Trading Cattle "Beef Bonanza" in 1860s in America

I once heard a story how cowboys traded their cattle between 1860s - 1880s -period known as "Beef Bonanza". I cannot confirm if this particular story is true, but it goes like this.

Cowboys met to trade cows, and one cowboy, lets call him John would approach Bob and would offer him $100 for 6 of his cows. Bob would say $110 is the minimum price he can accept, everything under $110 would cause him stomachache. John said, ok, let's meet half way at $105, and I will take you wonderful cattle. Bob accepted the offer with some pain. Few week later, John and Bob would meet again, and John would say to Bob, --- listen, I like you cows, they are great, I milked them, and bathed them, I fed them, they are great, but I would like to sell them back to you for $120, since I was taking care of them for 2 weeks. Bob said that he cannot accept the offer, but he is willing to purchase them back for $90 since Bob thinks he sold the milk and made some profit there. John, said that $90 is too little and he will just go to the next cowboy, who will pay $100 or more for them. Bob didn't want to lose this deal, he wanted to make sure he gets his cattle back, he was emotionally attached to this cows and he said to John, OK - $100 for all 6 and we call it even. John replied with a counteroffer of $105 - they shook hands and deal was done.

Turnover $220. No profit.

This story seems laughable and ridiculous, we are observing this event from 21st century and laugh. Yet, this is how they did business, it was all about deals, who gets more deals during great beef bonanza in 1860s to 1880s.

Hundred years from now or probably even less, people will think that our stories of dot-com bubble and financial crisis of 2008 are laughable and ridiculous. I think they are now.

Internet company in 1999 with market-cap of $10 billion and no earnings. Forecast - no earnings. You couldn't even tell where the earnings would be coming from, but the value of this void was $10 billion. You would actually need to come up with $10 billion to buy void with a nice logo and dot-com domain.

It's deeply rooted in people's nature to do this and to keep doing it. We will see it again and again. Again, follow the craziness, whether it is taking place on the downside by investor's being too skeptical  or on the upside where they are being to positive. Out of any craziness you will find value. However, it takes character to observe this game on the sidelines with cash in hands and not wanting to play.

Happy investing!

Damian Kosutic

What is your EDGE when it comes to investing?

I started following the markets in 1997, I was 15 years old, and I didn't know much about the markets, just what I saw on the news. But ever since I saw Wall Street with Michael Douglas, I became more and more interested what this business of equity investing is all about. It was very interesting for me, because everybody seemed to make so much money, and everything seemed moving so fast, I must say when I look back, I was truly impressed by it. People were talking about Yahoo, Microsoft, Hotmail, Ebay everybody was talking about all these companies that I was using on daily basis. My first email account was with Hotmail, I was using Yahoo as my search engine, Netscape as my web-browser, Microsoft of course as the operating system on almost all computers. At the same time, my father at work had a Macintosh, I didn't really like it, but Internet was much faster there than at home, so I would often use my dad's Mac. I also remember when in 1999 Bill Gates net worth briefly surpassed $100 billion! I just could wait to get out of school and start investing, who cares about University, you can skip that, and make some money. At the same time, as the top 5 richest people in the world were all Americans, 3 out of 5 came out of Microsoft, Bill Gates, Paul Allen and Steve Ballmer. Apple Computers was doing very badly, and I felt so sorry for them, because I remember how I didn't like my father's Macintosh at work, I could understand why they were doing so badly.

Just a year later, starting in April 2000, the markets declined considerably, NASDAQ Composite from 5,000 to 3,300 in just 2 weeks. Analysts were saying it was a normal market correction, some said it was because of USA vs. Microsoft monopoly court case, etc... I didn't understand why all these companies declined in value so much. Media was saying that the bubble bursted, and that the stocks were overvalued. By April 2001 NASDAQ Composite was around 1,700 and I understood the concept of overvalued - I started to question so what is the real price of these great companies... Few months later, Sept. 11 2001, and markets dropped further.

