Hardship breeds success.
That’s true for individuals, companies and entire nations.
It’s why the United States sprang forward after the Great Depression. It’s why China, India and even dirt-poor Bangladesh are leaping ahead today.
And it’s a fundamental principle that can unlock great investment opportunities for you in the months ahead.
In a moment, I’ll show you exactly how and where. But first, let me tell you where I come from — so you can better understand why I believe in this so passionately.
Tokyo, 1955
In a small noodle shop in Tokyo, a beautiful young waitress serves American GIs stationed at a nearby base. That’s considered acceptable behavior.
But then she courageously ventures to go out on a date with a young soldier. That’s not so acceptable.
She speaks very little English; and the solider, even less Japanese. Still, the romance blossoms, and they’re married after a few months’ courtship.
Like clockwork, I come nine months later, and life is wonderful for the young couple.
My father is no Marlon Brando. And I don’t like clichés. But if my story conjures memories of the movie “Sayonara,†the images you remember are probably not very different from the scenes I’m describing.
Soon, however, the soldier is transferred back to Ft. Lewis near Tacoma, Washington. Before we can join him, my mother and I have to wait months in Japan for space on a naval transport ship.
The queue is long and hundreds of other war brides are ahead of us.
“Onegai! Amerika-ni ikanaide!†are the last words of desperation my grandmother shouts as she watches the ship depart. “Please! Don’t go to America!”
Tacoma, 1957
My mother should have listened — her marriage was over the day my father left Japan.
When our ship arrives, we find ourselves in a strange land with no family, no friends, and no money. We spend our first two months in America living under a bridge.
For food, Mom rummages in garbage cans. Her favorites: The ones outside a Chinese restaurant where she can find still-edible white rice.
But despite our plight, my mother refuses to return to Japan. “In America,†she later drills into my head, “you can make something of your life if you study hard and work hard.â€
Fortunately, on a cold Saturday night, a kind stranger, also a waitress, finds us behind the Chinese restaurant. She takes us into her home and becomes our personal savior. Her church adopts us and introduces my mother to Ken Sagami, a humble vegetable farmer who becomes my new father.
Intensive truck farming — maximizing the soil’s yield with hard labor, the most advanced irrigation techniques, and some gutsy risk-taking — is all he knows.
But in the Japanese immigrant community, it’s the foundation for the success of future generations.
Success
That’s what happens with Mom and me. Our first months of hardship are replaced by many years of hard work on the farm. That, in itself, is a vast improvement in our lot.
And ultimately, hard work on the farm has led me to some great successes in my life.
Today, in addition to writing for Money and Markets, I own a successful money management company, an investment software company, and even a profitable convenience store in my small Montana town.
But my most ambitious venture is a web-based company that provides communication and collaboration tools for small businesses — online meetings, remote desktop access, and online customer support. That’s one reason I follow the tech world so avidly, and why I’m especially concerned about some new, old dangers now re-emerging.
The Return of the Dot-Com Mania
In 1999, my web-based business was rocking and rolling. New customers were opening accounts faster than we could get to them. Back orders were piling up fast.
I didn’t have too much time to enjoy it, though. Because along with the booming business came a problem I had never envisioned: spoiled, rotten brat employees that had no concept of hard work — kids who expected to be pampered like rock stars or paid like professional athletes.
Everybody in the dot-com and high tech business was hiring, and the competition for qualified employees was brutal. Finding them was hard; keeping them, even harder.
It wasn’t just about money and stock options. High tech and dot-com companies also showered employees with idiotic butt-kissing benefits.
Refrigerators were filled with free soda, juice, and Snapple beverages. My company routinely spent $3,000 to $5,000 per month just keeping the employee refrigerator stocked.
The year-end holiday season was transformed into a competition for who could throw the most extravagant party.
AskJeeves, for example, hired Elvis Costello. Respond.com brought in the performers from Cirque du Soleil. Hewlett Packard flew in a collection of works by Picasso never before shown in the United States.
I couldn’t afford all that. Nor could I afford the big signing bonuses, trips to Hawaii, cash to pay off student loans, free cars, and house down payments that were routinely offered to pimple-faced kids fresh out of college.
In any given week in the San Francisco Bay area, you could find dozens of dot-com parties that cost $30,000 to $50,000 to put on. Salesforce.com, one of my main competitors, would throw parties that cost more than $200,000.
