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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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They never lost money holding the dominant investment overOver the last two centuries a series of awakenings have rejuvenated productivity and introduced new business cultures. Each of these has raised the bar incrementally higher on the profits that can accrue to investors. Each new business culture necessarily brings with it a new investment culture. It is our good fortune that the new market that began in 1998 brought us the most investor-friendly investment culture that has ever existed. The steps required to use it hang together like an instrument that can be played to suit an infinite variety of individual tastes. This is not the message being communicated to the general public. The old investment culture is committed to the old-fashioned idea that the market is a single, omnipotent entity represented by the Dow and, if you insist, by the S&P 500. This restrictive view works in keeping investors attention off of the more important concern of what they must do to achieve a personal average return goal that they have set for themselves, which would create a mass marketing nightmare. Instead, the message aimed at investors is that they must be concerned about what the Dow did today and where it will be tomorrow. This monotheistic view of finance sets investors up as powerless pawns. It has caused many people to give the market authority over their lives. They allow themselves to be lured into taking unnecessary risks and to be frightened away from reasonable opportunities. The new market culture puts control into the hands of investors. You can find the zone where your financial life and your personal life meet to create your own market, the only one that is necessary for you to follow. Chapter 3 explains how this is done. Like all things outdated, the fable that the Dow is the center of the financial universe served a purpose once. There is an interesting story behind our progression from that nostalgic time to the present, where the only market that counts is the one that revolves around you. His boss came just this close to physically throwing him out of the office. He was a young yet talented analyst, but he was always coming up with crazy ideas that his stressed-out superiors had no time for. Business had been a lot easier a few years earlier when the market was booming. Things were pretty good now, but more confusing. Old business models were being replaced, and new kinds of jobs, products, and services were being created. Companies that had been stable and dependable sources of growth for decades were going bankrupt. This was being attributed variously to mismanagement and a slowing economy. Those that were firmly rooted in the old investment culture believed, or at least fervently hoped, that the new sorts of businesses that were popping up all over would only be more flashes in the pan. Didnt the market disasters of 01 and 02 prove this? Only fools or speculators would invest in these new corporations. The year before was bad enough, but 01 and 02 proved that (1) things were not different this time, (2) fundamental principles did not change, and (3) it is best to stick to the basics. There is no template with which to measure the dynamics of the new style corporation. How was an investor expected to put blind faith in the hope that a companys profits would materialize out of thin air somewhere down the line? It is fine to talk of new technology, efficiency, and productivity. But there is no good way to measure it, and everybody who had any sense knew it. So on a busy day in a Wall Street office what was not needed was a young man talking about another new company being a good buy around $40 per share. On top of that he had the arrogance to have concluded that it would soon be worth $130. He demonstrated his calculations. He had figured it out. He quantified the new efficiencies and put a value on the companys future growth. He had to be nuts. He was out of there. The thing was . . . the kid turned out to be exactly right. His calculations worked. We know this because the stock did what he said it would, as have many others. Check for yourself. Was it Concord EFS, AdvancePCS, CACI ? No, none of those. The company that our rejected young analyst liked was an odd thing called Calculating, Tabulating, and Recording Company. Never heard of it? They wisely changed their name to IBM. The young analyst was Benjamin Graham. The big market drops of 00 and 01 were 1900 and 1901 and 1902 not 2000, 2001, and 2002.1 We have made a connection for you. The markets at the beginning of the twenty-first century are similar to those at the beginning of the twentieth. An epic change had occurred that would fundamentally alter how companies would work and how investing would work for the next century. In each case the investment establishment ignored the evidence of the transformation and clung so desperately to the past that it got rope burns. You would have thought that the investment establishment would have immediately embraced Benjamin Graham. He was on to something worth a fortune, and in a capitalistic system you would think that any view that positively impacts the bottom line whether it be old, new, or from another planet would immediately be accepted. This is not the case. That the investment world is hopelessly stodgy is the reason why, three years into the twenty-first century, investing is still done the way it was 100 years ago. After spending two decades in the investment community we have concluded that the resistance to change is one of its most destructive characteristics. We will use IBM again as just one example. After being misunderstood and overlooked for years by most everyone but Benjamin Graham, it eventually became the stock that everyone had to own. By the end of the 1970s, IBM symbolized American technology. Investment dogma practically mandated ownership of the blue-chip stock in any and all mutual funds and stock portfolios. During the mid 1980s, IBMs earnings fell into decline.2 This fact was disregarded because it had become almost un-American not to own IBM stock. In 1983 the stock traded at $25. The buying continued even as the company was losing money. Incredibly, by 1987 investors were paying $44 per share for it. Clients would react indignantly if we suggested that $44 was a ridiculously high price for a company with declining earnings.3 Finally, the stock began to fall, and still you could find very few analysts who would say anything negative about it. Once it became part of the canon of the financial system, logic went out the window. Conformity may be useful in some occupations but it is counterproductive in the investment business. IBM gradually fell from its 1987 high into a trough in which it remained for 10 years. Millions were lost as it went as low as $11 a share, not returning to its 1987 level until 1997 (see Figure 1.1). What dynamic is at work that makes the investment establishment prefer to stay in a rut? An understanding of where the resistance felt by Benjamin Graham and by his insightful successors of today comes from will enable you to empathize with, and then confidently deflect, admonitions from those mired in the past. The financial markets have some stiff competition for investment dollars. Real estate, art, antiques, jewelry, and collectibles can also deliver profits, and with a huge advantage: You can see them. Their ownership offers satisfactions beyond the commercial. Your painting can be admired even as it grows in value, but you cannot invite your friends over to see your new financial assets. There is no inherent emotional connection. Your money appears to have been deposited into thin air, and all you have to show for it is a piece of paper. Capitalism is a wealth-creating machine, but its concepts are intangible and to some can even appear vaguely fishy. Governments and political parties share the same problem. Unless their abstract concepts can be made real, they will not attract loyal supporters. The solution is to establish a strong belief system that makes sense to the people one wants to attract and then create symbols and principals that represent the belief system so that people can identify with it. This is exactly the process developed, quite unintentionally, by the financial community. The general public has always had the wisdom to invest their most important dollars with the businesses that were doing the best job of growing the U.S. economy. With no need to be addled by economic numbers, they have always been able to smoke out the source of their improving lifestyles. Whether by noticing where new jobs were coming from or by which products were changing their lives, these perceptions led to a concentration of investment dollars into what we call the dominant investment. Out of the stew of innumerable choices the dominant investment rises to the top because it is the pipeline to the main sources of wealth creation and a way to participate directly in Americas economic growth. This is why investors in the dominant investment have always had these experiences: They never lost money holding the dominant investment over the long term. The dominant investment generally outperformed all others. They were reassured to see that all methods of analysis were built around the dominant investment. Peripheral investments were held against that standard. They had plenty of company. The smart money and old money and the wisest investors had the bulk of their wealth in the securities of the dominant investment. The path from perceptions to experiences finally led to a belief system that would sustain the dominant investment: Patient investors would never lose money, could expect superior performance, and were investing alongside the most seasoned investors when making their blue-chip purchases. Here were the principles that properly elevated the markets above the level of a crapshoot and legitimized investing. With this arsenal of ideas a dominant investment becomes as audacious as a new nation. People are attracted by its logic and rewarded with results. All that is needed to complete the package is a flag to wave so it can be easily identified. One dominant investment was lucky to have the journalist Charles Dow to put this last piece in place. |
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