Westerner defined as those people in what was once called the first world)

In 1900 the majority of the population in most of today's "developed" nations were still employed in agriculture related occupations with only England and Germany having less than 50% of the population living outside cities. Even the US still had just a handful of large cities, Detroit was yet to become "Motown" and Los Angeles wasn't much than a provincial town. Japan had barely begun to industrialize and even in England the most common forms of transport involved horses.

Of more importance was that the world was large. Aero planes did not exist. To get from London to Paris took the better part of a day, London to New York was a week on a liner or 2 weeks by freighter and New York to Los Angeles would take 3-4 days even if you were a railroad magnate with your own private train and absolute priority (see Kipling's Captains Courageous for an reasonably accurate timing of a trip from LA to Boston in about 1896). If bulk transport was slow then data transfer wasn't much faster. Sure you could send a telegram from anywhere to anywhere, but the speeds were about 1 bit/second and wireless communications were in their infancy. Telephones were rare and electricity had yet to be widely deployed. Home appliances were human powered and the most advanced computer was the Hollerith Tabulating Machine used for the US census, a device which worked rather like those Florida ballot machines. While an ancient Greek or Roman (or Arab or Chinese) might have found urban 1900 strange he could have traveled 50 miles from any large city and found a way of life that was much the same as he would have found when he was alive. Ploughs would be better and candles might have replaced oil-lamps but very little else would be strange. Perhaps books and newspapers would be a surprise to anyone born before the printing press but not much else would be beyond his grasp.

Compare this to 2000. I am writing this in the south of France and once posted on a website hosted in Virginia it may be read by people all over the world who will be able to view the document in mere seconds. If anyone wishes to visit me they can do so in less than 24 hours from practically anywhere in the world using an aero plane. I can do a day trip to London to go shopping for about $60 if I book far enough in advance (and have done so). I could probably go and see BruceBrown perform in Vienna leaving in the afternoon from the office, be back at my desk around 10 the next day and still not pay much more than double that London price... in fact I may just try it one of these days to see so Bruce send me your schedule ;-) Horses are used purely as a hobby or sport as are steam engines. Instead, the majority of goods and people are transported by machines burning oil. The average house has gadgets to wash things, cook things and preserve them. Televisions and radios permit me to hear and see things from all around the world - I just switched off NHK news (from Japan) before writing this and instead I can watch CNBC, CNN, the BBC or almost anything that I can get from the Astra Satellite. I can order any book on amazon.com and get it delivered next day. Should I (for some reason) going for a walk people can still get in touch with me via my cell-phone, no matter where they are in the world (and almost no matter where I am - with GSM I can be called on my Cell phone number anywhere in Europe as well as the Middle East and most of Asia). More incredibly, we take this all for granted and I get frustrated that I have 2 more weeks of 56kbps access to the internet chez moi and I consider that 14.4kbps access available through my cell-phone to be wholly inadequate. Despite the fact that 5 years ago 14.4 was as good as it was possible to get and 10 years ago 1200bps was about your limit.

There has been a huge increase in speed in the last 100 years, more than at any other time in history. From a man's running pace of some 10mph the horse merely doubled or trebled that speed. Since the invention of the horse, speeds were pretty much limited to 30mph until the invention of the train in about 1800. Trains only just trebled the maximum human speed in 100 years to around 100mph on specially prepared track at special times and more like 60mph as an average top speed. In the last 100 years the world land speed record has been way more than trebled and regular scheduled aircraft go even faster - ignoring Concorde, military aircraft or spacecraft.

Communication likewise is far superior. Shouting or running is very limited in range and speed. Systems such as semaphore towers or beacons could signal distances of 20 or so miles before they needed retransmission and you could signal perhaps one letter a minute or so (flags and code books obviously improve this a bit). Telegrams and radio could make the distance far greater (say 5000 miles) but even so the information transfer rate was painfully slow and there was no way to have multiple simultaneous conversations on the same wire. Of course it is hard to measure but lets assume that information transfer rates climbed 10,000fold from prehistory until 1900 (this is probably an overestimate). These days instead of 1 bps telegrams or 1 voice channel telephones we can have almost unlimited numbers of simultaneous conversations on the same fiber and the bit rates have increased far more than ever before from 1bps in 1900 to anywhere from 10,000,000,000bps to 1,600,000,000,000bps (10Gbps to 1.6Tbps) depending on what you count as installed and with Lab demos quadrupling that again. This growth is so staggering that it has to be put in perspective. Its like in 1900 having only one human in the world being able to talk compared to today where we can all talk simultaneously and even then assuming the world population doubles. So that 10,000-fold increase from 0 in the previous 100,000 years has been replicated 2-3 times in the last 100 years (and most of that increase has been in the last 30 years)

This has a big impact on the way we see the world. Thought 5:

No matter what the crackpots say globalization is a fact.

Almost every major city in the world outside has a Chinese restaurant and a MacDonalds. No matter where I go in the developed (and much of the developing) world I can buy the same products from pokemons to pens to computers made from components from all around the globe. I have traveled more than anyone else in my family's history back to that caveman named Grunt apart possibly from those that joined the navy (and probably even many of those) and I still have a life expectancy that means I can do the same many times more in my life. It is normal to me to visit Japan once or twice a year and California 4 times a year. This is part of my job and is unexceptional, heck I know people who do fly around the world once a month. In 1900 it would take 1 month or more to travel to Japan from France and about 2-3 weeks to visit California. Today it takes less than 24 hours to reach either. More than that, anyone reading this message has more resources available to them for scientific research that any scientist before 1900. I am also richer than almost anyone before 1900. Richer in the sense that I have a longer life expectancy than any of them and during that life I will never need to suffer from cold, hunger or most infectious diseases and will always have enough money to purchase luxuries, be it opera tickets, fresh strawberries in December or a DSL line. But this is true for most people reading this message. None of us are likely to be cold unless we go skiing, be without food for more than 12 hours unless on a diet or die from any of the old scourges of the world such as smallpox, syphilis, cholera, measles... and we consider a phone line and a TV to be life's bare necessities, despite the fact that neither existed a hundred years ago.

However now we take this all for granted. We expect things to change every 5 years or less, despite the fact that even 50 years ago the pace was slower. Not only have we become addicted to speed but we accept that the world changes ever faster. This means that patience is ever harder to accept and because there is no struggle for the bare essentials, greed for ever bigger, faster, better stuff becomes more and more ingrained. But if you can just put this into perspective for a second you will realize just how fortunate you are (even if you lost all your investments last year) and that even today instant gratification is a myth.

Best wishes for a prosperous and patient new Millennium

DD