10/3/2020

Investors Want Lottery Tickets

Below, we quoted Thomas Jefferson, in a 2000 newsletter to investors.  During that period stock market went down for almost 3 years after 2000. We kept buying things we understood and from 2000-2003 and Target 3 had good returns.

We wrote this in 2000:

When the stock went on sale on July 4th, 1791, a mob purred in, swarmed over by the clerks, and in less than an hour oversubscribed by 4,000 shares the $8 million stock offered to the public. Thomas Jefferson in his constant political battle against Alexander Hamilton wrote, “Ships are lying idle at the wharfs, buildings are stopped, capital with drawn from commerce, manufactures, arts & agriculture, to be employed in gambling.”* He went on to say, “The spirit of gambling, once it has seized a subject is incurable. The taylor who has made thousands in one day, tho he has lost them the next, can never be content with slow and moderate earnings of his needle.”*

Human nature doesn’t change.

Currently, we have entered into a speculative zone for the stock market.  When it reverses nobody knows.  We are confident in saying the next 5-7 years returns of the stock market will be lower, to much lower than the last 5 years.  As Warren Buffett said, “If it can’t continue it will end”.  Currently investors don’t care about earnings, dividends and the price they pay.  They just want a stock that goes up, with a story they can fantasize about, without regards of where that value comes from.  In the end, the business itself has to produce the value, the stock itself doesn’t produce anything.  If it was the stock price that produced something, there wouldn’t be any private businesses.

*“Alexander Hamilton”, by Forrest McDonald, pg. 223, W.W. Norton & Company, Inc. 500 Fifth Ave New York, NY 10110

 

Your money invested like our own, be assured we’re partners in every investment.

This blog does not constitute an offer to sell, or a recommendation of any security, this update is for informational purposes only.

Exubera’s Launch

Exubera’s launch was somewhat disjointed.  Originally scheduled for mid July of 2006, the official launch was changed to September of 2006.

Source: http://www.fdanews.com/articles/61241-exubera-launch-delayed-by-pfizer

Looking at the data (Graph Below – click on graph for a bigger picture) it appears that the fate of Exubera was sealed by about the official launch date,  September of 2006.   Weekly new script’s growth rate fell below about 15% and stayed there.   By May of 2007,  it was reported by Hambrecht analyst Andrew Foreman, that current users of Exhubera were 5,000.   I would estimate that the patient retention rate was around 35%.  A majority of patients tried Exubera and quit using it.

Source: http://www.brandweeknrx.com/2007/05/hambrecht_analy.html

 

Exubera Lauch NRx

Zero Interest Rates Mean Low Returns For Everything In The Future

Based on forward p/e ratios the market is not overvalued. Yet, this is due to record margins and very low labor share.  As a market historian said, profit margins are the most mean reverting historical data series we have. If they don’t revert, capitalism doesn’t work.   Also valuation measures are not short term timing models.  To wit: The irrational exuberance speech by Greenspan, Dec. 1996. If you look below you can see the models, at that time, were pointing to a fairly low expected future return, yet it took 6 years for markets to be reasonable again and it took over 10 years to be cheap again.  I have spent a quite a bit of energy on this over many years.  About all you can say, with a fair degree of confidence, is the total real return for stock prices over the next 7-10 years will be about -10%.  Nobody knows how we get there.

One way to offset market risk is to look for stocks that have a chance at being isolated from markets. The pickens are getting pretty slim.  Zero interest rates, in the end, mean low returns for everything.

Chart of Shiller p/e vs. future returns.
 Click to View
Or you can pick a model from Hussman’s charts
 
Jeremy Grantham (at GMO) who has been making 7 year forecasts for decades comes up with:

US Large: -1.1% to -1.6%
US Small: -4.5% to -5.1%
US High Quality: 2.7% to 2.1%
Intl Large: 1.5% to 1.0%
Intl Small: 0.7% to -0.1%
Emerging: 4.2% to 4.1%

Financial Folly

Oriental Trading Company

Almost everybody gets the Oriental Trading company catalog.  It is a catalog of party favors and trinkets.   The company was founded in 1932 by Harry Watanbe in Omaha, NE.  His son, Terrance, inherited the business in 1977 and continued to grow the company until he sold it for an undisclosed sum in 2000.  After the sale, Terrance was expecting to devote his time and efforts to philanthropy. Within a few years he started gambling at Harrah’s casino in Council Bluffs.  By 2005 Terrance was a high roller in Las Vegas.  By 2007 he had managed to lose $204 million, in addition, he had borrowed another $14.7 million from the casinos and lost that also.  It has been called the biggest losing streak in Las Vegas history.  Court battles ensued and eventually Terrance was cleared of his gambling loans.  After Terrance sold Oriental Trading Company it went on to file for bankruptcy.  A buyout firm, KKR, brought the company out of bankruptcy in 2011 and recently it was sold for $500 million to Berkshire Hathaway.  How ironic would it be if Warren Buffett hired Terrance to run the company again?