Mobs, Messiahs and Markets
by Alexander Green, Chairman, Investment U
Monday, August 27, 2007: Issue #706
There are dozens of investment theories that are misguided, unrealistic or completely boneheaded. Of these, only a handful are so seductive that the great mass of investors take them up immediately.
Chief among these is the "efficient market hypothesis."
Supporters of this notion believe that rational, self-interested investors - with their daily buying and selling - continually discount all material information into the share prices of pubic companies. The market is so efficient, they argue, that it is futile to attempt outperforming it, since share prices will always reflect everything that can be known about the future prospects of a business.
In his new book Mobs, Messiahs and Markets, friend and colleague Bill Bonner, tears this theory right at the roots. Sure, everyone is self-interested but rational?
Is a man thinking rationally, not emotionally, when he falls in love and gets married? Is he thinking rationally when he decides to have kids and devote a few decades to raising them? Is he thinking rationally when he buys into market rallies and then sells into the corrections?
As Bill writes, "Thus does the neocortex sputter in fits and starts from dubious assumptions to preposterous conclusions with nary a whisper of doubt in between."
Trust me, if I could write that well, I would.
I don't know anyone whose comments on the public spectacle in financial markets - and in life - are more cleverly expressed than Bill's. And his new book "Mobs, Messiahs and Markets" is a rollicking good read.
About the housing bubble and mortgage debacle, for example, Bill says:
"A monstrous delusion developed - the homeowner came to believe he had an ATM machine in the bedroom. He could now regularly withdraw from the Bank of Four Walls and a Roof Yet Warren Buffett still lives in the same house he bought 40 years ago. What a dolt! He should have traded up, flipped and refinanced."
On hedge funds:
"My guess is that when the history of the early twenty-first century is finally written, derivatives will get a special tipping point like the Hindenburg in the history of the Zeppelin business or Little Big Horn in the life of George Armstrong Custer."
About gold they say:
"Gold pays no interest, issues no press releases, and offers no guidance on quarterly earnings. It has no earnings. It does no mergers and no acquisitions and it never restructures. It charges neither commissions nor management fees. But it is the thing that goes up when other assets go down."
Or consider his thoughts on modern art:
"We marvel at the elegant symmetry of it all: Things with no value are bought by people with no sense. Make believe art flows from scalawags and hustlers to dimwits and social climbers and life goes on."
And then there are Bill's unique thoughts on life in general. For example:
"People need a well-developed vice they can stick with through thick or thin. Otherwise, they are prey to every new fad. A man can't, for example, be a womanizer and a drunk at the same time. Nor is heavy gambling compatible with heavy drinking. No, a man has to find a vice that suits him and stick with it."
The authors even scrutinize our own milieu, the investment publishing industry, which they warn us is filled with "nuts and kooks, charlatans and dreamers, brazen hucksters and earnest geniuses."
"Investors who follow newsletter gurus have no guarantee of making money," he concedes. "But those who follow the crowd are practically guaranteed that they will not."
There are gems on every page. I started an advance copy of his book when my plane left Calgary on Sunday and was done before it landed in Houston.
Much of what Bill has written is uncommon good sense. But even when you disagree with him, it hardly matters. His most provocative opinions are so delightfully expressed, you won't stop reading.
And it looks like I'm not the only one who feels that way. Pre-orders indicate his new book will debut at #1 next week on The New York Times Business Bestseller list.
Today's Investment U Crib Sheet
Voltaire was one of history's great skeptics. He was skeptical of the revealed truth of the Church, skeptical of the divine right of kings, skeptical of the wealth and position of the aristocracy, and skeptical of the "wisdom" of the common man.
"Doubt is an uncomfortable position," said Voltaire, "but certainty is an absurd one."
You would do well today to heed Voltaire's advice - and be rightly skeptical of economic forecasters, market timers and other investment soothsayers. All the greatest investors - from Warren Buffett to Peter Lynch to John Templeton - confessed that they had no clue what the market was about to due next. Instead, they bought companies that were selling for a fraction of their true worth and sold them when the market recognized that value.
Here are 7 characteristics of winning companies, published in one of Alex's earlier messages.