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"Making Money on the Stock Exchange," by Charles Gifford and J.A. Stevens, has a nice discussion of what to do when the market is too high. The book is in the form of Q&A, and the author answers: "If you think the market is too high, you are assuming that the people whose purchases made it too high were mistaken, and if you think it is going higher, that they are in error.
Q. Doesn't that mean that I should get out of equities [when they're too high]?
A. Natural humility. In making the assessment that the market is too high, and that people who have pushed it there are wrong, you will have sat in judgment on such subjects as the future course of interest rates, and the relative number of good and bad years to be expected in the future."
Such a foundation of natural humility is something we recognize often in our friends and heroes. Johnny Unitas had it in sports, Issac Newton and Albert Einstein had it in science, J.S. Bach had it in music, Horatio Hornblower and Jean Valjean had it among the great characters of literature, Jim Lorie had it among my professors, and my father, Artie, had it in my family. None of them ever said a good word about themselves but every other word was about some hero like Michael or Tiger in Jim's case, and Moey and Ralphie Adelman (two great handball players), or me, in my father's case. He must have told me a million times that he was "the world's worst" at this or that activity. And unlike the Sage, he really meant it.
He'd always tell me not to be too sure of my positions, and that he knew many bums on the Bowery who had more numbers and relations to support their specutions that I had and they died broke.
Somebody is going to say, "Vic should have had more humility when he sold all those naked puts in 1997." I agree. It's something I work on every day.
I find companies with natural humility do much better than those that have the opposite character. Occasionally you see that in the down-to-earth, self-deprecating sensibility shown when executives for companies like Wal-Mart sleep two in a room on a trip or travel a few hundred miles for their famous Saturday meetings.
Forgetting a natural humility is the reason that so many of the financial weekly commentator's forecasts and hopes -- dare I say all of them since 1964? -- have been so erroneous. And it's the major reason so many bearish funds and pessimistic books about the stock market find the limelight at stock market lows, even though a buy-and-hold strategy in almost every market returned some 10,000-fold in the last century.
Speculators might do well to adopt the practice of a humble venture capital company that lists its misses . For my own part, I would list my passing up or selling investments at an incipient stage in Audiovisual Associates, E*trade, Indiana Precision, and Navtech as being among the 9- or 10-figure disasters I have made. In the market, I have so often allowed myself to be squeezed out of enormous profits for the sake of a token gain that it almost lays me low to think of it.
Greg Rehmke responds:
Your post on humility reminded me of a place where humility is unknown: state and federal governments. Politicians complain that gasoline prices are too high, and oil company profits are too high. How do they know this? I think BMW prices are "too high," but apart from appealing to people who would prefer lower prices, how could politicians know what the price gasoline should be? Of course they don't know that, or much of anything else. So I wrote the article below as one I would like to see in the New York Times someday...
A Program of E Pluribus Unum Films
2247 Fifteenth Ave. West, Seattle, WA 98119
Secret Post-Hurricane Plan Taps Into 1.4 billion Gallon Reservoir,
by Not-New York Times reporter Greg Rehmke
Congressmen and journalists nationwide were upset to be upstaged by a secret oil industry plan to respond to hurricane Katrina (secret only because journalists were unable to comprehend it and report upon it). The oil industry plan drew upon the distributed knowledge and incentives of all Americans with automobiles and tapped into a vast 1.4 billion gallon gasoline reservoir.
The oil industry was unable to predict exactly how much gasoline refining capacity would be knocked out by Katrina, nor how long it would be out. Nor could they predict exactly how much gasoline would be available in regions near Katrina and supplied directly by Katrina- hit refineries. Working through a network of thousands of gasoline- distribution agents, oil industry experts unveiled a complex plan to enlist cooperation not only employees, but also of firms they sell gasoline to, and, astonishingly, all their customers.
Customers were called upon to individually examine driving patterns and make their own decisions on ways to reduce gasoline purchases. Customers had no way of knowing how easy or hard it would be for their neighbors to conserve scarce gasoline supplies. Somehow, an entire nation of automobile drivers had to arrange their response to Katrina with the also unknown details of just how much refinery supply was knocked out. And they had to somehow continue this coordinated response day-by-day through the entire duration of supply constraints.
Wealthy investor Don Smith (not his real name), on his way Saturday from Pittsburgh to Houston, revealed his part in this nationwide Katrina-response plan: "Not since high school had I bought just $5 or $10 of gas at a gas station." When asked, Mr. Smith confirmed that he could afford a full tank of gas. But since he expected the price to fall once refineries were repaired, he chose not to fill up. He added, "I couldn't easily switch to a smaller car, but I'm careful now to accelerate more slowly onto the freeway, and to brake less." As the crisis passed in the Pittsburgh area, and gasoline prices dropped to $2.19 a gallon (as of October 29), Mr. Smith said he expects to replenish his automobile's private reservoir the next time he visits an area gas station.
Central to the nationwide response, now seen by most as amazingly successful, was consumers' ability to tap into their own individual gasoline reservoirs during the supply emergency. Instead of filling- up, millions more Americans filled their tanks just to half or three- quarters full. High prices led millions not only to reduce gasoline consumption in their own preferred ways but also to draw down their own private gas tank reserves.
Unfortunately, since this oil industry response plan involved market concepts and demand-management through price changes, it was beyond the comprehension of most legislators and journalists. Legislators responded by calling for a "windfall tax" on profits generated by higher gasoline prices. They plan hearings where academics will testify that oil companies could have sold gas at lower prices. Interestingly, TV news viewership, as well as sales of newspapers and magazines, jumped significantly in response to hurricane Katrina. No word yet whether Congress plans to similarly tax "windfall" media profits.
Notes on numbers: 200 million cars in U.S. with average tank size of 14 gallons (at least my Volkswagon has a 14 gallon tank, which, pre- Katrina, averaged one-half full and post-Katrina averaged one-quarter full). With these numbers, the nationwide private gas-tank reservoir capacity is 2.8 billion gallons. If it averaged one-half full when Katrina hit, there were 1.4 billion gallons available for individual consumers to draw upon. 700 million of these gallons could be used before the average driver's tank hit one-quarter full. I can only speak for myself and wealthy investor Don Smith (not his real name): We both drew our tanks down and kept them down as long as prices stayed up.
-- Greg Rehmke, reporting from Pittsburgh and SeattleGreg Rehmke directs Economic Thinking, a nonprofit economic education program for high school, homeschool, and college students (more information at www.EconomicThinking.org). This "news report" is from www.EconomicThinking.blogspot.com.