4/29/2011 12:12 PM ET
It's psychologically difficult to own out-of-favor securities, yet potentially rewarding. Consider silver not long ago -- or Microsoft today.
Related topics: Microsoft, commodities, Apple, investing strategy, Bill Fleckenstein
Recently I have received an unusual number of emails from readers of my subscription site, Fleckensteincapital.com, on the seemingly unrelated subjects of silver and Microsoft.
With silver on a tear lately, some of these emails have bordered on giddy. Others, though, have taken me to task for not believing in the theory (aka myth) of silver market manipulation that has been floating around for years, and which I have debunked many times.
Similarly, every time Microsoft (MSFT, news) stock swoons, I get a batch of messages from readers telling me their thesis as to why it is weak. (Microsoft is the publisher of MSN Money.)
The history of silver prices
In thinking about those emails, I realized the topics were connected and that they illuminate a very important subject in investing: the power of psychology. This is the "force" that persuades people to hate what is cheap and love what is expensive. These two assets provide textbook illustrations of that phenomenon.
Over the past few weeks, silver has become especially popular, and its market quite frothy, while Microsoft is somewhere between loathed and forgotten. As recently as 2004, silver changed hands for a little more than $4 per ounce, yet it's now well above $48 an ounce. Thus, in the last seven years, it has appreciated more than elevenfold, although at the start of that run it was regarded even more pitiably than Microsoft is today.
Bill Fleckenstein
People today can at least acknowledge Microsoft as a viable investment. Silver in 2004 was thought of as barely even an industrial metal, one whose price was destined to decline as photography went digital. So why would anyone ever want to own it?
Conversely, though off its 2000 high, a share of Microsoft changed hands for about $25, or 20 times earnings, in 2004. That's approximately the same price the stock sells for today. Since then, earnings have doubled, from around $1.26 per share to something north of $2.50 this year. Thus, the price-to-earnings ratio has been cut in half.
Microsoft stock trades as it does not because of some enormous flaw in its collective business strategies, but simply because it has become unpopular -- for a variety of reasons. The biggest of these is probably the rise in popularity of cloud computing concepts, followed by the market being mesmerized with anything related to Apple (AAPL, news).
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People are enthralled with Apple's doodads even though life in the business world could easily go on without Apple, while it could not without Microsoft. But Microsoft is not alone. Other large-cap tech stocks trade similarly. I just focus on Microsoft because I think it is positioned so much better than Intel (INTC, news), Cisco Systems (CSCO, news) or other comparable companies.
Precious 'mentals'We aren't limited to technology to demonstrate how psychology impacts the price of securities, though. In the mining arena, it was only two months ago that Newmont Mining (NEM, news) issued guidance for the year that was deemed not good enough. The stock was bludgeoned; it dropped about 10% in one day and wound up losing almost 20% in two weeks before that little swoon was over. Yet now it is right back to where it was. The perception then was, apparently, that Newmont had problems. But since then, its results have alleviated some of those concerns.
The Newmont example also shows that psychology can change rather quickly. Whether that change was momentary, I can't say. But the impossibility of handicapping the mental variable (in Jim Grant's wonderful book of the same name, he labeled it "Money of the Mind") is why contrarians do as well as they do. By being willing to take the side of apathy or scorn, they get a price on a security that is depressed because of human emotions. As a result, what is required to make money is not a change in the business, but rather a change in the perception of that business. And if you are lucky enough to get both, you can benefit from a double whammy, as the earnings and the earnings multiple both expand.
Still, the madness of crowds is what makes the investment business so difficult -- which is why it is called investing or speculating, not winning. Sometimes it is quite straightforward to ferret out what a company may do, but how that will be perceived is often anyone's guess. That is why conventional wisdom argues for diversification; one can't really know how the other wildebeests on the plain will react to a potential change in the wind.
In any case, I hope that discussion of two ideas that seem so disconnected -- silver and Microsoft -- helps folks navigate future fluctuations in ideas or asset prices they care about. As unsatisfying as it is to say, on a short-term basis, psychology matters a great deal more than underlying company fundamentals.
On the airFor readers who enjoy my interview series with Eric King of King World News, we covered a lot of ground in our latest exchange. Those who are interested can listen to it here.
