[transcript]
Dangerous Don: Welcome back, everybody! Welcome back to the MACHO INVESTING blog, the
home of you and me and a TON of other stock-market millionaires just like
us. We’re blogging to you direct from our
worldwide corporate headquarters right here in Scranton, Pennsylvania.
Johnny: And I second the motion, even though we’re
actually in Dunmore! Sitting in Don’s kitchen. Welcome back, everybody!
Dangerous Don: I’m your host, Dangerous Don. I’m sure you recognize the name. I happen to be one of the greatest
stock-market investors of all time.
Johnny: And sitting right here next to me is. . . .
. . . .
Dangerous Don: . . .
. . and sitting right here next to me is the distinguished co-host of this
blog, and the dean of the Scranton. . . .
Johnny: Dunmore.
Dangerous Don: . . . . . the dean of the Dunmore financial
gurus, Johnny Doorknob!
Johnny: Pleasure to be here, as always!
Dangerous Don: So. .
. . . Johnny. . . . little bit of personal news, before we start. How’s your new grandson?
Johnny: Ryan! What
a pistol! Smiles at everybody!
Dangerous Don: How old?
Johnny: Three weeks!
Dangerous Don: He's reading the Wall Street Journal already, I’m
sure.
Johnny: Funny
you should mention reading. My daughter
asked me about that too.
Dangerous Don: Really?
Johnny: I think
I told you this. My daughter Cindy
taught my little granddaughter Cathy how to read before she was four years old.
But.
. . . now. . . . Cindy isn’t sure whether little Ryan is going to be able to
learn that fast.
Dangerous Don: Ahhh. . . .
Johnny: So I said to Cindy. . . . . Don’t worry! In
fact. . . . . I said. . . . . from one way of looking at it, Ryan can read
already.
Dangerous Don: Already?
At three weeks?
Johnny: His DNA.
The DNA in your body can read 64 words.
Each word, 3-letters long.
Dangerous Don: No kidding.
Johnny: They call them “codons”. Three chemicals attached together, in kind of
a string.
Dangerous Don: Hmm. . . . . .
Johnny: Crazy thing is that the order of these
chemicals is important. DNA can tell the difference between the codon CAC
and the codon ACC.
Dangerous Don: And. . . . . ?
Johnny: Different instructions. Different commands. The DNA does different things, as it reads
each codon.
Dangerous Don: So. . . . . wait a minute. . . . . my DNA is
actually “reading”? Like, reading a
book?
Johnny: Absolutely!
This is reading. Knowing 64
words with 3 letters each is reading. And knowing the difference between CAC and ACC. That’s reading. Reading at a first-grade level, for sure.
Dangerous Don: So. . . . even a three-week-old kid knows how
to read?
Johnny: Every cell in his body is reading all the
time.
Dangerous Don: Johnny, you never cease to amaze me. The things you come up with!
Johnny: But, we got to get back to business! We’re here to talk about investing and stuff.
Dangerous Don: Correcto, my friend! This is the MACHO INVESTING blog, and those
good folks out there are waiting for our take on what’s going on in the
investing world.
Johnny: Biggest news, in my opinion, is that trading
volume is way down. Average daily trading
volume, in all US stocks, is down 50% from 2008.
Dangerous Don: Not a
big deal. In my opinion. Main
thing is, stock prices are up. S&P
500 is up. . . . heck, it’s more than double where it was in March, 2009.
Johnny: Okay.
But if there are fewer and fewer buyers in the market, sooner or later
we’re heading for one of those Emperor’s New Clothes moments.
Dangerous Don: Meaning. . . . ?
Johnny: People start asking themselves. . . . . well,
what actually keeps these stock prices up?
Dangerous Don: Obvious.
Earnings.
Johnny: But the companies everybody wants to invest
in don’t pay any dividends. Sure, they have earnings. Some of them have lots of earnings. But
you, the share-holder, you don’t get any of those earnings. Google has never declared a dividend in its
entire corporate history.
Dangerous Don: Point being. . . . ?
Johnny: Owning a share of non-dividend-paying stock doesn’t
put any food on your table. Any more
than owning a baseball card does. It’s only
valuable because you’re pretty sure somebody down the road will buy that share
from you at more than what you paid.
