Featuring Lutts’ Logic:
The Wisdom of Doing Nothing
A Plan for 2009
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An Urgent Profit Opportunity From Cabot
By now you’ve heard that the National Bureau of Economic Research says the U.S. is in a recession … another piece of bad news as this horrible year for investors comes to a close. But all is not lost … there’s a special investing technique that traditionally brings big profits to savvy investors every January. It’s called the January bounce and let me show you the short-term, double-digit profits from past years.
* Bluefly – up 22% in three weeks
* Krispy Kreme Doughnuts – up 26% in four weeks
* Lucent – up 76% in two weeks
* Nanophase Technologies – up 39% in four weeks
* Shengda Tech – up 65% in three weeks
Take advantage of this annual phenomenon … please read on immediately to avoid missing out.
Yesterday’s New York Times Magazine brought the 8th Annual “Year in Ideas,” full of thought provoking, sometimes amusing, articles, patents and more. One I found relevant to the current investing situation was the paper published by a team of Israeli scientists in Journal of Economic Psychology earlier this year, titled “Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks.” The authors analyzed 286 penalty kicks and found that 94% of the time the goalies dived right or left; only 6% of the time did they stay in the center. Yet the ball was stopped most frequently when the goalies stayed in the center! So why all the diving? Because to act is to look busy. Because not to act is to appear helpless, as if they don’t know what to do.
And so it is in the stock market, for many people, both amateurs and experts. They’re always looking to do something … but sometimes the best course of action is inaction. A case in point is the Model Portfolio of our Cabot Market Letter, which editor Michael Cintolo has kept heavily in cash for most of 2008. While the Dow is down 35% this year and the Nasdaq is down 43%, Cabot Market Letter has lost just 13%. And I’m thrilled with that, and not just because we’ve avoided losing big bucks. Today, while many investors are wondering whether to sell their losing stocks or hang on and hope for a bounce, the Model Portfolio has no losers! Mike has the Letter sitting in cash while he coolly and calmly studies charts, working on identifying the potential leaders of the next bull market. When they move, he’ll pounce, carrying no baggage from the bear market of 2008. As a result, I’m expecting a very profitable 2009.
Speaking of the future, back on December 5, I reprinted letters from readers that predicted two contrasting visions of the future.
The first, which claimed that democracies have finite lifecycles of 200 years, predicted that in the U.S. freedom is now waning, and that from apathy we will move to dependence on government and then to bondage.
The second offered a glorious notion of a high-tech vehicle that would help us end our dependence on foreign oil and usher in a new wave of growth.
Today, I have some of your responses.
“If the USA is finished, who the hell is going to take the reins? If the USA is morally bankrupt, who the hell in this world is any better? Everyone despises the USA, but when you get right down to it, who the hell will fill your boots; China? Russia? Iran? GOD HELP US ALL if any of these morally ripe candidates step up!!! You Americans might be greedy pigs but you are the least of evils!”
D. C. from British Columbia
“I feel if the US fails it will be in the next 15 years, based on the changes I have observed over the past 45 years since getting out of high school.
“We are without any doubt no longer a REPUBLIC, but now have become a Social Democracy, with this year’s bailout by Government of businesses who are in trouble because of DEREGULATION created by Congress.
“Yep–America is over. The question is how much longer till total loss of freedom.”
“The problem with the “Democracy” arguments is that there are several things mixed together, most notably “Democracy” itself and “success as a nation, which are different things. Please consider:
“(a) The Roman Empire was a republic in the beginning, but the “glory of Rome” lasted from 753 B.C until 476 A.D., with a 200-year peak period.
“(b) The British Empire was supreme from the time of the Spanish Armada in 1588 up until the time it was bankrupted by World War I (in all of this probably the best lesson for us to learn).
“(c) We are not an absolute democracy but a representative one. If you look at our two hundred year history, and do it carefully, you’ll find that people are better represented now than ever before. The original aristocracy that founded our nation excluded women and minority races.”