At the time of publication, Bill Fleckenstein owned or controlled stock in the following companies: Newmont Mining and Microsoft.
This column is a synopsis of Bill Fleckenstein's daily column on his own website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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Back in 2004 Michael Dell ( who started the company ) decided to quit ... I mean take some extended time off from his duties as Dell CEO. Rollins replaced him and made some 'bad decisions' ... foremost of which was the decision to 'cook the books' of Dell Computers Inc.
You see, even though the tech bubble burst big time in 2001-2002, most folks in the computer tech industry at the time figured the downturn wouldn't last long. As such, Dell and Rollins made TOO MANY PCs in 2003, 2004, and2005 and COULDN'T SELL THEM. So Rollins decided to stuff the surplus Dell computers in a dozen warehouses throughout Texas. Rather than write off the inventory as a business loss ( which would have put the company out of business ) Rollins decided to 'count the PCs as having the same net worth as the cash it took to manufacture them.' In other words the cash Dell Computers claimed to have on hand was in fact tied up in a million obsolete computers that Dell couldn't sell except at a loss.
That's why Dell had an 'accounting scandal' back in 2007 ... about the same time Dell decided to come back from his extended vacation. But King Bush decided ... since Texas had enough bad publicity regarding Enron ... to sweep the problem under the rug ... and hand it over to King Obama ... who has decided to do the same. And since Dell's revenue has almost doubled in the past ten years ... provided the company can continue to 'grow revenue and profits' ... the losses Dell should have taken five or six years ago ... won't amount to much in a year or two.
But, of course, there's still the problem of a million Dell PCs that need to be 'unaccounted for.' That's why Ebay is stuffed to the rim with seven year old Dell PCs ... you can 'buy one now' for $50 on Ebay ... which would have sold back in 2005 .... if someone had decided to buy one ... for $1500. And that pretty much sums it up when it comes to the true condition of crony Corporate American business.
Why am I bothering to 'write such useless slander' ... because I'm sick and tired of Wall Street's socialism for rich people ... and I'm one of those folks who busted my butt to figure out how a computer works ... and never got a chance to profit from it like the Duke of Dell did.
0 0ReportSpamb_capp12 hours agoMumblings about how well Microsoft is positioned in the business world are unfounded. Yes, most folks believe Microsoft is in the driver's seat when it comes to Operating Systems, Business Software, and Gaming Platforms. Just go into Best Buy and take a look at all the computers running Windows. What other software is there? Microsoft owns it all.
At least, that's how the argument goes.
But lift the curtain and take a peak behind the scenes, and you would conclude the same as I have. Microsoft has a business model which worked well in the past but is seriously flawed today. So why is Apple winning and Microsoft losing? For starters, Apple has become a 'systems innovator' consumer electronics company. Apple realizes there is little money to be made in producing only software. You have to produce the product, that is, the electronic system, and 'glue the components together,' and practically give the software away for free. The iPod is nothing more than a DSP and speaker with a simple easy to use interface. Much the same as the iPhone. The iPad proves Apple can still 'glue chips together' to make a new style computer.
That's something Microsoft can't do because Microsoft is only one third of a monolopy that divides the spoils of the PC profits. Intel makes the hardware, Microsoft makes the software. Dell markets and supports the PC. Due to this 'business plan,' even if Microsoft engineers have the technical know how to duplicate the Ipad they won't do as such. Why? Because Microsoft doesn't want to step on Intel's turf because if they do, Intel engineers won't explain to Microsoft software engineers how their chips work. That's also why Apple has an Arm Holdings processor ( and not an Intel Atom ) in their iPad.
Because software is so easy to copy, and because there are many folks who really want to know how a computer works, there is community outside the confines of Microsoft who have produced an Operating System called Linux. There are many flavors of Linux. You have Suse Linux which is supported by what's left of Novell. You have RedHat Linux which is essentially 'North Carolina Research Triangle' software. You have Ubuntu which is South Africa/England Linux software. Not to mention Debian and FreeBSD which is 'Linux software' that resulted from AT&T finally giving up on trying to make money from Unix. I don't have the space to mention the two hundred other flavors of Linux. All this 'Linux software' has but one goal ... MAKE THE BASIC CODE TO RUN THE PLATFORM PRACTICALLY FREE ... if you can figure out how to use it. And once most people figure out how to use Linux ...