By 2003 and 2004 markets seemed to go back to high levels, economy was boosting, everything was working fine. I was a little bit skeptical, I didn't believe this would last, by 2007 markets were so high again. Google (GOOG) was at $724.80 on Dec. 10 2007 and analysts were saying it will go further up to possibly $2,000 a share! That moment reminded me of Bill Gates net worth in 1999, I knew then we are heading in a wrong direction again, even though Google didn't have anything to do with credit crisis. It was all nice and attractive, but this cannot last I said to myself. How can all these analysts and investment bankers and all these professionals value companies precisely to a dollar? I cannot exactly say how much my car is worth down to a dollar, and yet they know how to value complicated businesses like insurance companies and financial institutions, down to a dollar? This didn't seem right, and still doesn't seem right to me.

Well, we all know what happened by September 2008, markets crashed again, this time much harder than in 2000. Warren Buffett called it financial Pearl Harbor. It didn't look good. To cut this story short, we seem to be back on our feet again, the Dow is almost at 13,000 again (up from 6,500 in March 2009) - so it is now safe to say it went up by almost 100% since then. I lived through 2 major market crashes in just 14 years and I know this will be happening again and again. We have to collect cash when it happens so we can buy businesses for a bargain, and wait when craziness seems to be on the upper side and sell them again.

I don't know what will happen tomorrow or in 10 years. But I can tell you that by the age of 29 I've seen things I could never imagine to see. I can tell you that in our lifetime we will see so many things on the markets that we will not believe them again. I will. Because now I know that is all in human nature.

People cannot change their stripes and will always show characteristics of greed and fear. They will always calculate how much they can make and not how much they can lose. They will want to get rich quick. When things go bad again, they will overreact and start selling urgently.

So, what is your EDGE in investing? I know mine, it is long term, always long term.

Happy investing!

Damian Kosutic

Why are markets crashing? Herd Mentality!

I talked about herd mentality in the last few posts, something interesting to observe. The question is why are markets around the globe plunging because of this tragedy?

1.) Bank of Japan injected $184 billion into the financial system to fight future market turmoils, but NIKKEI still plunged over 17%. However, the Japanese banks will now have $184 billion to spare to rebuild the damages. Who will get this money?

2.) The damages are now estimated at around $170 billion! We can easily make the connection when we compare that number to $184 billion the central bank injected into the system. This is $170 billion that will spend. Who will get this money?

3.) Therefore unprecedented economic activity will unleash. Japan's economy will circulate with quarter of a trillion dollars in the next year or two. Again, who will get the money?

For starters, construction companies with earth moving machinery - Komatsu, Mitsubishi, Hitachi, US companies, like Caterpillar, they will make loads of money on restructuring the damaged areas, it is just mind-blowing. What about steel and copper? Japan will need millions of tons of steel. Nippon steel and ArcelorMittal - just think of how much steel they will have to provide to Japan!

For instance, Nippon Steel is trading 17.20% below the closing price on Thursday. Why is this stock trading low when it is inevitable to predict how much steel they will have to provide to rebuild devastated areas. ArcelorMittal is trading 28% below its 52-week high, you can find bargains by just simply analyzing the stock. Again, I am not suggesting any stocks, I am just showing you how to find bargains.

Another idea that crossed my mind. Solar and wind energy. Japan has proved that they can build nuclear power plants that can resist earthquake magnitude of 9, but they will always struggle with tsunamis and salt water, which is not that good for nuclear plants. Maybe they will heavily invest in wind power on the east cost of Japan and move the nuclear plants more inland.

Finding bargains in times like this is not difficult, you just have to understand the business, I am personally deeply invested in Energy/Commodities and Construction sector, so I understand this is my field of competence and you have to disconnect from the herd mentality.

Remember, $184 billion will be spent. Most of the money will go to construction companies, commodities such as steel and copper and energy sector, especially oil, but also solar and wind power.

Happy investing!

Damian Kosutic

SNE (Sony Corporation) - Continuation #2

Here is what media says about Sony

"Sony Corporation (NYSE:SNE) reported its several operations and Sony Group sites and facilities are affected by the Pacific Coast of Tohoku Earthquake and tsunami, and the company is monitoring the status of each of these sites on an on-going basis, while also considering the most effective recovery measures. The company also responded to reports of widespread power outages by voluntarily suspending operations at several sites. The company is currently assessing the full impact of the earthquake, tsunami and related power outages on Sony’s businesses and consolidated financial results.

