The Bubble in Concept Stocks

The Bubble in Concept Stocks

Performance Comes to the Market

The next speculative mania came into being during the mid-sixties, when there was heightened competition among mutual funds for the customer’s dollar. In such an atmosphere, it is obvious that it would be easier to sell a fund with stocks in its portfolio that went up in value faster than the stocks in its competitors’ portfolios.

And perform the funds did – at least over short periods of time. Fred Carr’s highly publicized Enterprise Fund racked up a 117 percent total return (including both dividends and capital gains) in 1967 and followed this with a 44 percent return in 1968. The corresponding figures for the Standard & Poor’s 500-Stock Index were 25 percent and 11 percent, respectively. This performance brought large amounts of new money into the fund, and into other funds that could boast glamorous performances. The public no longer bet on the horse but rather on the jockey.

How did these jockeys do it? They concentrated the portfolio in dynamic stocks. Take the Dreyfus Fund and the growth-oriented Fidelity Funds. Jack Dreyfus, a high-stakes bridge player, got a running start on the performance record by investing heavily in Polaroid during the company’s most rapid growth stage. Fidelity, run by Edward Johnson and Gerald Tsai, also held large blocks of stock in a relatively few rapidly growing companies, however. At the sing of a better story, they would quickly switch. Both funds chalked up impressive successes in the mid-sixties and this led to many imitators. The camp followers were quickly given the accolade “go-go”funds and the fund managers were often called “the youthful gunslingers.” Nothing succeeds so well as success,” Talleyrand once observed, and this was certainly true for the performance funds in their early years – the customers’ dollars flowed in.

Concept stocks. Photo by Elena.

The fickleness of men like Gerry Tsai extended even to their own relationships. Feeling he could make a better story on his own. Tsai left Fidelity inn February 1966. In retrospect hi ambitions were modest: He felt he would be able to raise $25 million in an initial offering for his own fund, the Manhattan Fund. His underwriters, Bache & Co., agreed and opened their subscription books for orders. Both found out that Gerry didn’t know his own multiple: $274 million was subscribed on the first day. Within a year, Gerry Tsai had more than $400 million to manage. Tsai became the first superstar of the performance game and brokers could sound wise by watching the ticker tape and saying. “Ah, Gerry is buying again.”

The performance game was not limited to mutual funds. It spread to all kinds of investing institutions. Businessmen who had to make constantly larger contributions to their workers’ pension funds to meet retirement obligations began to ask pointedly whether they might be able to reduce their current expenses bu switching more of the fund from fixed-income bonds into common stocks with exciting growth possibilities. Even university endowment-fund managers were pressured to strive for performance. McGeorge Bundy of the Ford Foundation chided the portfolio managers of universities:

It is far from clear that trusties have reason to be proud of their performance in making money for their colleges. We recognize the risks of unconventional investing, but the true test of performance in the handling of money is the record of achievement, not the opinion of the respectable. We have the preliminary impression that over the long run caution has cost our colleges and universities much more than imprudence or excessive-risk-taking.

Barbie, Happy Birthday!

Happy Birthday, Dear Barbie

In 2009, Barbie celebrated her 50th birthday. The celebrations included a runway show in New York for the Mercedes-Benz Fashion Week. The event showcased fashions contributed by fifty well-known haute couturiers including Diane von Fürstenberg, Vera Wang, Calvin Klein, Bob Mackie, and Christian Louboutin. Since then, Barbie exhibits have been organized in many countries, and here you can admire some of them.

All the pictures have been taken by Elena. 

Mattel estimates that there are well over 100,000 avid Barbie collectors. Ninety percent are women, at an average age of 40, purchasing more than twenty Barbie dolls each year. Forty-five percent of them spend upwards of $1000 a year.

Vintage Barbie dolls from the early years are the most valuable at auction, and while the original Barbie was sold for $3.00 in 1959, a mint boxed Barbie from 1959 sold for $3552.50 on eBay in October 2004.

Barbie has expanded into a media franchise, including animated films, television specials, video games, and music.

Barbie had a significant impact on social values by conveying characteristics of female independence, and with her multitude of accessories, an idealized upscale life-style that can be shared with affluent friends.