“As my late father used to say, “humans have made amazing advancements in the last 100 years, but they haven’t changed one bit in the last 10,000 years.” Our inventions to make life easier and improve the quality of our physical lives are amazing, however our moral and ethical character remains the same. So, both perspectives may be correct–unfortunately we may all be bonded slaves zipping around in hydrogen/electric pods owned by the big uncle. Maybe the question is, will the technical inventions of the information age save us from ourselves?”
“The great strength of the U.S. is intellectual capital, i.e. the constant creativity and ingenuity of the American people and the willingness to take risks, to dream and to create new businesses. This is what will create the Googles, the Microsofts and the eBays of the future. This constant ability of America to renew itself is what will enable us to flourish over time. We may well be entering a multi-polar world in which the U.S. is “Primus Inter Pares,” and I happen to think that is healthy for us and the global economy. It fosters interdependence and mutual reliance because all the key players have a stake in the system.
“Nothing, however, is guaranteed; it requires constant enlightened leadership by our political, business and educational elites. Look at places like North Korea, Argentina and many African nations and you see the consequences of bad leadership. Singapore, 30 to 40 years ago, had a per capita income of $500. Today it is one of the wealthiest nations in the world on a per capita basis, despite the fact it has no natural resources. Ditto Japan with scarcely any natural resources.
“The U.S. sometimes takes a wrong turn but we always self correct … not without some pain sometimes. So … as I look around the world, I like the U.S.’s chances.”
M.A. from Colorado
“By way of introduction, I grew up in the Netherlands in the 1940s and ’50s. I remember bombers coming over my hometown at 500 feet altitude dropping food and clothing supplies (winter 1944-1945). These bombers showed U.S. stars on the wings. Remember the Marshal plan? It was America who put Europe back together and it was America who practically created the present country of Japan. I moved to Canada in 1961 and have spent the intervening years living about 15 miles north of our common border. In my own business I have been dealing with America for close to 50 years. My brother and my daughter and their families live in the USA.
“After WWII the U.S. represented, in round numbers, 50% of the world’s economy, 60% of the world’s manufacturing capacity. Today these numbers are less then half of what they were then. All that this means is that Europe, Japan, and to a lesser extend other countries, have grown and matured.
“America is one of the greatest and most successful societies ever to exist on this globe, and more things have gone right than wrong. It does not mean that there is not a lot that needs fixing, but there is a lot of success and many good parts to your society.
“As a foreigner, I see the following areas that need attention for the USA to keep its primary standing in this world and to regain the respect of other nations that has been eroding in the last decades.
“1. Education. Availability of quality education must be improved but more so it must be made available to all young people. It is unconscionable that a university degree comes with a debt load of $25K to $50K. No excuses anymore for providing free education and higher education to all Americans. If India can do this so can you.
“2. Health care. You must provide affordable health care to ALL Americans. Don’t look at Canada for an example, look at France, reportedly the best in the west. Your health care system must be controlled by the national government in order to make it truly universal.
“3. Old age coverage. With the automobile industry in trouble it is interesting to hear that the U.S. government will take over the exorbitant pension plan arrangements the autoworkers have extracted from the manufacturers. Is your government not the government of all the people? Then why not arrange for a universal pension plan covering all Americans over 65?
“4. Military. This institution takes far too large a part of your national wealth and your international profile. It must be reduced. The mention of the USA today, outside your country, brings to mind the military complex even before the economy. From the Crusades to the Vietnam War, only one war ever improved the well-being of mankind, WWII; all other ones were a waste of time, money and young lives. Military might is a great club if you want to be a bully, but only if that is what you want to be.
“5. International (1). Decide who your friends are and treat them that way. NAFTA is not perfect for any of the participants, but it works well on balance. Why beat up on your friends, Canada and Mexico, while your real economic problem lies in the competition from China, India, Japan and elsewhere? Work to level the playing field between you, China, Japan and India and it will go a long way toward resolving your trade problems.
