Market Note

March 29, 2000

George Santayana, the Harvard Professor and Philosopher once wrote that “….those who cannot remember the past are condemned to repeat it.”* What he did not write was that those who do remember the past, and its pitfalls, can also become opportunity’s orphans.


Certainly, those that invested in “new economy” stocks over the past few years have done well, while those that stuck to a disciplined, rational value approach have suffered. But perhaps Professor Santayana was correct. History does repeat. What we who search for value at a reasonable price may have overlooked was the glorious, upward ride provided by the momentum stocks of the past – conglomerates and leasing companies in the sixties, oil service stocks in the seventies, savings and loan and the LBO’s of the eighties and biotech stocks in the early nineties. Many of us who lived and invested throughout this period have tended to focus, most recently, on the downside risk. We “know” that this “mania” shall, too, pass. We don’t know when, but our caution has penalized our returns.

We recognize that the Internet and the changes it is creating in business and in our every day lives are truly revolutionary, but think for a moment as to who benefits. New products and services are being provided by a myriad of new companies, and there is intense competition among those companies. It is the consumer of those services that will be the big winner. Individual consumers can purchase continually enhanced computer hardware for increasingly less money. They can purchase everything from books to automobiles for less money and less hassle. Their homes will be more efficient, and they will be able to stay in closer communication with their children. More importantly, business consumers can purchase parts, services and supplies less expensively and faster than ever before. Plants can be operated more efficiently. Closer contact with customers can be maintained. In short business consumers of these products and services of the “new economy” are doing everything that should enhance their own profitability. Certainly there will be pressure points. Some businesses will adapt more readily to the changing environment than others. There will be losers as well as winners; however the point is there will be winners among the companies that operate within the “old economy”.

A number of industries and companies have taken advantage of the Internet and new technologies within communications to grow and expand their businesses. Examples can be found in industries as diverse as autos and utilities, entertainment and truckers, media and financial services. Despite these opportunities, many stocks within these industries are selling at, historically, reasonably prices.

If we harken back to another era, the late 1960’s and the early 1970’s, there are lessons that can, perhaps, lend some perspective to today’s environment. At that time the foremost growth stock in the U.S. was IBM. By 1973 IBM was selling at 50 times earnings, and had ( or would soon ) earned the distinction ( so far unmatched ) of being the only public company to grow its earnings at a rate of 20% or higher for 15 consecutive years. The company continued at the forefront of technology, yet the price of the stock from 1970 to 1994 was unchanged. Since 1994 IBM stock has appreciated ten fold, but that still has provided an annual compounded return of only 8% over that thirty year period, certainly disappointing for a company that was considered, in 1970, the premier growth company in America – a sobering thought in today’s environment of stocks selling at many multiples of revenues, let alone earnings. Stocks are not companies. Professor Santayana was a wise man. It may be worthwhile to remember his words of caution.

Sydney Williams

George Santayana, Life of Reason, “Flux and Constancy in Human Nature”, Vol. 1, Chap.11, 1905-06.