Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

 

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ASK the CHAIR!

Q:

Dear Vic,

I have had a series of misadventures in buying common stocks over a lifetime that is almost too sad and disastrous to think about, let alone write about., but you seem to be an accepting and sapient sort, so maybe you can help me.

In a nutshell, I've lost more money in more ways in stocks than seems conceivable. Let's start eight years ago, when I gave up on U.S. equities (something that has happened about 10 times in my life, each time after disastrous losses). A friend told me that he had made 100-fold by buying a Thai construction company, and then I read that the emerging tigers were bigger and growing five times as fast as Europe and I knew that an Arab sheik had just made a fortune by buying Citibank when it went to 8 on the theory that big banks always turn around -- they have to. So I bought Krung Thai Bank at 50 after it had dropped from 200.You see, not only did it have the "guaranteed to turn around" good thing, but the Thai government itself owned 90% of it. So it was doubly -- nay, quadruply -- less likely to continue to swoon. .

Oh my gosh. I got forced to sell out at 5 and that precipitated a contagious string of events that brought me to the knees if not the belly up.

Next thing after giving up, I gave my money to a biotech genius who had turned 50 cents into a million dollars. He turned a few million into about $50,000 for me in such stocks as  gene company whose main product was a cure for lupus that led to exactly the same proportion of deaths and recurrences as the disease itself. Finally, a friend asked me what evidence I had that he had actually turned 50 cents into a million since he had to borrow money from me to fly from Florida to Michigan to attend a biotech conference.

We laughed a little about this and I turned my stocks over to a great expert, a man who combined his stolidity as a great weight-lifter and engineer with a dash of imaginative futurism that only the scientific young could possess. His specialty was the tech stocks, especially the tried and true like Sun and Lucent and Cisco that were paying dividends and once had been as high as Krung Thai and were sure to bounce. I lost about 80% on 7 figures before the master mind pulled the plug and went to another firm to trade futures with the techniques I taught him instead of individual stocks.

After a series of misadventures with such things as stocks recommended by friends who had Russian portals valued at 1/100 the comparable Yahoos and Googles in the US, ready to be underwritten at 20 times my purchase price, all of which went down by 95% in the year after I bought them, I went back in myself. I figured I would buy distressed things that had spillover declines from unrelated disaster stories in companies that really did have problems. Sort of like buying Allstate when AIG has trouble. But I chose to buy Pfizer when Merck announced that it was pulling Vioxx.. I bought Pfizer at 30, down from 35 a few days before and 50 the year before. Not only did I know that Pfizer's product Celebrex had nothing in common with Vioxx, but I also as a statistician could tell that the excess heart diseases that the Cox 2's apparently caused were mere statistical artifacts caused by faulty adjustments for multiple comparisons, and that these drugs had many benefits infinitely greater than the 1 or 2 percentage point-a-year extra heart attack risk that the data-mined, propagandistic studies falsely pointed to.

Well, it was like a deluge. I got visited with every affliction of the Big Pharma industry. First another study was dusted off that implicated Celebrex, next I had to face declining government and insurer payments for products, next patents that were expiring, next a challenge to its main product that the experts all said was about 50-50 to succeed, next a study by a co-payer that said they shouldn't have to pay for the product because it didn't work in their group, then television programs every minute urging viewers to join the class action suit for redress, next news that the product under question had less than half the prescriptions written for it than previously.

Finally, when they announced that their sales and earnings were going to be down drastically this year but that they were going to spend $5 billion to save $8 billion over the next four years, and that they were going to reduce the number of sales reps calling on doctors with exactly the same product to three, I threw up my hands and took a 10% loss, on the one day it seemed to have risen since I bought it six months ago.

Well , Vic, I could go on. but I think you get the drift. The rest of the story is too sad to tell. What in the name of Joe should I do? I feel like Willie Sutton, that ardent Dodgers fan, who shortly after escaping from prison was listening to the 1951 playoff game with the Giants. And when he heard, "I don't believe it! I don't believe it! I don't believe it! The Giants win the pennant! The Giants win the pennant! The Giants win the pennant!" about Bobby Thomson's homer, he just wanted to go right over to police headquarters and turn himself in.

Please tell me what to do.

