The Cohan Letter +15% in 2008

My investment newsletter, The Cohan Letter, outperformed the S&P 500 in 2008. Specifically, the average stock mentioned in The Cohan Letter rose 15% in 2008. This compares favorably to the performance of the S&P 500 which fell 38.5% in 2008.

The three top performing stocks mentioned in The Cohan Letter were:

• URS Corp (NYSE: URS) rose 22% from $33.41 at the end of November 2008 to $40.77 by year end. URS -- a design and construction firm, did win a $3.3 billion contract in December and may be perceived as well positioned to take advantage of an infrastructure stimulus package expected in early 2009;
• AAR Corp (NYSE: AIR) rose 15% from $15.99 at the end of October 2008 to $18.41. AAR -- which supplies aviation parts -- saw its sales rise 14%, fully-diluted earnings climbed 21% and its backlog increased 28% in a December report; and
• Plexus (NYSE: PLXS) increased 11% from $15.21 at the end of November 2008 to $16.95. Plexus develops and manufactures electronics telecommunications, medical, industrial, and computer companies.

Each month The Cohan Letter mentions three stocks. If a stock mentioned declines 2% after it's mentioned, the stock is "sold" from the portfolio. This 2% stop loss rule contributes to the relatively high average return of The Cohan Letter.

Now in its seventh year of publication, The Cohan Letter's average annual return of 20% since 2004 compares favorably to the -2% average return of the S&P 500 during that period.

Pioneers of Globalization

Jorge Nascimento Rodrigues and Tessaleno Devezas have written, Pioneers of Globalization, which has a unique take on the popular globalization theme. Their book combines the theory of the long wave, developed by Russian economist Nikolai Kondratieff, with an intriguing analysis of how Portugal's mastery of ocean navigation contributed to this tiny country's domination of global trading routes from South America to Africa and India.

What is perhaps most intriguing about the Portuguese version of globalization is that although the authors focus on a period 500 to 600 years ago, the Portuguese approach to globalization seems very modern to me. Here are the key elements that the authors articulate:

• Strategic intent. The authors argue that Portuguese people are proactive when they have "an enterprise to executve"
• Globalist vocation. Possibly because Portugal is a relatively small country with a limited market and finite natural resources, it chose to overcome these weaknesses with a global outlook.
• Long-term scientific commitment. Portugal invested in research and development.
• Knowledge management. Portugal's skills at navigation created knowledge workers who could apply these skills.
• Looking ahead. Portugal looked beyond the current geostrategic boundaries and battles of the Mediterranean region.
• Control of asymmetric information. Portugal had a passion for choosing the unknown over the known which gave it an advantage over other nations.
• Incrementalism. Trial and error and pragmatic correction were the key to Portuguese strategies.
• Critical attitude. Portugal employed the scientific method that challenged existing dogma with experiments and facts.
• Geostrategic 'cleverness'. Portugal employed secrecy, counterintelligence, and disinformation to achieve its ends.
• Organizational improvisation. Portugal employed a mix of improvisation and clear strategic intent to achieve its goals.

Before reading Pioneers of Globalization I had not realized how timeless these strategic principles are. But the authors make a compelling case that Portugal was pioneering them hundreds of years ago.

The Cohan Letter up 28% in 2007

My investment newsletter, The Cohan Letter, outperformed the S&P 500 in 2007. Specifically, the average stock mentioned in The Cohan Letter rose 28% in 2007. This compares favorably to the performance of the S&P 500 which rose 3.5% in 2007.

The three top performing stocks mentioned in The Cohan Letter were:

• New Oriental (EDU) which rose 84% from $43.75 in April 2007 to $80.59 at year end;
• CVRD (RIO) which climbed 77% from $18.50 in March 2007 to $32.67 at year end; and
• Transocean (RIG) increased 66% from $86.20 in April 2007 to $143.15 at year end.

Each month The Cohan Letter mentions three stocks. If a stock mentioned declines 2% after it's mentioned, the stock is "sold" from the portfolio. This 2% stop loss rule contributes to the relatively high average return of The Cohan Letter.

Now in its sixth year of publication, The Cohan Letter's average annual return of 22% since its inception compares favorably to the 11.8% average return of the S&P 500 during that period.

