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GP 25 July 2007: Flying into the Eye of the Hurricane

Tried But Not True. When in peril, all manner of people look for some place to hide their heads.  In business these days a corporate chieftain will do things by the book, steadfastly following the business- practices catechism he memorized when he attended an MBA temple in Cambridge or in Philadelphia.  Rote management, of course, is no substitute for thinking.

One bright Boston strategist has told us that when consultants don’t know what to do or where they are going, they resort to process.  Til they get a clue, they do things by the numbers.  Later, if they can grasp what is wanted, they will aim at results and set aside all the meaningless busywork.

Back in the early ’70s when the stock market took a tremendous plunge, a young portfolio manager at one of New York’s esteemed banks who specialized in smallish companies was told to dump his portfolio, the captains of industry at the bank quaking at how fast such stocks had fallen in price.  The edict went out to one and all that “we only are buying Golden (Big) Oldies.” Maybe you will not be surprised to learn that after he carefully liquidated his portfolio and left the bank in disgust; big capitalization stocks—all the household names— took a hit many times worse than small caps.  The secure route turned out to be a disaster.

This sort of herd-mentality foolishness repeats itself in every calamity.  Arthur Koestler, the writer, came from the old Austro-Hungarian Empire.  Three times he tore up his supposed passes to fame and fortune.  Having gotten all the credits he needed from his university, he literally ripped up his transcript in Vienna (there were no central records then) and went off to Israel.  Later, secure in a newspaper job with Ullstein (a house today owned by the Swedes) in Berlin, he liked not the way things were going in the Germany of the 1930s.  So he quit and took off for Russia.  He was the despair of his family who espoused safety and soundness.  But he, not they, lived to tale his tale—and theirs.  They stayed in German lands, only to be put to death by the Nazis, given their Jewish heritage.  His fascinating life is recounted in his autobiographies Arrow in the Blue and Invisible Writing.

In times of tumultuous change, only the fool sticks with the tried and true.  For the tried turns out to be simply tired and not very true.  Taking exceptional risks when Armageddon is in the wings is liable to be the safest choice of all.  Hedge fund guru Nicholas Nassim Taleb, who has just opened a new fund, is, in fact, betting that we are in a period of extremely high volatility when careful incrementalism is bound to leave you in shambles.  You can read about his return to the markets and his new bet on volatility in “Mr. Volatility and the Swan,” Wall Street Journal, July 13, 2007, p. C1.

Agile Countries.  As our partners have said in several places, including “Agile Countries” the countries today that have bright ideas and who have put them to work are not the goliaths such as Russia, China, Germany, or the United States, but the nations where we seldom go and which we love to ignore.  Finland has the highest educational standards and has reduced cancer and heart failure rates terrifically.  Iceland has a very high GDP per capita.  Mongolia, in some areas, is as wired as you can get in the world.  Chile seems to have come up with the most innovation in its pension schemes, though they could use some fine tuning.  Spain, outside Barcelona, has produced a cluster of the world’s best restaurants.  As well, it is making great strides in alternate energy generation.  Prompted by some Scandinavians, Estonia put together the software for Skype, now owned by Ebay—which is transforming global communication and wresting some power away from the old telecoms.  Bhutan has styled itself the Kingdom of Happiness, suggesting that Gross National Product does not measure a nation’s wealth.  One could almost say, “Go where nothing is happening, because something is.”  The Cold War over, these smaller nations are not burdened with the cumbersome thinking it imposed and can stage breakaways.

Tasty Restaurants.  Even 50 years ago, luxury emporiums throughout Scandinavia never measured up to their reputations.  If you wanted something great, you avoided any spot too famous, and too rich for anyone’s blood.  That’s as true in Stockholm today, as it was then.  A party of 15 tourists recently laid down a packet of cash at Wedholms Fisk, a fish restaurant by the water in Stockholm which House and Garden has raved about.  For their money, they received ‘arch’ service, a menu limited to two dishes, and poorly prepared, rather tasteless turbot. Uptown, for much less money and a whole lot more fun, a smaller party went to Marden, a sidewalk café with an active bar trade and a young, white-collar clientele: there, the veal and lamb were very well prepared, if a little slow to the table.  Maybe fifteen blocks away, just off Birger Jarlstan, the great long street named for the founder of Stockholm, it was just unknown enough to be good.  But if one does not want to stray too far from the port, Café Milano turns out to be a favorite of locals, who want dependable food at reliable prices.  Every interesting resident, as well, seems to know of Lisa Elmquist, a most pleasant bustling fish restaurant in Stockholm’s produce market, offering superior freshness.  Simple to say, the best and the most interesting in Stockholm is almost sure not to available at its grandest restaurants.

