April Showers

June 15, 2002

So much for April showers bringing May flowers. Despite some volatile days, May saw most of the major indexes not do much of anything. But then, flat may be about as good as it gets in these turbulent times.

Any way you slice and dice it, the market is expensive. This is not a new thing. The market has been expensive for at least the last decade, if not longer. We've been complaining about valuations being sky high for years, but that doesn't mean there aren't good categories of funds in which to put your money. You can still invest in a historically overvalued market, and probably should.

No, overvaluation is not the problem. The problem is people are starting to care about overvaluation, and that is sending prices down. People are losing faith - the cult is breaking up. Investors are starting to question the very people who built the bull market, namely, the brokers, the investment bankers, the CEO's, and others - the celebrities of a roaring bull market. These people had our trust, and they have squandered it with their own greed and self-interests. That has put pressure on the premium between what a stock is really worth, and the price at which it trades - the faith premium if you will. 

What has clearly been going on for the last decade, and particularly the last 5, is that many investment bankers and CEO's stopped caring as much about making investors money as they did about making themselves money. 

Sadly, quite a good chunk of the money lost in these late 90's wonder-stocks can be "found" in places like the $100 million dollar house Gary Winnick of Global Crossing fame recently purchased in Bel Aire, or the millions of dollars in art and apartments purchased (tax free) by Tyco's CEO, or Imclone, or hundreds of millions in personal loans given to executives at WorldCom and Adelphia. 

Everybody (shareholders, SEC, stock analysts, reporters, etc) seemed perfectly content with these captains of industry earning salaries and options of hundreds of millions a year - as long as the stock of their companies clicked higher.

The stocks of U.S. companies have long been considered the best investment in the world in part because managers have a vested interest in how the stocks perform. But CEO compensation based on stock price is a double-edged sword. It never really occurred to anyone on these compensation committees that if you give a CEO stock options that become worth $500 million when the company's stock triples, they may do things that are not in the best long term interest of the company to get said stock price move.

There is nothing wrong with CEO's getting rich. Heck, it's almost un-American to say otherwise. Bill Gates got rich. But along the way, he made many others rich as well. Gates also didn't start selling all his stock a year or two after the company started - he waited almost 20 years. He didn't use borrowed money to acquire companies to pump up his stock price. His company has billions in cash in the bank. 

Gary Winnick's company (Global Crossing) has a stock price of a few cents a share now. Winnick spends most of his time figuring out what marble to import from Italy for his Bel Aire home/castle, paid for largely by fund shareholders who spent their whole lives working to save a few hundred thousand dollars.

The American investor is slowly starting to realize they've been duped, tricked, barn waggled, hoodwinked, ripped off, taken advantage of, given the short end of the stick. Maybe it was one too many "aggressive buy" recommendations made on a lousy stock the broker firm did lucrative investment banking business with. Maybe it was seeing one too many CEO's take the fifth before congress. Maybe it was simply seeing a billionaire like Martha Stewart selling her ImClone stock just days before it plummeted. 

Investors are beginning to think that the Market is a game that can only be won by insiders. When investors finally decide to take their money and go home, and sell their stock mutual funds to put the money back into bank CD's, then we will have a real market bottom - with all the 90's excess finally wrung clean. 

And that, sadly, is when you should invest with all your guns ablaze. I say sadly because most of the very people who lost in this terribly wrong investing game of late will sell when it all looks completely and unequivocally dismal, when the faith premium all but vanishes, when the NASDAQ is back in triple digits, and they will miss out on when you're supposed to invest in stocks - namely, when they are cheap. It's a pattern that has repeated itself since when they first started trading shares under that buttonwood tree in downtown New York.

Meanwhile, until that day of zero faith, you have to be careful. For now, we'll invest where the faith has already all but left the building, and where value can still be had. For more detail on the goings on in our portfolio, click here.