In addition to manufacturing sites, the company’s Sendai Technology Center (Tagajyo, Miyagi) ceased operation due to earthquake damage. While certain production sites in Japan have been moderately affected, there has been no report of employee injury or facility damage, and operations continue. The possible damage at other Sony Group companies in Japan is currently being reviewed. Also, Sony Chemical & Information Devices Corporation, Kanuma Plant (Tochigi Prefecture), Sony Energy Devices Corporation, Tochigi Plant (Tochigi Prefecture) and Sony Corporation Atsugi Technology Center (Atsugi, Kanagawa) temporarily suspended operations on a voluntary basis, to assist with the alleviation of widespread power outages."

The stock opened today 15% lower from its last week Thursday price, which means by now market capitalization is down by $5.2 billion. Earlier I assessed Sony damages at a maximum of $100 million, which really is an exaggerated figure, but to be on the safe side I assumed $100 million. The company lost on its market value by $5.2 billion!

Again, I will not suggest any stocks; I used Sony only as an example to see how markets react to certain events. From time to time stock markets offer good bargains due to a herd mentality of people; I use these opportunities for the benefit of my fund.

Happy investing....

Damian Kosutic

SNE (Sony Corporation) - Continuation

Since March 10 (a day before the earthquake in Japan) until today, SNE stock fell by 10%.

Market capitalization of SNE before the earth quake was $34.5 billion, now it is $31 billion. If you were to buy the whole business today, you would pay $3.5 billion less on Monday then on Thursday last week. The total damage to one plant is around $10 million according to the media. Production has stopped for 2 days in 6 out of 10 plants due to power shortages, total production loss cannot exceed $50 million, so let's say for the sake of easier calculation and comparison that the total damage to Sony business globally is $100 million. On NYSE the total damage was assessed to be $3.5 billion or more if the stock continues to plunge.

Let's see what will happen with SNE in the next few days.

Damian Kosutic

SNE (Sony Corporation)

I said I will not recommend any stocks on this blog, but I will look at certain stocks to make some short analysis and comparison.

Today I am looking at Sony Corporation (SNE) traded on New York Stock Exchange (NYSE). I deliberately chose the stock traded on NYSE to reflect the idea better.

SNE opened today at $30.95 which is 7.5% lower from the closing price on Friday. Of course, this is due to earthquake and tsunami catastrophe that hit Japan on Friday. Sony is a Japanese company and all Japanese stocks have been influenced by this terrible catastrophe.

Sony Corporation has little to do with the earthquake and its price shouldn't be influenced so much by this event. Their global headquarters are in Tokyo and they haven't been effected by the earthquake nor tsunami. Most of its production is outside of Japan, media reports that Sony has 10 plants in Japan and that they are closed due to power shortages, which is true, however they are small operation centers and have little to do with production of bigger consumer products which are mostly produced in China. Six out of this ten plants are currently offline due to power shortages, one plant was damaged by tsunami.

We now have 3 Nuclear power plants that have now been effected by tsunamis. However, we have to keep in mind that Japan has 53 nuclear power plants, 3 have been damaged and 1 is offline, therefore we have 49 power plants that are working. I am sure the power shortage that now in Japan effect some one million people will be sorted out very soon.

Investors fear that Sony plants will be offline for more than few weeks according to some media, and this will cause significant loss to its production. Again, small production of micro-chips and research centers were effected by the earthquake, majority of larger consumer products like TV sets and computers are produced in China. All these factors create fear and investors are now dominated by fear concerning not just Japanese stocks but also European and American companies.

People's psychology works this way, they think like a herd, and they either overbuy or oversell the stock based on certain events.

Imagine a Japanese farmer owning a land with cattle in Peru (which many Japanese farmers actually do). How can you justify that the price of his land and his cattle decreases by 7.5% due to a disaster in Japan? Answer is simple, you can't. This exactly the case of Sony today.

Finding value has a lot to do with herd mentality, observe what people are doing, like today for example, and you will most often find some value in stocks.

On other note, my parents are journalists, my father has visited over 40 nuclear power plants in the United States, Canada and France during his career. So I was influenced in some way by nuclear power and journalism during my life. Media is doing a terrible job reporting on nuclear "disaster" in Japan, there is a huge difference between what happened and what media is trying to say "may" happen. Nuclear power plants are one of the toughest built structures, if not the toughest. There is absolutely no danger, or I should say the danger is so small that the reactors will explode and that a nuclear disaster will unleash that it doesn't deserve such a dramatic portrayal by mainstream media.

