To print article, click
Print on your browser's File menu.
Go
back
Posted
6/13/2002 |
|
 |
| Price |
1.190 |
|
| Change |
+0.050 |
| Research
Wizard
Add
to MSN Stock List
Message
Board
|
 |
| Price |
3.400 |
|
| Change |
+0.270 |
| Research
Wizard
Add
to MSN Stock List
Message
Board
|
 |
| Price |
1.860 |
|
| Change |
-0.110 |
| Research
Wizard
Add
to MSN Stock List
Message
Board
Related Resources
Build
a screen of real estate stocks with our Stock
Screener
What
stocks are hot or not?
What
are the top-performing
industries?
The Speculator
Recent articles:
• Get the jump
on a jumpy market, 6/6/2002
• Avoid the pits
by following the pendulum, 5/30/2002
• No greatness
without great risk, 5/23/2002
More...
|
|
| sponsored by: |
 | |
The Speculator
Foil the money-snatchers: Buy a
stock
The
assault of the pod people has left investors shell-shocked and
bereft of hope. This kind of pessimism is the very basis for our
optimism.
By Victor
Niederhoffer and Laurel Kenner
“There was only one way Wilma Lentz knew Ira
wasn’t Ira. Just one way to tell, because it was the only
difference. There was no emotion, not really, not strong and human,
but only the memory and pretense of it, in the thing that looked,
talked, and acted like Ira in every other way.”
Jack Finney,
"Invasion of the Body Snatchers"
I bought
WorldCom (WCOM,
news,
msgs),
Charter Communications (CHTR,
news,
msgs),
Vitesse Semiconductor (VTSS,
news,
msgs),
i2 Technology (ITWO,
news,
msgs),
Citrix Systems (CTXS,
news,
msgs),
Sanmina-SCI (SANM,
news,
msgs)
and Nvidia (NVDA,
news,
msgs)
on Monday for reasons that have less than usual to do with the
scientific testing we like to do.
True, they’re
all Nasdaq 100 companies down 50% or more on the year with recent
insider buying. We’ve found in the past that such companies perform
slightly better than the 3- or 5-percentage-point advantage that
insider buys show over insider sells. But if you like everything
tied up with string, with measures of uncertainty and full
spreadsheet workouts, you’re going to be disappointed.
No,
what made me pull the trigger was the complete absence of hope about
the market. People everywhere saying that no stock is safe. That
they're ready to throw in the towel, that investors have been
betrayed, that executives can’t be trusted, that they're greedy and
shameful, that corporate financials can’t be trusted, that U.S.
stocks are in freefall, that foreigners are just beginning to sell
U.S. stocks because the dollar is weaker. Also that 30% of all
Nasdaq stocks declined more than 10% last week. Not just Intel down
20% but stocks such as RF Micro Devices (RFMD,
news,
msgs)
down 38%, Conexant (CNXT,
news,
msgs)
down 33%, Flextronics (FLEX,
news,
msgs)
down 30% and, of course, Tyco (TYC,
news,
msgs),
down 54% among the S&P 500.
But there was something even
worse than that. For a long time, there has been one person, a
friend of great competence and stature, a Rukeyser elf, an adviser
to major foreign banks, who I relied on to buck me up when I was
blue. He's always been a beacon of hope amid the shadows of fear and
anxiety. No matter what, I could rely on him to tell me that money
flows were positive, that there was more buying on down days than
selling on up days. But over the weekend, even he, even Laszlo
Birinyi, president of Birinyi Associates in my hometown of Westport,
Conn., seems to have called it a day. The
Intel (INTC,
news,
msgs)
announcement last Thursday of reduced sales forecasts for the next
quarter was too much for him. "We keep getting these surprises, and
they're not little surprises," he said. "I think there's still a lot
of things that need to be shaken out."
Pondering the pod people
For a long
time, my favorite horror film has been “Invasion of the Body
Snatchers,” based on a novel by Jack Finney. I had seen the original
1954 production and one of the two remakes that seemed to hit just
in time for each of the next two generations. But the events of the
last week sent me back to read the book. It is great, and aside from
the Dimson, Marsh and Staunton book “Triumph of the Optimists”
(which we wrote about most recently on April 11),
this is the book I would recommend most to those who wish to prosper
in the current market environment. The story is about the danger of
conformity, loss of hope and acceptance of the status quo. If you
succumb to the conformity and stop thinking for yourself, the pod
people will get you.
Problem is, they look like you, talk
like you and act like you. They are quite peaceful, but very
deceptive. For sure, they don’t buy growth stocks.
The hero
of the story is Miles Bennell, a doctor in a typical small town. He
is confronted by an epidemic of apparent mass hysteria among his
friends and patients. One after the other tells him that their
relatives, teachers and friends are not the people they seem to be.
But then strangely, they come back to recant. Now they're feeling
fine.
The only problem is that Miles’ intellectual friend
Jack Belicec doesn’t believe it. He finds a mannequin-like body in
his cellar. He then lays it out on a billiards table to inspect it
-- and invites Miles over. Jack and Miles find that it is a blank,
like an undeveloped photo, with no fingerprints. "Miles, that's what
the face looks like. It’s all there. It has lips; a nose, eyes,
skin, and bone structure underneath. But there are no lines, no
details and no character. . . . It’s like a blank face, waiting for
the final finished face to be stamped upon it."