Web 2.0: Now and Next

What is Web 2.0? How popular is it? Who is making money off it? How is it leaping the synapse from startup to incumbent? What are its risks and opportunities for business? Where is it heading?

What is Web 2.0?

Web 2.0 – a web of collaboration among individuals -- is a marketing buzzword introduced in 2004 which has gained fairly wide acceptance. Web 2.0 companies includes some successes – such as video-sharing site YouTube, the user-written online encyclopedia Wikipedia, the photo-sharing site Flickr, and social networking sites like MySpace and Facebook, on which users can interact with each other in a virtual setting.

Web 2.0 has become much more refined – in 2007, for example, a Web 2.0 Awards conference cited 41 different categories including:

• Blog Guides
• Bookmarking
• Books
• Business
• City Guides & Reviews
• Classifieds and Directories
• Collaborative Writing and Word Processing
• Communication
• Content Aggregation and Management
• Digital Storage and Remote Access
• Events
• Feed Management
• Fun Stuff
• Games
• Health
• Hosted Wikis
• Lists and Polls
• Mapping
• Marketing
• Mashups
• Mobile Technology
• Music
• Online Desktop
• Organization
• Philanthropy
• Photos and Digital Images
• Podcast Services
• Professional Networking
• Questions and Advice
• Real Estate
• Retail
• Search
• Social Networking
• Social News
• Social Tagging
• Start Pages
• Travel
• Video
• Visual Arts
• Web Development and Design
• Widgets

How popular is Web 2.0?

Web 2.0 is much less popular than the hype. According to a study by the Pew Internet and American Life Project, only 8% of people in America really do a range of Web 2.0 activities.

Who is making money off Web 2.0?

The sellers of these startups and their venture backers are the ones making money off of Web 2.0. YouTube’s founders sold it for $1.65 billion in 2006 to Google (venture firm Sequoia – which invested roughly $11.5 million for 30% of the company, made an estimated $400 million from the sale); Flickr’s founders made an undisclosed amount – estimated between $15 million and $35 million -- selling to Yahoo in 2005; and in 2005 MySpace’s founders made $580 million selling to News Corp.

How is Web 2.0 leaping the synapse from startup to incumbent?

These acquisitions demonstrate how Web 2.0 is spanning the synapse from startup to incumbent. The reason for the incumbent interest is that rapid growth in the number of users of Web 2.0 sites. For example, YouTube’s user base leapt from 0 to 19.1 million between August 2005 and August 2006. More recently, in March 2007 Cisco Systems bought online videoconferencing company, WebEx, for $3.2 billion; Sun Microsystems has been wooing Web 2.0 startups with free software and cheaper computer servers; America's second largest ISP, Comcast, announced a deal to give its 12 million Internet (and cable) customers access to Zimbra's Web-based interface for e-mail, calendars, contact lists and instant messaging.

What are Web 2.0’s risks and opportunities for business?

Many companies are using Web 2.0. A recent survey by the Economist Intelligence Unit found that 85% of C-level executives see the sharing and collaboration aspects of Web 2.0 as an opportunity to increase revenue and/or margins. Companies have initially focused their Web 2.0 efforts on the creation of online communities that can help with product marketing or product development. Companies are also establishing blogs or wikis to initiate conversations and share knowledge inside or outside the company.

But Web 2.0 also creates significant business risks: increasing exposure to viruses and malware and damage to corporate reputation through the release of embarrassing information about employees.

How does Web 2.0 increase risk of virus and malware infection? An executive from Secure Computing noted that Web 2.0 applications like blogs, wikis and social networking sites allow users to post code in chat sessions and other areas. In some cases, hackers corrupt legitimate technologies for their own gain. For example, encrypted HTTP (known as HTTPS) was supposed to ensure sensitive data wasn’t transferred "in the clear" over the Internet. However, attackers can also use secure connections to transmit malware.

And Google researchers have found that Web 2.0 opens up new opportunities to compromise users’ computers. In particular, Google surveyed billions of sites, subjecting 4.5 million pages to in-depth analysis. 450,000 were capable of launching so-called "drive-by downloads", sites that install malicious code, such as spyware, without a user's knowledge. A further 700,000 pages were thought to contain code that could compromise a user's computer. To address the problem, Google has started an effort to identify all web pages on the internet that could be malicious.