All our thoughts are with Japan and its wonderful people!

Damian Kosutic

Japanese Earthquake / Tsunami Crisis Response

Anybody who has been to Japan will tell you this: they are extraordinary people devoted to the tasks ahead of them and finishing them in the best possible way. They will never settle for good, they will always seek for improvement, with Japanese a progress is a matter of continuation and it doesn't have a finish line.

Today, they have experienced one of the hardest earthquakes in their recorded history, many people have lost their lives and many more are missing. All my condolences go the people of Japan.

One thing I know about Japan. Their engineering, attention to detail and preventative efforts against earthquakes have today saved millions of lives. They have already done more than half of the job, I put all my bets that they will be ready and going in few years. Like always, we will look back with awe and ask ourselves "how did they do it..."

Hard work, attention to detail, outmost devotion, and last but not least their continuous effort to make things better and better is a huge lesson and a reminder for humanity at large.

With love and hope for Japan!

Damian Kosutic

NASDAQ Composite March 10 2000 - March 10 2011

Just a quick and interesting observation.

On Friday, March 10 2000 (today 11 years ago), NASDAQ Composite peaked at an intra-day high of 5,132.53, it closed at 5,048.62, this is the all time high for NASDAQ.

On Monday, March 13 2000, the dot.com bubble bursted and it declined in 19 months to an intra-day low at 1,108.49 on October 10 2002. A decline of 78%!

Today, NASDAQ is at 2,700, almost 150% up since October 2002.

Again, greed dominated until March 10 2000, and this was unprecedented greed. Bill Gates net worth at the time was $100 billion, because Microsoft shares were traded at almost $60 (split adjusted). Craziness was dominating the market.

As a value investor what I do is I follow craziness. I look where craziness is taking place on the market, in 1999 - 2000 it was tech-stocks, in 2006 - 2007 it was the housing/credit market, once every 10 years we will have a heavy craziness taking place somewhere on the market. It is not difficult to spot it, but it is important to pay a close attention to it and be ready when the bubble bursts and the market goes south, this will create a value for future investing.

In the words of Warren E. Buffett "...be fearful when others are greedy and be greedy when others are fearful."

Happy investing!

Damian Kosutic

Dow Jones Industrial Average from 1921 to 2011

In 1921 Dow Jones Industrial Average (DJIA) was 64, today it is 12,200. The question is how could you lose money in this period and the fact is that many people did.

In these ninety years between 1921 and 2011 we had the Great Depression from 1929, Pearl Harbor, Second World War, Korean War, Cuban Missile Crisis, the Cold War, the Vietnam War, Oil Crisis, Stock Market Crash of 1987 or Black Monday as we know it, Gulf war and invasion of Kuwait, wars in Yugoslavia, September 11th 2001, War on Terrorism, war in Afghanistan and Iraq, and the Financial Crisis of 2008. A lot of events and many more I didn't mention that worked against the markets and the trend was still upward and by what margin, an increase of 18,900% in 90 years or 6% compounded annually + dividends.

The lowest point was 41 in 1933 and the highest point was 14,164 in October 2007, so from 1933 to October 2007 Dow increased by 34,300% in 74 years or 8.21% compounded annually. So we have navigated between fear and greed, fear in 1933 and greed in 2007.

Post 2008 lowest point of DJIA was in March 2009 and it was 6,547. That is a decline of almost 54% in less than 17 months. Again in October 2007 people were navigating by greed and in March 2009 by fear. I cannot predict markets and nobody can, I cannot tell you how the market will open tomorrow as many couldn't tell you how the markets would open the next day on September 10th 2001. However, we can be sure of one thing. In the next 10 years we will see the markets decline by 25 - 35% or even more, this will be again a very good opportunity for value investors who are looking for bargains. Since March 2009 DJIA hit a new post-crisis high of 12,391 in February 2011 - that is an increase of 88% in 23 months.

I know one thing, you will not make money by dancing in and out of the markets, this is how many people before you have done it and they have lost money between 1921 - 2011 when Dow advanced 18.900%. You have to find an opportunity when to buy, like March 2009, and hold it for as long as you can, and you will do more than fine over a long period of time.

Sell when the market is dominated by greed (October 2007) and buy when market is dominated by fear (March 2009) and think long term, only long term.

Happy investing!

Damian Kosutic