Barbie is the figurehead of a brand of Mattel dolls and accessories, including other family members and collectible dolls. Barbie has been an important part of the toy fashion doll market for over fifty years, and has been the subject of numerous controversies and lawsuits, often involving parodies of the doll and her lifestyle.

American businesswoman Ruth Handler is credited with the creation of the doll using a German doll called Bild Lilli as her inspiration.

Australia, Safari outfit.

"Barbie syndrome" is a term that has been used to depict the desire to have a physical appearance and lifestyle representative of the Barbie doll. It is most often associated with pre-teenage and adolescent females but is applicable to any age group or gender. 

Elvis Presley,

Eastworld.

Barbie's Atelier.

Barbie in furs.

Barbie as classical dancer.

Barbie -  Cher.

Irish dance princess.

In recent years, Mattel has sold a wide range of Barbie dolls aimed specifically at collectors, including porcelain versions, vintage reproductions, and depictions of Barbie as a range of characters from film and television series such as The Munsters and Star Trek.

Three Barbues : Legend of the Phoenix Firebird, Ominous Dark Beauty and Oriental Beuaty.

Legend of the Phoenix - Firebird Barbie.

Ominous Dark Beauty Barbie.

Barbie in Green.

An Indy Guide to Used Car Buying

An Indy Guide to Used Car Buying

Be a pro when you kick the tires of an auto you’re considering owning

Marlboro-Penske team member Rick Rinaman has been the pit crew chief for two-time Indianapolis 500 champion Emerson Fittipaldi since 1990. Here are Rinaman’s tips on what to look for mechanically when shopping for a used car.

Fluids: Check the front CV joints, the front wheels, and the wheel wells for grease. Bearing grease in the wheel wells may indicate bad seals that need replacing. If you get into replacing CVs, you start getting up in the dollars.

If there are any problems with seals, there will be oil spots on the ground. Be sure to look for leaks around the seals in the rear end.

If someone’s is selling the car, he’s probably changed the oil in it. If he hasn’t, you want to look at the filter and see if it’s been on there for a million miles. It’s very easy to change an oil filter and if you put a new filter on, it stays clean for a lot of miles. If it hasn’t been changed recently, you’ll be able to tell right away if the owner’s been taking care of the engine.

Exhaust: A car that has a lot of miles on it is going to show a lot of rust and whatnot in the exhaust system. You don’t want to get an exhaust system that has areas that have been spot-welded. The muffler might not leak while you’re test-driving it, but a couple miles down the road, it could just fall off.

The best way to check for a rusted-out muffler is to actually get down underneath the car and grab the muffler. When exhaust systems start to go, you can actually crush them with your hands.

Body Condition: First of all, open the door to get a better look at the body. Any part in there that looks like it’s new or is covered with fresh paint is an indication that the car has been in an accident – which means you’re looking at possible alignment problems.

Indy Guide to Used Car Buying. Photo by Elena.

If the rear panels have been repainted, the may also have been body-puttied to cover up damage or rust. You could get into trouble with that.

Suspension: Check for rust around all the suspension parts. A lot of old cars rust at the top mounting plates from the top of the shocks – especially in the front, where it’s pretty visible once you lift the hood and look past the engine at the plates. The struts may actually push through the metal.

Tires: Unless the seller has put on a new set of tires, which is probably very unlikely, you can tell a lot from tire wear. If the wear is sort of wavy with high and low spots in the tires, for example, you have bad shocks and they need to be looked at. If you have wear on the sides, on the other hand, you have front alignment problems.

Steering: A lot of play in the steering wheel shows a lot of hard wear and indicates that the steering system will probably need to be replaced. If there are two inches of play and the tires aren’t turning, watch out – the problems go beyond the steering system.

Brakes: Check the brake pads for wear. A hard-driven car is going to show on the brakes. Check the rotors for scars. A lot of times, people buy a used car and they have to have their rotors ground because they’re pretty rough.

Interior: There are a lot of people who say they don’t like smoking in their car, so keep that in mind. If the vinyl or any part of the interior console is cracked, then you know it’s been outside in the sun a lot.

A Checklist for Avoiding Grief

You don’t have to get yourself covered with grease to tell quickly whether a car has been well maintained. The following tips for reading a car’s history will save you lots of headaches later:

Steering wheel: Expect no more than two inches of play in the wheel when the engine is off.

