2005: A Bumpy Year

I’ve always looked at stuff like this and wondered why all these very smart people with access to tons of data and possessed of the time and financial incentive to get the right answer often get it wrong. Maybe the future is essentially unknowable, at least for now.

Royce –

While the stock market is not perfectly efficient it is terribly efficient. I suggest you calculate a histogram of returns of the S&P500 or DJ over a period > 10 years and I am sure you will convince yourself of the futility of predicting stock market returns.

Someone wrongfully opines:

While the stock market is not perfectly efficient it is terribly efficient.

…trust me. it’s not. Pat Byrne made a fool of himself on Bloomberg on Dec 23rd (a Friday). The market didn’t digest until Tuesday, since that’s when traders returned to work. That’s not an efficient market.

Some of us at the YHOO board were able to profit from his histrionics way before the masses returned to their desks after way too much egg nog.

Barry,

I continue to be impressed by your ability to find great charts. For example, I can never find a chart of oil futures in the out years when I want one.

The comment above by kmr makes this a good location to answer your email about how I achieve good performance.

Basically, I have mixed the philosophies of Daniel Boone, Ken Fisher and John Maynard Keynes. Ken says that if you find something you know to be true and you know that the majority believes it to be false then you have a great opportunity to make a great deal of money. Daniel Boone said to make sure you are right and then go ahead. John Maynard said that with perfect diversification there is no profit. He also said that in Economics the majority is always wrong.

Some of my big winners this year were Google, AMTD, ET, AMR and CAL. When I was as sure as one can get and when it was clear that the majority thought they were way over priced, I started buying and I didn’t quit. Google has had a number of admirers along the way but there is still great skepticism about the price of all of these stocks.

Many great investors, including Fisher, Keynes and Buffet have been willing to make large bets when they are confident. I am so sure that CAL and AMR have successfully made the turn that I am willing to place large bets on companies that have no earnings, no book value and junk credit status; the results to date have been outstanding.

You and I share a number of traits. I thank you for having the courage of your convictions. I totally disagree with your market call for 2006, but I respect that you have personally studied the situation and have made a public call that is not merely a parroting of others attitudes. I appreciate that you read the work of others to temper your own thoughts and that you accept responsibility for your calls.

By the way, as a confirmed contrarian, I used your suggestion to “hit the bid” on AMTD at 13 as a small part of my rational for continuing to hold this stock. From memory, I believe I paid around $4 for this one maybe 3 years ago. It was tempting to sell at 13 but the trend toward online brokerage is not nearly complete.

My biggest winner in money terms this year was CAL. I bought the stock in a few friends and family accounts 74 times on the way up. Obviously if one rides ones winners hard, one can do quite well in a short period of time.

My best market move ever was in May and June of 1984 when I purchased millions of dollars worth of 30 year treasuries at 13.75%. I used heavy margin and enjoyed a fantastic ride for the next couple of years. In hind sight the call to buy bonds at these rates seems obvious but at the time our economy had experienced years of high inflation and years of destruction of real bond values. At the time I made the purchases, I caught a lot of flack but the more I caught the more I bought.

My MSFT Outlook is giving me fits. I tried to answer your email but got an error message. If you would, please change my email address to jack.miller@gmail.com.

By the way, I believe Google is going to change the way the world communicates. The mistaken notion about the Google Computer Cube rumor today is that Google is trying to become a hardware company. This is the equivalent of calling MSFT an Xbox company or Gillette a razor company.

Google will probably help distribute low power, low cost, wireless, hand held, computers in order to dramatically increase the number of times consumers will search for the lowest cost gas in the neighborhood and for millions of other uses. Put the combination of AOL’s AIM and Google’s Google Talk on billions of hand held devices and you have an instantly profitable communications network.

Google will not likely make the “original Apple mistake”. Google does not need a closed proprietary system and consumers do not need a fat, heavy laptop loaded down with hard drives and heavy batteries. AMD has designed a wireless laptop that is projected to be profitable at about $100 each. Google may take the MSFT–Gillette route and subsidize the product. It would probably be worth more than a few bucks if the internet start-up button took each machine directly to the owner’s personalized Google page.

Do the Google Gulp, it is hard to swallow this stock but it is good for you.