Sotheby’s has just had another record sale. A painting by Mark Rothko went for USD$72 million.
Somewhere…the gods are laughing.
We observed yesterday that Richard Russell has changed his tune. Now he warbles an almost up-beat melody; the Dow is entering the third and final stage of its great bull market, he says. A top is yet to come.
Russell is one of the great old-timers of the guru trade. He has been interpreting Dow Theory for 40 years.
The theory can be described so simply that it sounds ridiculous:
The stock market runs in big, long trends…it goes up, up and up – until it reaches the top. Then it goes down, down, down – until it reaches the bottom.
In theory, that makes it easy to invest. You just have to identify the primary trend. In practice, you are still stumbling around in the same fog as everyone else, because you can never know for sure which direction the trend is really going or when you have hit the extremes.
We have followed Russell for many years. What we find useful about his analysis is that it emphasises the long-term trends, which are visible, at least, in retrospect. And it focuses on values. How do you know when stock prices have reached a peak? Just look at the values. Major peaks come when you don’t get much value for your money. At major bottoms, you can buy a share for 5-10 times earnings. At major tops, you have to pay much more – three to five times more. At bottoms, it’s not hard to find stocks paying dividend yields of 5%-8%. At bottoms, you’re lucky to get 2%.
Based on values alone, we judge the US stock market – and the worldwide art market – to be at peaks, or dangerously close to them.
Russell may be right about the exact position of the major trend…and the coming Third Phase. But we will stick to the values.
The trouble with investors, if we may steal a line from a dead man, is they know the price of everything and the value of nothing. What is the value of a Rothko painting? We don’t have any idea. We just have an opinion. And in our opinion, whoever spent USD$72 million for it should seek treatment…immediately.
But, at least in the world of real investments, there are numbers to help. We have Return On Investment (ROI) numbers, for instance, to guide us. An investment that gives us a 10% return is a better investment, we figure, than one that gives us only 5%. Since you can’t really know which way the market is going, you shouldn’t count on capital gains. Even Russell, with his formulae and his long experience, has often been wrong; anyone who stays in the business is proven wrong sooner or later. It is simply not given to man to know his fate. Look at earnings. Or the yield. If you’re lucky enough to get anything more than that, well…bully for you.
Betting on the direction of the market is a mug’s game that violates our most obstinate prejudice, announced in this space as Bonner’s Law:
The quality of information declines by the square of the distance from the source.
When you buy a company – especially one that is next door to you – you can study it in detail and make a fair guess about its earnings. But when you are merely ‘in the market,’ you are nothing more than a patsy for the financial industry. You are buying something you don’t understand from someone you shouldn’t trust. And if you make any money at all, you don’t deserve to.
You are better off studying your investments carefully…individually…and focusing on value. At least then when you lose money, it’s your own damned fault.
Markets and Money