Dangerous Don: And somebody always will!
Johnny: That’s called “The Greater Fool Theory”. You buy something, and you know that it ain’t
going to put any food on your table. But
you buy it anyway, because you’re sure somebody else. . . . some Greater Fool. . . . will buy it from you, at a
higher price.
Dangerous Don: That’s right!
Johnny: Thing is. . . . the whole market for non-dividend-paying stocks is nothing more than a
glorified version of the Greater Fool Theory.
Dangerous Don: Tell that to the hundred million people who
bought stocks last year.
Johnny: Bonds pay you interest. CD’s pay you interest. And some companies pay you dividends. All that means real food on the table.
Dangerous Don: But you’ll always make more on the
stock market. More than bonds. And really, really more than CD’s.
Johnny: But non-dividend-paying stocks pay you
nothing. You’re only going to get back
your investment by selling.
Dangerous Don: Google is a strong BUY, at least in my shop!
Johnny: A share of Google is only worth what the next
guy is willing to pay for it. And
somehow, you have to convince that next guy to ignore the fact that Google
stock isn’t going to put any food on his table either.
Dangerous Don: That’s the whole idea of the stock
market. And it rolls along nicely. . . .
Johnny: And it all rolls along nicely. . . . until it doesn't. Until we reach that
Emperor's New Clothes Moment. What's going to happen. . . . gradually, people will start paying more and
more attention to this news about declining trading volume.
Dangerous Don: And. . . . . ?
Johnny: And then. . . . one day. . . . investors will wake up and
realize they're trapped. There ain’t enough Greater Fools out there anymore, to do
all the buying that has to be done.
Dangerous Don: Don’t make me laugh! We’re
never going to run out of fools!
Johnny: Okay. You’re right.
The world will never run out of fools.
But not all of those fools will have the cash to buy 1000 shares of
Google stock. Not at $600 a share.
Dangerous Don: Don’t worry!
More than enough fools to go around!
Johnny: I think. . . . one day. . . . we’re going to
see the Greater Fool Theory start to operate in reverse. People are suddenly going to realize what
worthless pieces of paper non-dividend-paying stocks really are, and how buyers
seem to be getting fewer and fewer, and how likely they are to get stuck. . . .
Dangerous Don: And. . . . . ?
Johnny: And everybody is going to head for the door
at the same time. Prices will drop like rocks.
Dangerous Don: So. .
. . that’s it?. . . . the End of the World, right?
Johnny: All of a sudden, you figure it all out. You
finally understand what keeps stock prices up. Future buyers. That's the only thing keeping stock prices up. There's this myth that there's always going to be an endless supply of future buyers. Always buying at higher and higher prices. But right now. . . . . problem is. . . . . buyers seem to be disappearing.
Dangerous Don: And the oceans will start boiling, and the Moon
will crash into the Earth, right?
Johnny: You know. . . . lack of confidence is contagious. And it’s self-reinforcing. The main reason you start
selling is because you’re afraid everybody else is going to sell. When that happens. . . . the market nose-dives.
Dangerous Don: Gimme a break!
Johnny: We’ve gone through this whole mess twice, just in the
last eleven years. The Crash of 2001 and the Crash of 2009. People
remember.
Dangerous Don: What’s the odds of that kind of crash
happening again, so soon?
Johnny: Most people. . . . deep in their gut. . . . . would bet there’s
going to be another stock market crash within the next five or six years or so.
Dangerous Don: You
doom-and-gloom guys always talk a good line. . . . .
Johnny: That’s why the drop in trading volume is
going to spook a lot of folks.
Dangerous Don: . . . . . but the market always recovers,
despite what you guys say.
Johnny: I’m sure the market will eventually recover. But
only when companies start paying hefty dividends. Owning stock should actually put food on
your table. Without having to sell the
stock.
Dangerous Don: Never heard of . . . . .
Johnny: Actually, that’s the way things used to
be. Not so long ago. Most companies used to pay
cash dividends on their stock, at yields higher than their own bonds.
Dangerous Don: Before my time.
Johnny: It was only in the 1950’s. . . . that’s when
companies saw they could get away with not paying dividends. Because
investors seemed more focused on capital appreciation. That was a dumb
move by investors, by the way, to let companies get away with eliminating dividends.