Undiscovered Stocks.  We found recently that oldline Kiplinger’s, located in Washington, sort of an advisory set of personal finance publications that has been around forever and has a 1950s feel to it, understands that one has to go astray to make or save a nickel.  Frequently it has researched undiscovered stocks, obviously feeling that there is value to be had there, if one is reasonably careful.  Most recently, we would refer you to Andrew Tanzer’s “Under-the-Radar Stocks,” which just appeared.  The writer makes an effort to listen to the best picks of several crafty stockbrokers who are mainly located at small firms around America.  It’s axiomatic that you have to get outside the very big cities to find someone who truly knows something undiscovered.  City brokers are polluted by groupthink.

What one is looking for are companies that few or hopefully no financial analysts follow, which trade at fairly low prices so many financial institutions will not bother with them, and which are shunned by the private equity firms. Unknown, unloved, maybe a little unbecoming.

We ourselves advise a small company that fits the definition.  It has been around forever, always trading below $10 a share.  It’s called Biospecifics Corporation (BSTC), and it hit a bad speed bump a few years back because of a rather unnecessary FDA inquiry about its manufacturing standards.  At the time it made collagenase for bedsores.  But it has since re-created itself, and no longer makes anything.  Its collagenase idea can be applied to a whole other set of annoying obscure diseases that happen to afflict millions.  BSTC found a partner company which is doing all the testing and is expected to bring one or more products to market.  So the company, which few know about, has transformed itself from a small drug maker into an ‘intellectual property’ company.  That’s a good place to be, since America is desperately in need of innovation in the shape of idea companies.  Worth less than $.75 less than a year ago, it now hovers in the area of $4.75.  It’s valuable because it’s too small—and has had too many problems—for CNBC or Merrill Lynch to talk about it.  Obscurity has its rewards, many more than you will get from American Express.

P.S.  The World’s 100 Best Restaurants: you are herewith warned that it ain’t so.  There are some winners here, but there are a whole lot of dogs.  This list was put together by a mag in England, and it is notoriously unreliable, even though it gets heaps of attention.  Caveat emptor.

P.P.S.  This week we are putting up a revised Investment Outlook on the Global Province.  For several years we have had a flood of liquidity worldwide due to irresponsible central banks, with Mr. Greenspan leading the way.  Ray DeVoe, the best of the Wall Street writers, essays about this endlessly in his newsletter.  Now the game is practically over.  Investment-wise, one is looking around for safe ports, which are not obvious.  The right undiscovered stocks can be a help, since the hot money does not own them.

P.P.P.S.  The onetime head of Avis, Robert Townsend, wrote a book called Up the Organization, saying that there is the official way the front office claims a business operates—and then there is the way things really happen.  But in a crisis,  we think, absurdity really takes over, because the front office insists for the first time that we really follow its dictates, whereas the situation calls for intuition, flexibility, and commonsense.  At the very moment when we need to shoot from the hip, the boys at the top call for cannons and close order drill.

P.P.P.P.S.  America’s entry in the Tour de France has had to re-invent itself without Lance Armstrong, and is much out of the limelight, Rasmussen of Denmark who is with another team attracting all the attention.  But, as of July 22, Discovery Channel is in the lead, operating like a submarine, just below the surface.  Doctor Lundquist, our sports analyst, reports: “Discover has pushed itself into first place after stage 14, with Albert Contador the first winner of a stage for the team.  Contador also won Sunday’s sprint earning 20 points and was ‘king of the mountain’ leading with 40 points.  He’s an exciting 24 year old from Madrid.  ‘When I attacked, it was not programmed by Bruyneel,’ Contador said.  ‘I chose the moment.’”  Bruyneel is Discovery’s sporting director: he and others feel Contador will win the whole of the Tour someday.  The team has continued on its game plan in stage 15.

Doctor Lundquist also is sad to report that another Spaniard just missed winning the British Open—after some stunning play, although the winner Padraig Harrington staged a terrific battle. Needless to say, the great stars—Woods, Mickelson, Singh, Choi, etc.—were simply buried.  Our hats and hearts are off to Sergio and Padraig.

P.P.P.P.P.S.  The Jante Law (Danish and Norwegian: Janteloven; Swedish: Jantelagen; Finnish: Jante-laki) is a concept created by the Danish/Norwegian author Aksel Sandemose in his novel.  There are 10 different rules in the law, but they are all variations on a single theme and are usually referred to as a homogeneous unit: Don’t think you’re anyone special or that you’re better than us.  Maybe this explains why high falutin’ shops don’t work out that well in Sweden, since, in the background, a voice calls out to, “Come down off your high horse.”  Nonetheless, Sweden is still a monarchy, the lines in the sand being drawn in other ways. We will be examining Sweden at length in a forthcoming letter.  If Jante Law can keep some egos in check, then something like it is needed in many other countries. 

P.P.P.P.P.P.S.  The Dow Jones Industrial Average got started with 12 stocks in 1896.  Of those 12 companies, only General Electric is still in the index today.  As the chairman of one Fortune 500 company is fond of telling us, “It’s a hard climb up Mount Everest, but a fast slide down the backside.”

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