“6. International (2). The world order is changing and not in the “West’s” favour. In order to survive the coming competition from highly populated countries we (including Europe) will need alliances. Only one country may be applicable for leadership of Europe–the UK is not European enough, Germany is still not fully acceptable to most European countries and Italy is too divided internally to be in a leadership position. That leaves France. Luckily, France today has a pro-American president, Mr. Sarkozy. Form an alliance with Europe, eventually a common market and associated governments. We will need this alliance for size and strength. The window of opportunity here is small but it is open at this time. Needless to say you should continue to promote free trade and common markets with South America and the present NAFTA countries. All together we could be the largest trading block in the world.
“7. Energy. Start moving to alternative energy sources now!
“I am a conservative at heart but listened to President-elect Obama during the campaign where, for the most part, he said the right things. I hope he will manage your part of the world with intelligence and strength, treat friends and neighbors with respect and understanding and be firm in his dealing with your competitors.
“My affection and admiration for the USA is as great today as it has ever been and I would not like anything better than to see things go well for your country.”
P. V. from Ontario
Finally, a reader sent this quote by the late Southern Baptist pastor, Dr. Adrian Rogers
“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that, my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”
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I also wrote about improving our nation’s education system, asking, “The real question is this: how do we educate our children so that they become literate, contributing members of society? How do we educate them so that they can help us move forward as a society, instead of cycle back to a life of apathy, dependency and bondage?” The best answers follow.
“Tim, in your article you mention a 21%-23% functional illiteracy rate of graduates. This says to me that the failure is not with the students so much as with the system. Teachers who are there for a paycheck but don’t ensure that their pupils LEARN should be removed, union or no union. These people are as much responsible as anyone, (not to mention parents) for our rapid decline in education.
“As in most cases of employment around the country, unions and socialism are a very large problem. In my view, until we solve these problems, we will continue to decline.”
“You ask how we could better educate the next generation. There are four parts to the solution.
“1. Get Government out of education
“2. Give the teachers corporal punishment rights again, without the fear of lawsuits.
“3. Bring back the good old three R’s and teach them how to use their brains instead of a computer or calculator.
“4. Allow parents to deliver a few whippings when children are young with no fear of reprisals from the police.”
“1) The graduation rate of all children from high school is horrible, that of minority children is much worse. This might be addressed by changing the education law to read–IF a child and his / her parents decides to “drop out” before attaining the age of 18, that child (male or female) will automatically be inducted–and serve, in some branch of the military, until attaining that age. The actual “service” would include FORCED DISCIPLINE, continuation of teaching of the THREE R’S (including how to use/balance a budget and check-book)–SCIENCE AND HEALTH–and community service. Many of these children would otherwise be in street gangs or dope peddlers–or taking space in juvenile jails and maternity wards with unwanted babies.
“2) Removing these “drop-out-bound” children from the regular schools would give the teachers more options to teach rather than to “suffer through the school day” with a group of completely undisciplined children, which IS the fact of many school districts today.
“3) Teaching can occur ANYWHERE–LEARNING will happen ONLY where a modicum of discipline can be attained. Damn the torpedoes–PUT THE BOARD BACK INTO THE BOARD OF EDUCATION from K thru 12. Many of us veterans will always recall the words of our first platoon sergeant–WE CAN’T MAKE YOU DO ANYTHING–BUT we CAN make you wish you had. Spare the rod and spoil the child.
“4) Revisit “No child left behind”–if the child doesn’t earn passing grades (doesn’t achieve for WHATEVER reason)–don’t promote him. SOME of us remember being in 5th and 6th grade with 15 and 16 year olds–who HAD BEEN DISCILPLINED but could not learn beyond the “functional idiot” mentality.
“THE ALTERNATIVE–many of our BEST wannabe teachers are choosing to work at McDonalds rather than work in an undisciplined classroom; the product of undisciplined homes; the product of an undisciplined society.”
“The first thing we need to do to help our education system is to ban all teachers’ unions from our schools. All of the former teachers that I know quit teaching because of all the hoops they had to jump through that had nothing to do with teaching students. Salaries had nothing to do with it.