What reputational risks does Web 2.0 pose to companies? Former BP chairman, Lord Browne’s former lover posted his personal thoughts on Facebook – accelerating Browne’s departure from his job. And organizations are growing nervous about sensitive information finding its way into the public domain, through the growing network of blogs and social networking sites. At the same time, individuals looking for corporate jobs are worried that views they’ve posted online get them fired if the company runs an internet search of their name.

Where is Web 2.0 heading?

The key to Web 2.0’s future will be whether startups can generate sufficient growth in the number of users to attract the interest of incumbent media companies. With concerned about the decline in advertising revenue to newspapers and TV, established media companies could view Web 2.0 startups which can attract rapidly large numbers of users as attractive acquisitions because they could take up the slack.

One example of where Web 2.0 might be heading is Joost, a start-up that delivers television programming over the Internet. Earlier this month, Joost received $45 million in financing from venture capitalists and content partners including CBS and Viacom. Joost was founded 18 months ago by Skype’s co-founders and has signed up 500,000 users. Joost distributes shows in traditional television formats, like 30-minute or hour-long programs. It collects demographic details of its users and analyzes the profiles to help its 45 advertisers to tailor content to distinctive viewer segments.

But there’s also the chance that many Web 2.0 companies will fail. Web 2.0 has attracted significant amounts of financing -- $262 million in the first half of 2006 alone. But in late 2006, several venture-funded startups have either closed their doors or slashed staff. One is Browster, backed with $6 million in 2005 by VC firms Advanced Technology Ventures and Vanguard Ventures, which is now widely believed to have ceased operations. Even mobile Web 2.0 startup Motricity fired many workers, despite being heavily funded by leading VC firms.

Given its business risks and the low cost of entry, it appears unlikely that companies will invest significantly in Web 2.0 technologies as they did during the first Internet wave in the 1990s. Thus Web 2.0’s future depends on its ability to reinvent the media industry.

Only a handful of these companies are likely to gain such traction to leap the synapse between startup and incumbent.

Applying the Value Quotient (VQ): Experiment Frugally

To apply the VQ, I measure how well a company follows each of the seven principles of Value Leadership. Here's how I measure how well a company follows the principle -- Experiment Frugally -- which is harnessing happy accidents to create value for customers and partners. I detect whether companies follow this principle by looking at how well they conduct the following four activities:

• Grow organically: build new lines of business in markets that are large and growing in which competitive success depends on capabilities that your company can perform better than competitors;
• Manage development risk: break new product development projects into pieces. At the end of each piece, decide whether to continue based on results. Be disciplined about investing in projects that pass these tests and killing ones that don't;
• Partner internally: when developing new products, form a team which includes a company's different functions such as engineering, marketing, sales, manufacturing, purchasing and so on. By building product prototypes and getting fast feedback from customers, growth and profits are more likely to follow; and
• Partner externally: similarly, when a new product development will affect the design standards of an entire industry, companies should work with their extremal partners to create a mutually acceptable solution.

I give a company a score on each activity. For the 24 activities, the maximum possible score is 420 points. So the Value Quotient (VQ) for a company is that company's total points divided by 420.

The Celebrity Industrial Complex (CIC) holds together the two Americas

As presidential candidate John Edwards pointed out during his 2004 campaign, there are two Americas. My take on his idea is that one America allocates capital – defined broadly as money, technical brainpower, or celebrity charisma -- the other helps operate its machinery.

The capital allocators are benefiting hugely from this administration’s economic policies. Specifically, 36.7% worth of the $1.3 trillion worth of tax cuts went to the top 1% of families. Meanwhile, the ratio of the net worth of the top 1% of families to that of the median family in the US hit 190 in 2005, up from 131 in 1983.

These capital allocators wear many hats. They’re traders at Goldman Sachs who got their share of $16 billion in bonuses. They’re hedge fund managers, the top 100 of whom earned an average of $363 million in 2005. And they’re general partners in private equity firms – many of whom are listed on the Forbes 400 list of the wealthiest Americans. They’re CEOs like Bob Nardelli who decide how to spend shareholders’ investments – and often get rewarded for failure.

