New Deep Six Podcast

March 12, 2009 4:21:59 AM PDT
Title: "Stocks, Pi and Socks"I've been thinking a lot about the stock market, its ups and downs, where my money has been, where it is going, if it will ever come back - and how anyone can figure this whole thing out. Included in my thoughts has been the independent film Pi, which was directed by David Aronofsky, who most recently directed The Wrestler.

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The 1998 black and white psychological thriller is about a recluse named Max, who has a talent with numbers. We're not talking about Rain Man stuff, where he can count fallen toothpicks and Black Jack cards. This Max can figure out massively complicated mathematical problems.

In the movie, he constructs a supercomputer, calls it Euclid, and goes on to realize that there is a predictable numerical pattern for everything - everything, including the stock market.

One day, Euclid spits out a 216-digit number that turns out to be the solution to the problem of trying to predict the stock market. Not only that, this long, drawn out number seems to hold divine properties - which causes a lot of problems for Max - again, the protagonist in the film.

Just in case you plan on seeing Pi one day, I won't go on about what happens next, or in the end. But I will tell you it is a very powerful, and thought-provoking film. It makes you wonder - is there a hugely complicated, but very predictable mathematical equation that not only can predict the gyrations of the stock market - but actual events in the future?

Some say the Unified Field Theory, which confounded Albert Einstein in his day, might be that equation. That theory - if it is every truly, and fully discovered, would unify the four basic forces of the universe: the strong nuclear force, which includes nuclear power, the weak nuclear force, which involves radioactive decay, electromagnetism, which involves using electricity, and gravity, which surprisingly to some is considered the weakest force in the universe - because you can counteract gravity simply by using a small magnet. Anyway, discover this unified theory, it is said, and you will read the mind of Him - and when I say Him, I mean the one with the capital "h."

Far out stuff.

Anyway, I've also been thinking about a book I'm currently reading. It is called The Snowball, a biography of Warren Buffett, the man who - at least before the stock market crashed last year, was known as the richest person in the world. He still holds the title until Forbes re-tallies the numbers this year. (Editor's note: Buffett has just lost his top spot as of March 13, 2009. Forbes says the richest man is now Buffett's buddy Bill Gates)

Speaking of that crash, guess who told everyone to go out and buy stocks last fall? The Oracle of Omaha, Warren Buffett. At that point, everyone seemed to think the market had found the bottom. And then it crashed again - albeit over a two month period that actually began around the time President Obama took office. So, the point is, if Buffett is befuddled, and can be wrong about predicting stocks, what about the rest of us?

The Snowball, which was written by Alice Schroeder, and is a highly recommended read, starts off in the summer of 1999. If you held stocks in that period of time, you probably remember it fondly. That was when everyone was chowing down on internet stocks, or dot-coms, and watching them go through the roof. People even bought into Pets.com - which urged dog, cat, and fish owners to buy supplies online because, "pets can't drive." I bought the Pets.com sock puppet for my wife - thinking this company is going places, at least I'll have a collector's item one day. I don't know where that sock puppet has gone. We might have thrown it out.

We all know how the tech story ended: pets.com and countless other internet-based companies, plus the Nasdaq index, which tracks technology-based stocks, collapsed in the year 2000. I remember ABC's Charlie Gibson calling them "dot-bombs." Suddenly, after the Nasdaq collapse, we began hearing all these people starting up with their "I told you so's."

Why were so many people investing in companies that owned little more than a web site and an internet connection? Why did they value these companies higher than others, like, say, Dow Jones companies that actually own capital? I told you so, I told you so...

Well, guess who was one of the few, if any at all, who could say I told you so, and be telling the absolute truth? Warren Buffett.

Back to the biography The Snowball. Buffett is due to speak at a conference in Idaho, in 1999, about a year before the dot-coms became dot-bombs. This speech was very important to him, because he was about to tell some of the nation's top business people and investors what he knew deep inside, was the truth: at some point, investors will realize most of these internet stocks are worthless, they will sell, and go back to more boring, but far more stable and traditional stocks like one of Buffett's favorites, Coca-Cola.

The speech probably angered a lot of people at the conference, because many of them were currently profiting on the tech boom. They also thought Buffett was a relic from the "old economy," who might have been a bit upset because he missed out on the tech boom.

Buffett showed them a slide on the screen. This is what it read:

Dow Jones Industrial Average

December 31, 1964: 874.12 points

December 31, 1981: 875.00 points

Buffett's point was clear. If you put money in Dow stocks back in 1964, and left them there for 17 years, you would have made nothing. Meanwhile, the size of the American economy became five times bigger during that same period. The economy grows. Stocks go nowhere. Sound familiar?

I am recording this in mid-March, 2009. The last close of the Dow Jones Industrial Average, as of now, was 6926.49 points. That is below the close on February 12, 1997, when it was at 6961.63.

If you invested in Dow stocks 12 years ago, you would be sitting here today with the same amount of money. However, if you took those same stocks out on, say, October 9th of 2007, when the Dow closed at 14,164.53 points, you would have more than doubled your investment, in just over 10 years.

My point is...well, I guess there is no point. Strike that. What I'm really trying to say is, when it comes to trying to figuring out the stock market, well, there is no point.


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