Body condition: Rust, especially in the rocker panels under the doors, in the trunk, or around the wheels is bad news. Body works and painting as a result of an accident is also a warning sign. Be on the lookout for paint that doesn’t match, sheet metal with visible imperfections, doors that don’t quite fit, and welds that have been redone recently.

Interior: Resale value as well as comfort will be affected by seats and carpets that look shabby or smell musty. Beware of worn-down pedals when the odometer boasts low mileage.

Fluid leaks: Checking a car’s fluid levels and condition is like taking a person’s blood test. They can indicate both present and future problems. Oil spots around the engine or beneath the vehicle are obvious signs that something’s leaking. Other signs are less obvious: transmission fluids should be pink, not dirty.

Tires: Original tires should be good for 25,000 miles. A car with lower mileage but new tires may have had its odometer set back. Uneven tire tread can mean an alignment problem, which is easily remedied, or accident damage, a potentially more serious malady.

Brakes: Look for wear on the pads or scars on the rotor disk.

Suspension: Does the car look lopsided from the side or rear? Bad springs are probably the culprit. Does the car bounce more than a couple times when you push down hard on a corner? The shocks or struts could need replacing. If a front tire can be noticeably lifted by pulling on the top of the tire with both hands, you may have bad bearings or suspension joints.

How Your Car Does in a Crunch

Each year the National Highway Traffic Safety Administration conducts crash tests of new cars under conditions that are the equivalent of having a head-on collision with an identical vehicle at 35 mph. Vehicles should be compared only to other vehicles in the same weight class – if a light vehicle collides head-on with a heavier vehicle at 35 mph, for example, the occupants in the lighter vehicle would experience a greater chance of injury than indicated. Vehicles are classified by the estimated chance of injury for the driver of passenger, and receive a one- to five-star rating, with five stars indicating the best protection.

Collisions in the Real World

Most accidents involve moving cars, not fixed barriers. The crash impact isn’t the same.

A car need not to be expensive to protect you in a crash. Studies of crashworthiness of cars under “real-world” conditions found that moderately priced American sedans held up better inn crash tests at 40 mph than more expensive European sedans.

Government crash tests currently smash cars into fixed barriers at 35 mph to assess how well air bags and seat belts protect a vehicle’s occupants. But over half of all accidents involve cars colliding with each other at different angles, so the Insurance Institute for Highway Safety used a technique known as an “offset test” to simulate what would happen to the structural integrity of a car traveling 40 mph if it collided with another car at an angle such as near the driver’s door or behind the headlights.

How some of the midsize cars ranked in the Insurance Institute’s tests:

• Good (in order of finish): Chevrolet, Ford, Volvo.
• Acceptable: Toyota, Subaru, Honda, Mazda.
• Marginal: Saab.
• Poor: We’ll pass…

Theory of Stock Prices

Theory of Stock Prices

The Firm-Foundation

The greatest of all gifts is the power to estimate things at their true worth (La Rochefoucauld, Reflexions; ou sentences et maximes morales).

Investors can and and should learn vicariously from the stock market in order to save them from the traps that ensnare builders of castles in the air. Autopsies should be as useful in the practice of investment as in medicine. At the same time, to be forewarned is not to be forarmed in the investment world. Investors also need a sense of justification for market prices – a standard, even if only a very loose one, with which to compare current market prices. Is there such a thing? We happen to think so – though I believe it neither rests on a firm foundation nor floats like a castle in the air.

The firm-foundation theorists, who include many of Wall Street’s most prosperous and highly paid security analysts, know full well that purely psychic support for market valuations has proved a most undependable pillar, and skyrocketing markets have invariably succumbed to the financial laws of gravity. Therefore, many security analysts devote their energies to estimating a stock’s firm foundation of value. Let’s see what lies behind such estimates.

The Fundamental Determinants of Stock Prices

What is it that determines the real or intrinsic value of a share? What are the so-called fundamental that security analysts look at in estimating a security’s firm foundation of value.

Theory of Stock Prices. Photo by Elena.

Firm-foundation theorists view the worth of any share as the present value of all dollar benefits the investor expects to receive from it. Remember that the word “present” indicates that a distinction must be made between dollars expected immediately and those anticipated later on, which must be “discounted.” All future income is worth less than money in hand; for if you had the money now you could be earning interest on it. In a very real sense, time is money.