Dangerous Don: Enough about stocks already. Bonds have all these same problems.
Johnny: No they don't. Bonds don't depend on other people wanting to buy them. But you have to be patient, because bonds are all about time. Remember, you always have the option to hold on to your bonds. . . . . hold them to maturity. . . . . and collect every penny you invested, plus interest.
Dangerous Don: Enough about stocks already. Bonds have all these same problems.
Johnny: No they don't. Bonds don't depend on other people wanting to buy them. But you have to be patient, because bonds are all about time. Remember, you always have the option to hold on to your bonds. . . . . hold them to maturity. . . . . and collect every penny you invested, plus interest.
Dangerous Don: Enough of this doom and gloom. We’re gonna have to move on to a new topic.
Johnny: Okey-dokey.
Dangerous Don: Hired
a quant to do the math on the Hemline Index.
Johnny: Wait a minute. . . . . Hemline Index? You mean. . . . . that
crazy old superstition? About stock prices
going up when women’s dresses. . . . . ?
Dangerous Don: It is
NOT a superstition! We’re talking rock-solid regression analysis! Mathematically-proven correlation! Heck, even Wikipedia says it's valid!
Johnny: You know, Don. . . . sometimes. . . . I don’t know
whether you’re joking or not.
Dangerous Don: My staff constantly monitors the fashion world, to check
whether the hemlines on women’s dresses are going up or down. Including finding out what the fashion gurus are predicting for the
next five years, hemline-wise.
Johnny: Amazing.
Do all 401(k)’s operate this way?
Dangerous Don: Then, my staff pulls together all these hemline numbers,
together with all other relevant economic factors such as interest rates, inflation, commodity
prices, etc., etc., to develop a comprehensive stock-market strategy.
Johnny: Good lord.
Dangerous Don: I’m a
fiduciary. I have to be as thorough as
possible.
Johnny: Of course.
Dangerous Don: And yes, I belong to an association of 401(k)
investment advisors, and yes, our whole association agrees that these important
scientific metrics, like the Hemline Index. . . . . which are mathematically-proven metrics, not
superstitions. . . . these have to be the core of any investment strategy.
Johnny: Of course.
Dangerous Don: The math is the whole thing. That’s why I hired the quant. It’s not just a simple matter of dresses going up and going
down. Much more complicated. You
gotta ask. . . . how many inches of “up” in the hemlines equals how much
adjustment in the total Value-at-Risk of your equity portfolio? What's the delta? That’s the key!
Johnny: Okay, but. . . . . this is 401(k) money, right? These employees are saving up for their retirement, right?
Dangerous Don: And the math is only the first step.
Johnny: Ahhh.
. . . hate to even ask. . . . . .
Dangerous Don: We’ve also hired a lobbying firm, to lobby the fashion
industry. We are making sure they understand that an upbeat
stock market is good for everybody. And for
that to happen, we need upbeat hemlines.
Johnny: Wow! You
guys really work hard! So if you can convince the fashion gurus to raise
hemlines. . . . . ?
Dangerous Don: The S&P 500 will just go through the
roof!
Johnny: Amazing! But, actually. . . . hate to say this, Don. . . . . but. . . . on that upbeat note. . . .
Dangerous Don: It’s time?
Johnny: Afraid so.
Dangerous Don: Always seems so quick! Folks, sorry but it looks like we’ve run out
of time! Hope you learned a lot!
Johnny: Before we go, what's the take-away?
Dangerous Don: Same thing I've been saying for years. What all the textbooks on finance will tell you. RISK EQUALS REWARD. So, obviously, MORE RISK EQUALS MORE REWARD!
Johnny: That's completely nuts! But we're out of time. We gotta go.
Dangerous Don: See you next time!
Johnny: Before we go, what's the take-away?
Dangerous Don: Same thing I've been saying for years. What all the textbooks on finance will tell you. RISK EQUALS REWARD. So, obviously, MORE RISK EQUALS MORE REWARD!
Johnny: That's completely nuts! But we're out of time. We gotta go.
Dangerous Don: See you next time!
Johnny: See you next time!
Dangerous Don: Stay tuned to the MACHO INVESTING blog! Believe me, you are going to make a TON of
money!