Microsoft is going to have a hard time peddling their OS for $199 when you can get something that is just as good FOR FREE. But I don't think Microsoft is the first link in the Intel-Microsoft-Dell monopoly to get pitched in the PC toilet ... which has trashed many a computer company to date ... such as Micron, Gateway, and Compaq. I think Dell gets flushed first.
When is Dell going to pay his mortgage on the Four Season Hotel he owns in Maui, Hawaii ??? For more google 'Dell Four Seasons Maui default.' And why are there so many mid 2000s manufactured Dell Optiplex PCs for sale on Ebay, most of which are being offered by a company based in Texas ???
1 1ReportSpamwalter bradford (everydaysmoe) Sat 3:10 AMOne thing you have not debunked is that the price ratio of silver to gols is higher now than it has been since the mid 1800's. Eclipsing the ratio set back in 1983 when the Hunt brothers illegall tried to corner the silver market. This is potentially bad news. Previouslt Gold is 2.3 times the value of silver. Today Silver is 3.2 % the value of gold....overbought and for no reason, plenty of inventory above and below ground, Mining costs lower and central banks are not hoarding......this is all signs of a speculative driven market which could cost good people a lot of mone potentially. Remember, "Buy LOW Sell HIGH". It is getting harder and harder to buy low now. 16 4ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. 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$.dap("&PG=INVISA&AP=1089",300,60,"partnerad1");$.dap("&PG=INVISB&AP=1089",300,60,"partnerad2");$.dap("&PG=INVISC&AP=1089",300,60,"partnerad3");$.dap("&PG=INVISD&AP=1089",300,60,"partnerad4");$.dap("&PG=INVISE&AP=1089",300,60,"partnerad5");$.dap("&PG=INVISF&AP=1089",300,60,"partnerad6");MARKET UPDATEUSINTERNATIONALNAMELASTCHANGE% CHANGEThere's a problem getting this information right now. Please try again later.NAMELASTCHANGE% CHANGEThere's a problem getting this information right now. Please try again later.[BRIEFING.COM] Action at the end of April may have been subdued, but it allowed stocks to quietly put together an impressive series of advances. ... More
More Market NewsStock TickerStory StocksIn PlayShort StoriesCurrenciesNAMELASTCHANGE% CHANGEThere's a problem getting this information right now. Please try again later.See more currenciesRECENT QUOTES/*WATCHLIST/*SymbolLastChangeSharesWatchlist optionsUpdate quotesClear this listView full pageWhere's my listHelpQuotes delayed at least 15 minSponsored by:$.dap("&PG=INVSRQ&AP=1025",120,30,"quotead");RECENT ARTICLESResist the madness of the crowdA tale of 2 earnings seasons50 stocks to buy in AprilThe 7 best stocks for a lifetime5 can-do companies made in AmericaJIM JUBAKEarnings aren't as good as they seemChina creeps toward a crisisWhere to turn when the dollar fallsWorrying about QE2High-speed trains to nowhere?MORE ON BINGEasy ways to boost your car's gas mileageHow much more do college graduates earn?What to do if you are a victim of ID theftHow often should you rebalance your portfolio?Best places to retire in the USTODAY'S MSN STAFF PICKSINTERNET EXPLORER 9Download the browser's latest version now
Bing: Osama bin Laden is dead'Hangover' producers sued by Tyson's tattoo artistAs housing market sags, remodeling gains steam/* ({0})",msgr:"a.msgr",maxcount:9999,axob:"MSNMessenger.Hotmail2Control"});a(b).channelheaderflyout({delay:{open:500,close:50}});a("a.inbox").hotmaillivemenu({hotmailcalendertext:"Calendar"});a("div.websearch2").togglesearchtext({searchInputBoxId:"q4"});a("div.websearch2 form").bindSearch2();a(".myhp").setHomepage({url:"http://www.msn.com",txt:"Make MSN your homepage"})},a.jsUrl)})})(jQuery);jQuery("a.openpopup").async("openPopup");(function(a){a(function(){a.async("asyncCanary",function(){a(".ptnrcnt1").partnerhostedcontentfeature()},a.jsUrl)})})(jQuery);(function(a){a(function(){a.async("asyncCanary",function(){a.lazyLoad.timeout=6e4;a.cookie+=";MUID=";a(".cogr.coss").slideshow({delay:7e3});a(".cogr.cotb").tabGroup({hover:{delay:300}});a("div.ivideo").async("inlinevideo",[{param:{windowless:"true"},asyncp:1}])},a.jsUrl)})})(jQuery);jQuery("a.opennew").async("openNew");jQuery(".pageoptions1").async("pageOptions");jQuery(".pageoptions1 #ausug").async("autoSuggest",[{helpLinkText:"What is this popup",helpLink:"http://help.live.com/help.aspx?project=wl_searchv1&querytype=keyword&query=sihggus&mkt=en-US",formCode:"MSMONY",openNew:"0",market:"en-us",cookieDomain:null,cookiePath:null,inputId:"q4"}]);jQuery(".quotesearchbar0").async("quoteSearchBar");jQuery(".quotesearchbar1").async("quoteSearchBar");jQuery(".quotewatchlist0").async("quoteWatchList0");jQuery(".recentquotes0").async("recentQuotes0");jQuery(".stkscoutrating2").async("financefundamentals");(function(b){var a=b("#nav .breaknews1");if(a.text().length==0)a.css("display","none")})(jQuery)//]]>/*/*People are enthralled with Apple's doodads even though life in the business world could easily go on without Apple, while it could not without Microsoft. But Microsoft is not alone. Other large-cap tech stocks trade similarly. I just focus on Microsoft because I think it is positioned so much better than Intel (INTC, news), Cisco Systems (CSCO, news) or other comparable companies.
We aren't limited to technology to demonstrate how psychology impacts the price of securities, though. In the mining arena, it was only two months ago that Newmont Mining (NEM, news) issued guidance for the year that was deemed not good enough. The stock was bludgeoned; it dropped about 10% in one day and wound up losing almost 20% in two weeks before that little swoon was over. Yet now it is right back to where it was. The perception then was, apparently, that Newmont had problems. But since then, its results have alleviated some of those concerns.
The Newmont example also shows that psychology can change rather quickly. Whether that change was momentary, I can't say. But the impossibility of handicapping the mental variable (in Jim Grant's wonderful book of the same name, he labeled it "Money of the Mind") is why contrarians do as well as they do. By being willing to take the side of apathy or scorn, they get a price on a security that is depressed because of human emotions. As a result, what is required to make money is not a change in the business, but rather a change in the perception of that business. And if you are lucky enough to get both, you can benefit from a double whammy, as the earnings and the earnings multiple both expand.
Still, the madness of crowds is what makes the investment business so difficult -- which is why it is called investing or speculating, not winning. Sometimes it is quite straightforward to ferret out what a company may do, but how that will be perceived is often anyone's guess. That is why conventional wisdom argues for diversification; one can't really know how the other wildebeests on the plain will react to a potential change in the wind.
In any case, I hope that discussion of two ideas that seem so disconnected -- silver and Microsoft -- helps folks navigate future fluctuations in ideas or asset prices they care about. As unsatisfying as it is to say, on a short-term basis, psychology matters a great deal more than underlying company fundamentals.
For readers who enjoy my interview series with Eric King of King World News, we covered a lot of ground in our latest exchange. Those who are interested can listen to it here.
At the time of publication, Bill Fleckenstein owned or controlled stock in the following companies: Newmont Mining and Microsoft.
This column is a synopsis of Bill Fleckenstein's daily column on his own website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
I should add on to the statement regarding old Dell PCs clogging the Ebay used computer section. What follows is speculation as I have no proof, other than a sound opinion in my opinion of how the Texas business world works. Here goes:
Back in 2004 Michael Dell ( who started the company ) decided to quit ... I mean take some extended time off from his duties as Dell CEO. Rollins replaced him and made some 'bad decisions' ... foremost of which was the decision to 'cook the books' of Dell Computers Inc.