In arriving at their value estimates, firm-foundation theorists usually take the standpoint of a very long-term investor who buys his shares “for keeps”. The only benefits such an investor receives will come to him if the company pays out some part of its earnings in cash dividends. Thus the worth of a share to a long-term investor will be the present or discounted value of all the future dividends the firm is expected to pay.

Of course, the price of a common stock is dependent on a number of factors. We will now describe four determinants affecting the value of shares and then give four broad rules for applying these to determine the present (or firm-foundation) value of the stocks you are considering. If you follow these rules consistently, firm-foundation theorists suggest you will find yourself safe from the speculative crazes.

Determinant 1 : The Expected Growth Rate

Determinant 1 : The Expected Growth Rate

Most people don’t realize the implications of compound growth on financial decisions. It is often said that the Indian who sold Manhattan Island in 1626 for $24 was rooked by the white man. In fact, he may have been an extremely sharp salesman. Had he put his $24 away at 6 percent interest, compounded semiannually, it would now be worth over $50 billion, and with it his descendants could by back much of the now-improved land. Such is the magic of compound growth.

Similarly, the implications of various growth rates for the size of future dividends may be surprising to many readers. Growth at a 15 percent rate means that dividends will double every five years (a handy rule for calculating how many years it takes dividends to double is to divide 72 by the long-term growth rate. Thus, if dividends grow at 15 percent per year they will double in a bit less than five years (72 + 15).

The catch (and doesn’t there always have to be at least one, if not twenty-two?) is that dividend growth does not go on forever. Corporations and industries have cycles similar to most living things. There is, for corporations in particular, a high mortality rate at birth. Survivors can look forward to rapid growth, maturity, and then a period of stability. Later in the life cycle, companies eventually decline and either perish or undergo a substantial metamorphosis. Consider the leading corporations in the United States 100 years ago. Such names as Eastern Buggy Whip company, La Crosse et Minnesota Steam Packet Company, Lobdell Car Wheel Company, Savanna and St.Paul Steamboat line, and Hazard Powder Company, the already mature enterprises of the time would have ranked high in a Fortune top 500 list of that era. All are now deceased.

Knowing is not enough; we must apply. Willing is not enough; we must do (Johann Wolfgang von Goethe)

Look at the industry record. Railroads, the most dynamic growth industry a century ago, finally matured and enjoyed a long period of prosperity before entering their recent period of decline. The paper and aluminum industries provide more recent examples of the cessation of rapid growth and the start of a more stable, mature period in the life cycle. These industries were the most rapidly growing in the United States during the 1940s and early 1950s. By the 1960s they were no longer able to grow and faster than the economy as a whole. Similarly, the most rapidly growing industry of the late 1950s and 1960s, the electronics industry, had slowed to a crawl by the 1970s.

And even if the natural life cycle doesn’t get a company, there’s always the fact that it gets harder and harder to grow at the same percentage rate. A company earning $1 million needs increase its earnings by only $100,000 to achieve a ten percent growth rate, whereas a company starting from a base of $10 million in earnings needs $1 million in additional earnings to produce the same record.

The nonsense of relying on very high long-term growth rates is nicely illustrated by working with population projections for the United States. If the populations of the nation and of California continue to grow in their recent rates, 120 percent of the United States population will live in California by the year 2035. Using similar kinds of projections, it can be estimated that at the same time 240 percent of the people in the country with venereal decease will live in California. As one Californian put it on hearing these forecasts. “Only the former projections make the latter one seem at all plausible.”

As hazardous as projections may be, share prices must reflect differences in growth prospects if any sense is to be made of market valuations. Also, the probable length of the growth phase is very important. If one company expects to enjoy a rapid 20 percent growth rate for ten years, and another growth company expects to sustain the same rate for only five years, the former company is, other things being equal, more valuable to the investor than the latter. The point is that growth rates are general rather than gospel truths. And this brings us to the firm-foundation theorists’ first rule for evaluating securities:

Rule 1: A rational investor should be willing to bay a higher price for a share the larger the growth rate of dividends.

To this is added an important corollary:

Corollary to Rule 1: A rational investor should be willing to pay a higher price for a share the longer the growth rate is expected to last