By: funes on Venerdì 11 Gennaio 2002 21:06
Questa è per massimo, e più in generale per i patiti del cash :-)
ALEXANDRIA, Virginia - I prefer my companies to be young and nubile. A big mound of cash is a sign of inertia, like a roll of fat in the midriff. This is precisely why I suspect that graying high tech stocks that are trying to accumulate cash to qualify as "value investments" will disappoint their shareholders.
Take Oracle, for example. Larry Ellison is said to be crowing because his company has accumulated $6 billion in net cash. This is a sure sign that Oracle is yesterday's news. The same goes for Microsoft, but six times more emphatically. With $36 billion in cash, Microsoft is impersonating a railroad company. It is hoarding far too much cash to have many rapidly growing applications up its sleeve. That fact, alone, tells you that Microsoft is no longer on the leading edge.
I realize that it approaches sacrilege to question the business value of hoarding cash. But building a fortune through compound interest on a cash stash is as rare as understanding quantum mechanics.
Which brings me back to the notion against which all stock investment is measured today, its relative merits as compared to bank balances, and the illusory hope of attaining wealth through compound interest. Trouble is, money doesn't keep much better than fish.
A related misconception is this: it's too early to invest in stocks because they have not regressed sufficiently toward worthlessness to make them attractive to the Value Investor weaned on Graham & Dodd.
Here are a few simple-minded metrics to support the case for stock investment. We have just concluded the second year in a row of negative returns from stocks. The benchmark Dow Jones Industrial Average fell 5% in each of the last two years. The S&P 500 fell 12 percents in 2001, following a 9% drop in 2000 (dividends included.) Other indices have fallen even more sharply. The leading technology index, the NASDAQ fell 21% in 2001, after dropping a painful 39% in the year 2000. The Lipper international mutual fund index sank 20% in 2001, following a 15% drop in 2000.
It is notable that when the S&P falls during a calendar year, it almost always bounces back with a gain in the following year. In the 12 years that the S&P fell from 1941 through 1999, it rebounded in 11 cases the following year, with the average gain being 24%. The one exception occurred in 1974, when the S&P followed a down year in 1973 with another for a cumulative loss of 37% over the two years. Over the next two years, stock gained 70%.
To find a three year losing streak in the S&P, you have to look all the way back to the eve of World War II, when stocks fell by a total of 21% from 1939 to 1941. Over the next four years, stocks gained 146%. To find a period of four consecutive losing years for the stock market, you have to go back to the depths of the Great Depression.
I don't believe that we face such an environment today, unless you are living in Argentina, where unspeakably stupid government makes every investment an adventure. I say that having just lost a small fortune as the new Duhalde government has devalued the peso in an purported effort to make Argentina rich. Having the government drive down the value of its currency is like having a ceo sell short his own stock. It leads to nothing but disaster. But there is shortage of experts who thought that Argentina's currency board was horrid because it forbade the abracadabra of easy money as a cure for economic lethargy.
Consider that Argentina was a wealthy country the last time the US stock market suffered three losing years in a row. In 1939, Argentine ranked fourth or fifth among all nations in automobile ownership per capita. It was in the top 10 countries in telephones per capita, and it enjoyed higher GDP per capita than Germany, Italy or France. Yet thanks to year after year of misgovernment and remorseless attempts to redistribute income, Argentina has fallen from 100% of Western Europe's GDP per capita as recently as 1950, to less than 50% today.
Notwithstanding this sobering example of longterm economic decline in Argentina due to criminally incompetent, corrupt politicians there is good reason for optimism that the world economy will fare better than Argentina. It will rebound, and investment in the stock market will once again show positive returns.
This is where the ghost of Benjamin Graham might be prone to interrupt my monologue with a fistful of objections. Here I am functioning more as a playwright than as an investment analyst, but he might be inclined to object that the rebound of the stock market in the four years after 1941 is immaterial to today's prospects because the market has not fallen far enough by value standards to correct for the "excesses" of the 1990s.
I will take up that challenge and argue that Graham's arguments are anachronistic. If, indeed, the experience of stock investors from 1942 through 1945 is immaterial today, it is because technological innovation has created a more potent kind of compounding than the compounding of cash interest. In economic jargon, compound technical advances have continually pushed the economy's "production function" outward, to support ever higher levels of output per person.
Rather than approach the question of growing economic potential in the way that enthusiasts for the "New Economy" did during the 1990s, and try to paint a picture of the wonderful new efficiencies engendered by computational power, I think it might be more fruitful to borrow an argument from economist Bradford deLong, and look backward. As he points out, there are severe measurement errors that understate the speed of economic growth in recent decades. As DeLong says, "when we talk and think about the past century or two, we grossly underestimate the magnitude of the economic growth that went on and is still going on -- even though our standard estimates of economic growth over the past century are quite high."
A typical estimate, for example, would compare the time needed for an average worker to earn the purchase price of various commodities from a century ago versus today. If you took the Montgomery Ward catalog from 1895, and calculated the 1895 prices in terms of hours of work by the average person required to purchase them then, as compared to now, you would come up with roughly the same answer you would get from the Historical Statistics of the United States, namely that GDP per worker multiplied about five-fold during the 20th century, from the equivalent of about $12,000 in today's money to about $60,000 in today's money.
But DeLong makes the crucial and compelling observation that the valuing of the past's production at present-day prices "leaves out an important part" of the picture. He says, "the standard calculations are flawed because our material wealth and productivity today have more dimensions than just the one of our increased capability to produce the goods that were made a century ago. They are flawed because there are many things we make today that were not made back in 1895: much of our wealth today lies in our ability to make a broader range of commodities than used to be possible. That broader range is not factored into the calculations."
In other words, the standard valuation of the past's production at present-day prices says that "the material standard of living then was what we could obtain now if we had $12,000 to spend, but were required to spend it all on commodities that have been around for more than a century." Yes, we can make late 19th century goods more cheaply than they produced then, but a truer measure of economic growth should take account of the new goods and news services that we can produce today that did not exist a century ago.
DeLong estimates that real economic growth has been understated by between 1% and 1.5% per year. Taking into account the decline in the number of hours worked per year, he concludes that material wealth has grown "not sixfold but thirtyfold over the past century."
If DeLong's argument is right, as I believe it is, it has important implications, not just for the National Income Accounts, but also for investment. It strongly suggests that the "New Economy" is not just an empty buzz word or a figure of speech, but the principal focus of wealth creation. To understand how the stock market is likely to behave going forward, we should try to take the underestimated wealth creation from during the last century into account.
One important way to do that is to bury the ghost of Benjamin Graham. Realize that every stock need not shrivel to a p/e ratio that might have been appropriate for a late 19th century or early 20th century industrial company with slowly growing or stagnant demand in order for selected stocks to rally significantly from here. Most of the new wealth could be created in sectors which never existed before. Companies like Visionics, Viisage Technology and Imagis do not need to retrace to invisibly low prices before a new industry can be created. It can be created now, with rapidly compounding growth, because the technological horizon for rapid compounding has been crossed.