You see, even though the tech bubble burst big time in 2001-2002, most folks in the computer tech industry at the time figured the downturn wouldn't last long. As such, Dell and Rollins made TOO MANY PCs in 2003, 2004, and2005 and COULDN'T SELL THEM. So Rollins decided to stuff the surplus Dell computers in a dozen warehouses throughout Texas. Rather than write off the inventory as a business loss ( which would have put the company out of business ) Rollins decided to 'count the PCs as having the same net worth as the cash it took to manufacture them.' In other words the cash Dell Computers claimed to have on hand was in fact tied up in a million obsolete computers that Dell couldn't sell except at a loss.
That's why Dell had an 'accounting scandal' back in 2007 ... about the same time Dell decided to come back from his extended vacation. But King Bush decided ... since Texas had enough bad publicity regarding Enron ... to sweep the problem under the rug ... and hand it over to King Obama ... who has decided to do the same. And since Dell's revenue has almost doubled in the past ten years ... provided the company can continue to 'grow revenue and profits' ... the losses Dell should have taken five or six years ago ... won't amount to much in a year or two.
But, of course, there's still the problem of a million Dell PCs that need to be 'unaccounted for.' That's why Ebay is stuffed to the rim with seven year old Dell PCs ... you can 'buy one now' for $50 on Ebay ... which would have sold back in 2005 .... if someone had decided to buy one ... for $1500. And that pretty much sums it up when it comes to the true condition of crony Corporate American business.
Why am I bothering to 'write such useless slander' ... because I'm sick and tired of Wall Street's socialism for rich people ... and I'm one of those folks who busted my butt to figure out how a computer works ... and never got a chance to profit from it like the Duke of Dell did.
Mumblings about how well Microsoft is positioned in the business world are unfounded. Yes, most folks believe Microsoft is in the driver's seat when it comes to Operating Systems, Business Software, and Gaming Platforms. Just go into Best Buy and take a look at all the computers running Windows. What other software is there? Microsoft owns it all.
At least, that's how the argument goes.
But lift the curtain and take a peak behind the scenes, and you would conclude the same as I have. Microsoft has a business model which worked well in the past but is seriously flawed today. So why is Apple winning and Microsoft losing? For starters, Apple has become a 'systems innovator' consumer electronics company. Apple realizes there is little money to be made in producing only software. You have to produce the product, that is, the electronic system, and 'glue the components together,' and practically give the software away for free. The iPod is nothing more than a DSP and speaker with a simple easy to use interface. Much the same as the iPhone. The iPad proves Apple can still 'glue chips together' to make a new style computer.
That's something Microsoft can't do because Microsoft is only one third of a monolopy that divides the spoils of the PC profits. Intel makes the hardware, Microsoft makes the software. Dell markets and supports the PC. Due to this 'business plan,' even if Microsoft engineers have the technical know how to duplicate the Ipad they won't do as such. Why? Because Microsoft doesn't want to step on Intel's turf because if they do, Intel engineers won't explain to Microsoft software engineers how their chips work. That's also why Apple has an Arm Holdings processor ( and not an Intel Atom ) in their iPad.
Because software is so easy to copy, and because there are many folks who really want to know how a computer works, there is community outside the confines of Microsoft who have produced an Operating System called Linux. There are many flavors of Linux. You have Suse Linux which is supported by what's left of Novell. You have RedHat Linux which is essentially 'North Carolina Research Triangle' software. You have Ubuntu which is South Africa/England Linux software. Not to mention Debian and FreeBSD which is 'Linux software' that resulted from AT&T finally giving up on trying to make money from Unix. I don't have the space to mention the two hundred other flavors of Linux. All this 'Linux software' has but one goal ... MAKE THE BASIC CODE TO RUN THE PLATFORM PRACTICALLY FREE ... if you can figure out how to use it. And once most people figure out how to use Linux ...
Microsoft is going to have a hard time peddling their OS for $199 when you can get something that is just as good FOR FREE. But I don't think Microsoft is the first link in the Intel-Microsoft-Dell monopoly to get pitched in the PC toilet ... which has trashed many a computer company to date ... such as Micron, Gateway, and Compaq. I think Dell gets flushed first.
When is Dell going to pay his mortgage on the Four Season Hotel he owns in Maui, Hawaii ??? For more google 'Dell Four Seasons Maui default.' And why are there so many mid 2000s manufactured Dell Optiplex PCs for sale on Ebay, most of which are being offered by a company based in Texas ???
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