“The second is to revoke the prohibition of touching students. A local school recently raised money to buy a used car to offer as a prize in a drawing for students with a perfect attendance record. The winner was 12 years old! I think it would have been more effective to buy a case of horsewhips to be used on students with poor attendance records.
“I do not believe that anyone over the age of 21 who does not have a high school diploma or a GED certificate should be eligible for any form of public welfare unless they had been certified as mentally incompetent. Corporal punishment has been effective for hundreds of years and will still work! The Catholic tradition of nuns wielding rulers has been remarkably effective.
“I began my education in a one-room country school that did not have electricity or running water. We had windows and kerosene lamps, a hand pump on the well in the side yard, and two outhouses. Heat was provided by a stove fired by the teacher. Two of the four students in that school have retired from the faculties of major universities, I from the University of Illinois and my cohort from the University of Connecticut. I was a freshman at the University of Illinois when I was 16, and in graduate school at 20. My father never graduated from eighth grade and my mother had two years of high school.
“The main thing is–we worked! Living on a farm, a 60-hour workweek was a vacation. We finally got my father to cut back to 40 hours per week when he turned 70. He died at 87. I inherited the responsibility for feeding, watering and egg gathering from a flock of about 90 chickens the summer I turned 7, continuing until I left for college.
“I guess I am just a disgusted old goat.”
H. S. from Florida
“We in this country seem to feel we must follow a pattern until long after it becomes obvious we should look to new solutions. My local experience reveals that trade schools have waiting lists of students looking to learn a useful skill leading to work that will sustain them and their eventual family. Isn’t that the basic interpretation of success?
“There are good reasons to pursue the classics and arts, but the graduate must provide a service that others are willing to pay for. Trying to teach a bunch of future Joe six-packs about Athens or the Roman Empire (which we seem to be following) or Aristotle and Hypocrites is often a waste of time.
“My 15-year-old grandson is quite typical in that he wants to be interested in his education, but won’t relate to much of what is offered because he feels that what he is struggling to learn will have little to do with his future employment.
“Our students are like customers in that they won’t buy it unless they like it so let’s give them what they want … something they know is meaningful to their immediate future. Clearly this is something we do in business to help our employees become more effective.
“Throw out the preconceived notions as to how “school” should be and look at the real objectives at each level. Meet those objectives with a mix of creative and traditional approaches.”
B. E. from Massachusetts
OK, that was a lot. I hope you found some value there. I know I did. And even if some of the ideas appear unrealistic, it’s nice to know what people are thinking.
And now I’ll end with an investment idea, taken from J. Royden Ward, editor of Cabot Benjamin Graham Value Letter. The idea is Sanofi-Aventis (SNY).
Headquartered in France, Sanofi-Aventis is the world’s fourth-largest pharmaceutical company. It’s got 85 products in its drug pipeline, so you know it will have lucrative future. The dividend yield is a plump 6.2%. And just last Friday, a judge ruled that Sanofi-Aventis’ patent for Plavix, a blood-thinner that’s been the second-best-selling drug in the world for the past two years, was still valid, and that Apotex has no legal grounds to market a generic version of the drug.
Now, you could just run out and buy SNY here, and that might work out fine. After all, the stock has fallen from 50 to its present level of 30, and I’m thinking there’s a good possibility for a major market rebound in early January.
But that wouldn’t be true to the Benjamin Graham investing system, which says you should only buy a stock when it’s trading at a price that is so low that you get a margin of safety. And the Maximum Buy Price that Roy has set for SNY is 24.75.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor’s Note: Every stock in Cabot Benjamin Graham Value Letter also comes with a Minimum Sell Price, so you know when to take profits, selling before risk gets too high. The result of this quantitative system, practiced successfully since 1926 by investors like Warren Buffett, has been compound annual growth averaging 20% per year. If you’re looking for a low-risk system that will get you in and out of established stocks at the right time, I recommend a no-risk trial subscription. Click the link below to get started today.