-- Vic

A:

Go down to police headquarters without wasting any time and turn yourself in!  -- Daily Speculations

A: Go surfing. -- Jim Sogi

A: He should turn his screen upside down. -- "Bruno"

A: I've tried turning the screen upside down - it doesn't work. -- Philip J. McDonnell

A: Confess all to your dog. Then take him out for a run or walk. The stress release of the exercise will clear your head of yesterdays wounds. Sharing the joy of running with a dog will teach you to live for the moment. And with increased blood flow to the brain you might get some creative ideas for tomorrows battles.-- Russell Sears

A: Tell your "friend" there is always hope. Story in Traders monthly magazine about Chinese trader who lost money consistently for 20 years and now gets $180,000 for 1 DAY seminar on his methods because he allegedly is up last couple of years. Your friend could make pretty decent living off seminars and wouldn't even have to trade. -- Thomas Miller

4/8/2005
Variations on the 10 Plagues, by the Chairman

1. According to Exodus 7-11, the Lord released 10 plagues on the Egyptians to induce them to release the Jewish people from slavery: blood, frogs, gnats, flies, cattle disease, boils, hail, locusts, darkness and the slaying of firstborn sons. As alluded to in a letter to Vic, I bought some Pfizer in November 2004, and the deluge of bad news, disasters, calamities, collapses and disappointments visited upon that company brings to mind the 10 plagues that Jewish people get to reenact, sometimes with "experiential dramatic elements," in their Passover Services.

2. Here are some of the plagues visited upon Henry "Hank" A. McKinnell, Jr., PhD, chairman and CEO of Pfizer, and other stockholders such as myself since I bought it. On April 8, it was announced that Moody's is considering lowering Pfizer's perfect credit rating on long-term debt. On April 7, the FDA asked Pfizer to recall Bextra, a $1 billion painkiller. On April 6, Pfizer announced that its GAAP earnings in 2005 were going to be about half those of 2004, while sales would be flat. The company called 2005 "a transition year." Before that, a hailstorm of tort actions and invitations to class-action suits related to Celebrex...studies showing the painkiller increased heart-attack risk...third-party copayer studies showing members who didn't use Celebrex were healthier than those who used it...brilliant arguments by the lawyers challenging Pfizer's Lipitor patent that left the outcome too close to call...a call for the drug's withdrawal issued by the Citizens Public Interest Group, and the news that they had been successful in 9 of 11 previous such actions...calls and hearings by Congress to reduce Medicare costs by bulk purchasing a la the Canadians...the coming patent expirations in the next four years on drugs generating 40% of sales...the indicia of darkness by the announcement that Pfizer's sales force has in general five sales reps calling on each doctor with exactly the same product but will reduce that to three. Why, never since my foray into the Thai stock market have I been visited by such darkness.

3. Yes, but with all these disasters, isn't Pfizer a good buy? I found 200,000 references to disaster NYSE including a disaster of the day on Google. To bring it down to manageable size, Mr. Dude from this office and I studied the performance of all companies that received Wells notice since the end of 2002. Recall that a Wells notice is a formality to notify the company that the staff is considering a recommendation for a civil action alleging violations of laws. There were 37 such companies on this distressed list, and they included Imclone, Gateway and AIG. The results: too late the phalarope in the game for profit. The returns are -0.06% in the next year with a 95% confidence interval going up to + and - 8%.

4. News comes down the pike that Robert Olstein, formerly of the Quality of Earnings Report, is a master at making money from stocks that have collapsed. His Financial Alert fund has shown some superior performance since its inception a few years ago. Olstein's theories seem sound as a nut, and there are many anecdotes reported in a the Bloomberg story on him that leads one to believe that his knowledge of accounting gimmicks and strengths is far superior to mine. His year-end 2004 holding include such well-known stocks plagued by troubles or graced with virtues surrounded in darkness such as Tyco, Interpublic, Del Monte Foods, American Greetings, Payless ShoeSource, Williams, Gray Television, Tommy Hilfiger, Hasbro and Tupperware.

But apparently it's not surefire. The Professor reports that in each of the last three years, the performance of his fund has not beaten the equally weighted S&P, albeit this is a rather stiff hurdle. (To be continued)

[Note from the WebMeistress: The Chair owns none of the securities mentioned above, including Pfizer.]

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