Meanwhile the machinery operators face stagnant income and rising expenses – making up the difference through borrowing. Earlier this week, a report was released which indicated that – at -0.7% -- the US savings rate was the lowest it’s been in 74 years – during the depths of the Great Depression.

The reason that these households keep their head above water is debt. And just as the poor seem to be more overweight than the rich, so do the rich use less debt as a proportion of their assets. Specifically, the top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but a disproportionate 24% of the debt.

With 1% of the US population thriving and the other 99% not doing quite as well, a reasonable question to ask is whether our democracy is doing a good job of allocating the wealth of the economy. And if not, why don’t the majority of Americans who are falling further behind do something about the inequitable economic distribution.

In my view, the reason is simply – the celebrity industrial complex (CIC). The CIC is a modern version of the Roman concept of Bread and Circus or Marie Antoinette’s concept of letting them eat cake. The CIC is a collection of TV programs, gossip magazines, and web sites that make the other 99% feel like they have a shot at making the big time.

TV shows like American Idol reinforce the idea that anyone in America – if they have the talent – can go from being an average person to a star. TV shows like Access Hollywood, co-hosted by presidential distant cousin Billy Bush, give viewers insight into the personal foibles of Hollywood celebrities. And the New York Times, Wall Street Journal, Vanity Fair, and many others cover the wealth of the capital allocators.

The CIC cleverly serves a triple purpose:

• It keeps the public mesmerized by celebrities – thus increasing the odds that they’ll buy tickets to their movies
• It afflicts celebrities by highlighting their weaknesses – thus making people feel less uncomfortable with their relatively weak position
• It gives them a glimpse of celebrities’ wealth – which fuels their desire to accumulate more. And deludes them into thinking they can make it into the top 1%.

The CIC is not sufficient to keep the majority voting for politicians who implement policies that favor the top 1%. But it does play an important role in allowing the two Americas to coexist without tearing apart.

Cure for Iraq? Impeach Bush, Cheney

Vice President Cheney has challenged the Democrats to come up with a better solution to the Iraq problem. Notwithstanding that Cheney's comment mistakenly presumes that all the Republicans support his plan, I'll take Cheney up on the challenge. My suggestion is that it's time for Congress to impeach Bush and Cheney.

This suggestion brings up some reasonable questions, including the following:

• What's wrong with the Bush/Cheney plan?
• How will impeachment solve the Iraq situation?
• On what basis could Bush and Cheney be impeached?
• How likely is it that my suggestion will be adopted?

What's Wrong with the Bush/Cheney Plan?

The biggest problem with adding 21,500 US troops in Iraq is that it will not achieve its "mission." There are five key reasons for this:

