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Market Musings |
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Lyon Capital Management Expands |
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Prices Then and Now |
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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