The one
person Miles relies on, his one beacon of light on a foggy autumn
day, is Dr. Mannie Kaufman, a psychiatrist in a neighboring
community. Like our Laszlo, he is a man of great respect in the
community. So when Dr. Kaufmann tells Miles that “the human mind is
a strange and wonderful thing” and that “it is a common delusion,”
Miles is somewhat persuaded. The one thing gnawing at Miles is that
Mannie is usually a bit more cautious in giving out his opinion. The
thought then occurs to Miles that perhaps the person giving him the
opinion isn’t Mannie at all, but a pod.
It turns out that
Miles is right. Mannie is one of “them.”
Beating the pods and the pessimism
This
weekend, seeing Friday’s overnight decimation of Intel and the rest
of the market, I wondered if a similar invasion had taken over the
markets. Only a few years ago, I was surrounded by investors full of
emotion, eager to drink deeply from the economic miracle that is the
United States. Now these same investors seemed drained of feeling,
convinced that the miracle had been a hoax. They looked the same;
they responded to the same names. But they were not the
same.
Inspired by Miles’ example, I sought out a market
psychologist, Brett Steenbarger. With relief, I heard excitement in
his voice as he talked of crisis and opportunity. I realized that
he, unlike Mannie, had not fallen prey to the pods.
“We’re
dealing with more than body snatchers,” he said. “These are mind
snatchers as well. Behind all speculative success is a positive
triad of extraversion, energized mood and risk-taking. We know from
research that people who take an active interest in the world around
them are more likely to experience life with vigor. They are also
more likely to assume prudent risks."
“That’s not what we’re
seeing now,” he continued. “Investors are responding with the
negative triad that psychiatrist Aaron Beck found among depressed
people: dampened optimism about themselves, others and the
future.”
“What could have snatched people’s minds this way?”
I asked.
“It’s the hubris meme,” Dr. Steenbarger offered.
“It’s the same meme that told the Greeks that they could not fly too
close to the sun, lest they meet the fate of Icarus. What is taking
investors over is not the idea of a bear market. Those come and go.
It’s the idea that they deserve a bear market.”
With
that, the doctor pulled out a copy of Business Week, revealing an
article titled “The Betrayed Investor.” It chronicled the dashed
hopes of investors whose trust has been broken by the failures of
corporate boards, brokerages and accounting firms to protect their
constituencies. He pointed to the headline beneath the article’s
title: “Americans bought into the idea that stocks could only make
them richer. Then the market bubble burst -- and then came
Enron.”
“You see,” he said, “investors no longer feel
deserving of rich rewards. They feel like arrogant dupes, and they
must pay the price of Icarus for their hubris. This is what has
taken over the world. Investors dare not hope. They are afraid they
will bring an even greater calamity upon their heads.”
It
was then that I realized that Finney’s book held the answer for
today’s investors. They may feel like the betrayed Miles, or like
the betrayed lover. But there is an important difference. While
dashed expectations may portend a poor relationship, they are a
favorable indication for markets. Hitting a 40-day low point in the
markets has led to an average rise of 1.5% the next day, over the
past six years. Market pessimism provides the very basis for market
optimism.
In Finney's book, the situation looks desperate for
Miles and his girlfriend Becky. But they refuse to give up. “Even
prisoners in maximum-security prisons have escaped. We had no right
to waste ourselves. We were here -- with the pods -- and we had no
right to waste ourselves. Even though it was hopeless. Even though
it made capture an absolute certainty, we had to use ourselves
against the pods.”
Ultimately, Miles and Becky win out over
the pod people. They put up so much resistance that the pods move to
a more hospitable planet. "There had been others who had done what
we had. Who had simply refused to give up. Many had lost -- but many
who had not been caught and trapped without a chance fought
implacably." And that created the victory over them.
Hope -- and some time-tested
principles
“Invasion of the Body Snatchers” ends on a
heroic note. People resisted them. Refused to give up. "Many had
lost. But some of us who had not been caught, trapped without a
chance, had fought implacably." The pods found the environment too
inhospitable and left. Jack Finney, the retiring author of
"Invasion" who died in 1995 at the age of 84, says he was just
telling a story. That he wasn’t trying to write an allegory against
communism or McCarthyism. Nor was he trying to write a hymn to
buying Nasdaq stocks. The message that Brett, Laurel and I got from
the book may not be appropriate for all people. We both like to buy
the market when stocks are setting major lows. Counting it all out,
we find that gives us an edge of about 1% in the next two days, an
edge that we find quite necessary. However, a person who applied
that method in Nasdaq in the last three years might have found
himself totally destroyed by the bears unless he or she was
nimble.
The stocks I bought were an expression of my own
refusal to give up, an expression of a spirit of hope and belief in
the growth and resilience and goodness of business. But also a
statement partly based on counting and tested stock market and
insider behavior patterns. Even now, as I write, I’m not sure that
these stocks will go up. But this much I know: I’ll hold them until
they go up or I need to pay the bills.
One tested method that
prevented wealth being snatched in the past is buying companies that
are buying back their own shares. We have reported on this in many
recent columns. There are two recent announcements we will be adding
to our own portfolio: Dell Computer (DELL,
news,
msgs)
and FedEx (FDX,
news,
msgs).
Meanwhile,
kindly communicate with us at The Speculator and
let us your own thoughts on our work. We’ll send a workout of all
the companies that changed auditors from Arthur Andersen to thank
you.
At the time of publication, Victor Niederhoffer and
Laurel Kenner owned the following securities mentioned in this
column: WorldCom, Charter Communications, Vitesse Semiconductor, i2
Technology, Citrix Systems, Sanmina and Nvidia.
|
