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
Wednesday, May 11, 2011
Monday, May 9, 2011
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
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
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