• The mission is vaguely defined. It is unclear why US troops are in Iraq. In 2003, Bush sold the war as a way to eliminate the threat of Iraq's WMDs and to punish Iraq's role in the 9/11 attacks. Both reasons were proved false. So Bush/Cheney redefined the mission variously as "getting the job done", "victory" or "a democratic Iraq." It is impossible to measure whether any of these vaguely defined missions has been achieved therefore there is no logic for ever withdrawing US troops.
• The Bush/Cheney plan's real purpose is not consistent with that mission. It will not be possible to learn Bush/Cheney's true purpose for adding the new troops. I speculate that since Bush and Cheney's political careers will end no later than January 2009, they are currently trying to improve how history will judge them. I further speculate that they believe that adding more troops will increase the odds that they can delay a resolution of the Iraq situation into the next administration. By forcing another administration to withdraw US troops, I speculate that Bush and Cheney hope that history will shift blame for the failure of their policy to their successors.
• Iraq does not really exist. The concept of Iraq, as a united country fitting into the borders on the map which currently appears in atlases, does not really exist. Under Saddam Hussein, the country appeared to hold together with the help of a brutally repressive police force. In reality, Iraq is at least three separate groups -- the relatively peaceful Kurds in the North, a smaller group of Sunnis, and a larger group of Shiites -- the latter two having been at war with each other for a long time. Since Saddam left power, the fault lines between these three groups have emerged more clearly.
• The current Iraqi government is structured to undermine the Bush/Cheney concept of Iraq. Bush/Cheney envisions a unified, democratic Iraq. However, the current government is controlled by the Shiites. The Bush/Cheney plan relies on this Iraqi government stopping Sunni and Shiite extremists -- which Bush/Cheney believes are the cause of the Iraqi civil war. In fact, the Iraqi government supports the Shiite domination of the country and thus the Bush/Cheney plan will be directed to achieve this end rather than the Bush/Cheney concept of the Iraq mission.
• The American public does not support the Bush/Cheney plan. Polls suggest that only 29% of the US public supports the Bush/Cheney plan. This lack of support for its Iraq policy should have been clear after the the Democratic Party took over Congress last November. Moreover, the Bush/Cheney plan is at odds with the Iraq Task Force report which seemed to have greater support.
• The consequences of not pursuing the Bush/Cheney plan are unclear. Bush/Cheney claims that disaster will follow a withdrawal of US troops from Iraq. This claim is similar to the arguments made about withdrawal from Vietnam. Back then, President Johnson argued that withdrawing from Vietnam would cause a domino effect in which many countries would go Communist. Bush/Cheney are suggesting that US troop withdrawal would create a safe haven for terrorists. Clearly previous Bush/Cheney predictions -- that US troops would be greeted as liberators and that the war would last at most six months -- have proven false. The only consequence of their plan that's certain is that more US troops will die as they become targets for the parties to a civil war in Baghdad.

How Will Impeachment Solve the Iraq Situation?

Impeachment will not solve the Iraq situation immediately. However, it appears certain to me that the US will not form or implement a realistic strategy to solve the Iraq problem until Bush and Cheney are out of office. As noted above, they are not concerned about reelection which in their mind frees them to pursue policies which they believe will vindicate their legacy.

After four years of consistently achieving results at odds with the objectives they stated, it is clear to me that Bush and Cheney are determined to leave the problem to their successors. I believe that the problem will get worse in the next two years and will certainly result in more deaths -- especially as the 21,500 new US troops are added.

By impeaching Bush and Cheney, the US can reduce the number of lives lost and begin the process of minimizing further damage from their disastrous Iraq adventure.

On What Basis Could Bush and Cheney be Impeached?

Although I am not a lawyer, according to Impeach Bush, there are at least three legal bases on which impeachment could proceed:

• Violating laws against fraud by lying to Congress to justify the Iraq war. Bush justified the Iraq war based on claims -- later proven false -- that Iraq had Al-Qaeda ties; that it was responsible for the 9/11 attacks; and that it had WMDs -- including African uranium. All these claims have been proven false -- thus violating US Laws related to Fraud and False Statements, Title 18, Chapter 47, Section 1001 and Conspiracy to Defraud the United States, Title 18, Chapter 19, Section 371.
• Violating laws against unwarranted spying on US citizens. Bush has admitted to authorizing the National Security Agency (NSA) to conduct warrantless wire taps on American citizens. The spying even extends to postal mail. This violates US law because he was required to get approval from FISA; and
• Violating laws against torture. The evidence shows that Bush, Cheney, Rumsfeld and Gonzales are guilty of violating "Federal Torture Act" Title 18 United States Code, Section 113C, the UN Torture Convention and the Geneva Convention by ordering and condoning the use of torture.

How Likely is it That my Suggestion Will be Adopted?

My suggestion could be adopted but only with significant voter pressure. Unfortunately, it appears that an unspoken consensus has emerged that the impeachment process is not helpful for those members of Congress aspiring to the White House in 2009.

In order to move forward with new leadership, Congress would need to do something unprecedented in US history -- impeach a president and a vice president. Just impeaching Bush would not solve the problem since a president Cheney would probably make the situation even worse.

It is likely that neither would voluntarily resign as Nixon did. And achieving the votes necessary to ensure a successful conviction and removal of Bush and Cheney is a long shot -- the failure of which would likely have severe political consequences for all presidential aspirants.

However, everyone running for president or re-election will have to face voters in the near future. And they will be judged on how they handled Iraq. If enough voters push to stop the train wreck, Congress could change its mind.