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Published by: Lyon Capital Management, LLC - A Registered Investment
Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
Market Musings
By Doug Lyon
Warren Buffett – Dog to Hero
In 1999 Warren Buffett, perhaps the most successful investor of the past 50 years, was
seen as a dinosaur, foolishly unwilling to embrace the “new economy,” i.e. the
dot com technology mania. The stock of his company Berkshire Hathaway was
down 22%. For 2000 Berkshire’s stock was up 29% as the “new economy”
crashed and burned. Mr. Buffett is once again considered a genius.
Manias – From Tulips to Garden.Com
One of the tell-tale signs of a mania is people valuing an object not based on any
intrinsic value but on the hope that someone else will buy the object at a higher price
than they paid for it.
The Dot Com bubble will go down in history along with Tulip Mania, The South Sea
Bubble, and The Florida Land Craze as great manias in the history of investing.
Tulip Mania reached its height between 1634 and 1636 when “investors” paid
sums in excess of 5,000 florins, about $40,000 in today’s dollars, for a single tulip
bulb. The South Sea Bubble took place in 18th century England and pulled in one-half
the House of Lords, King George I, and Isaac Newton. The Florida Real Estate Craze
took place in the mid 1920s. At the top of the boom there were 75,000 real estate
agents in Miami, roughly one-third of the city’s population. After two years of
ever higher land values, prices that many thought only went up suddenly collapsed.
25, 50, 100, or 200 years from now people will read about these events, shake their
heads and wonder how relatively intelligent human beings could actually get caught up in
such foolishness, then go out and repeat it.
From the end of 1998 through 1999 and for the first three months of 2000 speculators
bought companies such as Priceline.com, Pets.com, Webvan, Etoys and Garden.com.
These companies barely had revenues, no earnings (with little hope of ever having any),
and a great lack of anything resembling hard assets. Various Wall St.
analysts, talking heads and other so-called investment gurus assured the investing public
that the relation of a company’s market value to its sales, earnings, or assets no
longer had meaning. At the peak speculators (I can’t call these people
investors) paid prices for Pets.com that indicated the company was worth just short of one
billion dollars. By the end of 2000 leveler heads realized the only thing of value
at Pets.com was the company’s “spokes-pet” – a sock puppet.
Stock Investing in 2000
Once, when asked what he thought stocks would do in the coming year, the great
financier J.P. Morgan replied, “They will fluctuate.”
“October. This is one of the peculiarly dangerous months to
speculate in stocks. The others are July, January, September, April, November, May,
March, June, December, August, and February.” Mark Twain, Pudd’nhead
Wilson.
2000 generally was a bad year for growth and momentum investing but a good year for
value investing, the style employed by Lyon Capital Management. Nobody knows what
will happen in 2001. We tell our clients and prospective clients that if they want
to invest in stocks they need to have at least a five-year time horizon. If they
want to have anything much over 20 to 30% of their assets in stocks they should plan on
not touching the money for at least ten years. Stock investors must have the time
and patience to ride out short-term (anything much less than two years) volatility and
allow an investment’s value to be realized.
Diversify, Diversify, Diversify
Another principal we preach is diversification. If you invest in stocks, buy at
least 15 to 20 issues in 8 to 10 different industries. 1999 and 2000 were good
examples of why this is a good idea. The high technology industries did very well
in 1999 but gave it all back and then some in 2000. Many Rochester, NY investors
learned “up close and personal” what a mistake it is to hold a large portion of
your assets in one stock.
As we periodically learn, investing a portion of a well-balanced portfolio in fixed
income securities is also a prudent idea. 2000 was such a year. Bonds, particularly
higher-grade bonds, out performed many stocks. Historically bond returns have a low
correlation with stock returns. This means that when stocks have good returns,
bonds don’t and when stock returns are weak then bond returns are often strong.
The goal for diversification is to reduce the risk you take as an investor by an amount
greater than the sacrifice in return. Since stocks and bonds both generate positive
returns over long periods of time and since their returns have a low correlations, then
when building a diversified portfolio holding both stocks and bonds makes sense.$$
Lyon Capital Management Expands
by Kate Lyon
In the year 2000 Lyon Capital Management completed the acquisition of an investment
advisory firm, formerly based in Rochester, NY. The acquisition significantly increased
Lyon Capital Management’s assets under management. Lyon Capital Management
currently manages over $15 million and has approximately 40 client relationships.
Our firm was established in 1994 with 1 client and approximately $1 million under
management.
Lyon Capital Management has always been run by 2 professionals – Doug Lyon, CFA,
the President and Chief Investment Officer and Kate Lyon, Operations Manager. We are
pleased with the growth of the firm over the last 7 years. We believe that placing
the highest degree of emphasis on service, strong performance and a proven
investment style have been the keys to asset growth and client retention.
High Degree of Customer Satisfaction
Our recent customer survey indicated that over 90% of clients were “very
satisfied” with our work and 100% responded they would probably or definitely
recommend us to a friend or associate. We consider this remarkable given the tough
times faced by many other value-oriented managers over the past few years.
In March of 2001 Lyon Capital Management will enter its 8th year serving clients.
For Doug Lyon, it will be his 12thyear in the investment management business. For
Kate Lyon it will be her 18th year in information and business management. We are
thrilled to continue our enthusiastic and dedicated service to our clients.$$
Prices
Then and Now |
| |
12/31/99 |
12/31/00 |
Change |
| Big Mac |
$2.00 |
$2.05 |
2.5% |
| Barrel of Crude Oil |
$25.60 |
$26.80 |
4.7% |
| 30-year Mortgage |
8.10% |
7.20% |
(11.0%) |
| Japanese Stock Index |
128 |
88 |
(31.3%) |
| NASDAQ |
4069 |
2470 |
(39.3%) |
| Natural Gas |
$2.33 |
$9.78 |
320% |
| Consumer Price Index |
168.3 |
174.1 |
3.4% |
| Gold (per ounce) |
$290 |
$273 |
(5.9%) |
| 6 month CD |
5.67% |
6.12% |
7.9% |
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