It was insane, and it all turned to dust. So surely, the high tech world has learned its lesson, right?
Wrong.
Googler Foodies
Right now, I’m seeing the same type of stupid excesses starting to creep back into the high tech world. And I’m not just talking about the price of Google stock busting through $400 a share.
I’m talking about the return of idiotic corporate spending. Consider this account by Steve Petuservsky, a famous chef who was interviewed for a cooking job by Google and then wrote about his experience in the South Florida Sun-Sentinel.
“Google feeds a free breakfast, lunch and dinner daily to employees at its beautiful Mountain View headquarters, and the company is looking for a chef …
“A handful of chefs from around the country are interviewed by phone and then those selected are brought to corporate headquarters to cook a full menu for a panel of 35 ‘Googlers,’ as employees call themselves …
“I have had a rich and wonderful career cooking in foreign countries for royalty and celebrities, but never have I done anything like this.
“I arrived in San Francisco early in the day and drove 40 minutes to Google headquarters, where a valet parked my car on the beautiful grounds complete with volleyball courts rivaling our finest Fort Lauderdale, Fla., beach courts.
“I was shown to the kitchen to begin my food preparation for the following day’s preliminary battle. It’s a large, well-equipped kitchen with dozens of cooks. The food prepared here is a benefit for Google employees, whose average age is 25. Unlike a traditional restaurant where stringent food and labor costs dictate the menu, this is a chef’s Disneyland where food is born of inspiration and pure love of cooking.
“The food is served to thousands of well-educated and savvy foodies. Many of the ingredients are organic and locally grown. There is every imaginable seasonal produce item, the finest natural meats and poultry, fresh fish, lobster, rock shrimp and organic tofu — both Japanese and Chinese.â€
My view: Executive chefs and company cafeterias aren’t unusual and lots of large companies have them. But free gourmet breakfast, lunch, and dinner?
As in the crazy dot-com days, money is being lavished on Googlers like rock stars.
But What Gets My Blood Boiling
Isn’t Just the Sheer Waste.
It’s the Shameless Disdain and
Disregard for Shareholders.
Sadly, the same brand of greed that took down Enron, WorldCom, and hundreds of other dot-com rockets is coming back to haunt corporate America.
This should make you worry. The pinstripe suit club is starting to party as if it were the 1990s all over again. But it isn’t the 1990s. The world has changed. And it’s a different ball game.
First, because too many investors got burned too badly. They’re not going to come rushing back to technology without solid profits and truly viable business models.
Second, because there are now bigger and longer-lasting booms elsewhere: In China, India, other emerging nations … and in Japan.
Meanwhile, the ground-floor bookies that plant the seeds of IPOs — venture capitalists — are again assigning extremely aggressive valuations to the companies they are funding.
According to VentureOne, a research company in the field, the median valuation for start-ups backed by venture capitalists soared to $16.8 million in Q3, compared to $13 million one year earlier. That’s the highest since Q2 of 2001.
This new round of euphoria has also worked its way into Internet stocks. Since Labor Day, the American Stock Exchange Internet Index has climbed from 160 to 178 — a hefty 11% jump.
That’s great news if you own high-tech stocks, but I want to remind you of one of investing’s oldest lessons:
Don’t Count Your Chickens
Before They Hatch
When I look at most tech stocks, I see an abundance of Wall Street enthusiasm, but a scarcity of profits. I don’t see the lean-and-mean hard work that breeds success.
Just take a look at some of the over-valuations of these widely-held tech stocks in the Nasdaq 100 index.
Adobe Systems is selling for 31 times earnings. Amazon.com is back up to 41 times.
Juniper Networks and Network Appliance are both at 43.
Broadcom and eBay are selling at nosebleed levels of 60 and 62 times earnings, respectively.
But not all techs are so grossly overvalued.
For example, Cisco and Intel are selling at 20 times earnings … while Microsoft and Oracle are at 23 and 22.
Some of these are still a bit rich for my blood. But at least they’re not in danger of crashing and burning.
Of course, there’s a lot more to investing than just P/E ratios. So please don’t interpret these two lists as buy/sell recommendations.
My main point is this: The dangers of old are returning to tech investing. But if you pick and choose carefully, you can find some real opportunities.
Everybody has to make their own decisions. But if you’re a tech stock investor, I suggest you apply this simple 4-part test to your holdings.
- If your tech stock hasn’t produced at least two consecutive quarters of double-digit year-over-year earnings growth … dump it.
- If it hasn’t grown its top-line sales by at least 20% in the last 12 months … dump it.
- If it has more than 50 cents in debt per dollar of shareholder equity … dump it.
- And if it has a Weiss rating of D+ or lower, dump it as well. For up to three free ratings, plus e-mail alerts regarding any changes, register at www.WeissWatchdog.com.
But the single most important message I hope to send to you is that the best tech opportunities are not to be found among the over-priced, free-spending American tech companies, but in the lean, mean, and aggressive Asian markets.
One area, in particular, is showing great promise.
Japan: I’m Truly Psyched by
What I See Happening Now!
And that’s not simply because it’s the country where I was born.
It’s because a decade of depression and tough times have primed Japanese companies, especially tech companies, for an impressive comeback.
Martin Fackler’s article in the New York Times this week, “New Optimism About the Japanese Economy After a Bleak Decade,†brings my point home better than I can:
“College graduates face the best job market in a decade, and wages are rising again. The lead stock market index has doubled in value in two years. Corporate profits are the highest in recent memory. And for the first time since 1990, land prices in Tokyo are up.
“Could it be that Japan, long the sick man among major global economies, has finally recovered?
“This is, after all, the country where the words “gloom” and “malaise” have been used for so long that many Japanese have come to view them as facts of life …
“But this time, most economists and analysts agree, the recovery seems to be real, its roots extending through the Japanese economy. After more than a decade of working off excessive debt, bloated payrolls and overbuilt factory capacity, Japan seems to have addressed its bubble-era problems and emerged leaner and more competitive, the economists say …
“Companies are investing heavily in new technology … For the last 12 years, Japan has spent more on research and development as a percentage of the economy than any other major industrial nation, according to the Organization for Economic Cooperation and Development.â€
What’s driving Japan’s new, emerging boom? Part of it is the fact that Japan’s partnership with China is so close and so capital intensive.
But that’s only half the story.
The other half is that Japan’s new generation is avoiding most of the blunders and extravagances that are still plaguing many U.S. companies.
The attitude in Japan today reminds me — to some degree — of the spirit that my parents brought me up with:
Debt avoidance.
Hard work.
No luxuries and no nonsense.
Here’s How U.S. Investors
Can Reap The Benefits …
Think Global: Expand your investment universe to include Asian stocks. A good place to start your search is with foreign stocks that are listed on the NYSE, as American Depository Receipts (ADRs).
For example, you can buy shares in companies like Honda, Hitachi, Mitsubishi, Nissan, and Sony.
Sony, in particular, is a bellwether for the Japanese technology sector. Its stock, which declined steadily from March through late October, has now surpassed its September high, a first key step before the next leg up, possibly to the 40 – 42 area.
Also Think Small: The best opportunities are usually found in stocks that you’ve never heard of. That’s doubly true when you’re talking about foreign countries.
Sony, for example, is about to revolutionize the DVD world with its new Blu-Ray Discs, or BD-ROM, but the company is so large that even a home run won’t have a significant impact on its bottom line.
In contrast, companies like Nippon Electric Glass — the world’s third largest manufacturer of LCD glass, used for high-definition screens — is small enough to make a mountain of money from that new technology.
Think Picks and Shovels: Most of my peers are looking for the next new, red-hot, super-sexy technological breakthrough.
Not me.
Like Levi Strauss, I’m convinced that the best tech profits are going to be found in companies that provide the electronic equivalent of picks and shovels for risk-taking, hard-working innovators.
And many of the most profitable pick-and-shovel providers are to be found in Asia because of the cheaper wages and lower business costs.
For example, Inventec Appliances is the biggest supplier of iPod components to Apple Computer and is making money hand over fist.
I’m not suggesting that you should completely abandon U.S. tech stocks. A few American companies, such as Microsoft, ATI Technologies, and Electronic Arts, could offer some good growth at the right time.
But if you want the 10-baggers that Peter Lynch used to talk about, take a virtual trip across the Pacific.
And always remember: We don’t want companies that depend on luck or spend on luxury. To greatly improve your chances of reaping big profits and large yields, we want solid evidence of fertile land, good technology, hard work, and even past hardships.
Best wishes,
Tony Sagami
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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