1. G6 EZ EE KLMNO SUNDAY, MAY 18, 2014
Inflation-adjusted returns in the 1970s
hit a loss of almost 75 percent.
It was also different in the 1980s and
’90s: A universe of new technologies
emerged — cellular, semiconductors,
software, storage, micro-processors,
Internet — that really were different.
They created a massive new wealth
when new industries were created. The
investor who refused to buy anything
over traditional P/E ratios — despite
enormous growth rates and increasing
revenue and profit — missed out on an
era of generational wealth creation.
Rates are now at unprecedentedly
low levels. That’s a fundamental
difference from the prior 30 years of
inflation and yield on fixed income.
There is a lack of competition from
fixed-income products for your
investment dollar, thereby making
equity dividend stocks that much more
appealing. This is a significant
fundamental difference in the markets
and valuation and prices.
Distinguishing between the two is
crucial. Identifying when things really
are different and when the collective
madness of the crowd is in full force is
the difference between sitting out a 180
percent rally or participating in it.
You are never different. But
sometimes, the data is. The sooner
people understand this, the better off
their portfolios will be.
Ritholtz is chief investment officer of Ritholtz
Wealth Management. He is the author of
“Bailout Nation” and runs a finance blog, the
Big Picture. Twitter: @Ritholtz.
pulled money out of the markets and sat
on the sidelines.
This time was different.
Human nature is unchanging. During
the boom, greed dominates. After the
crash, the residual emotion is fear.
Investors need to recognize when the
economic environment really is
different.
In 1974, the P/E ratio of the S&P 500
was a low 7.33, but inflation was running
at 11 percent and the 10-year bond yield
was 7.4 percent. Were investors to ignore
that different data? By 1981, P/E ratios
were about the same, but risk-free yield
of the 10-year was more than 15 percent.
Some investors dismiss fundamental
differences with a wave of their hand,
often quoting Templeton in a
misinterpretation at the same time.
When fundamental factors are very
different, it is worth noting. Those
investors in the early 1970s who bought
stocks because they were cheap were
surprised when they got much cheaper.
Looking at the booms, we see that
phrase has a specific meaning, involving
investors caught up in the frenzy of the
moment. They allow greed to get the
best of them. The collective psychology
of the crowd leads to all manner of
excuse-making and rationalization as
people fall into the throes of a
speculative bubble.
I said the formula was two parts
psychology; the first part takes place
during the booms, the second after the
inevitable bust. Greed is replaced by fear.
Risk aversion occurs, as the recent past
dominates investors’ collective mind-set.
Indeed, since the March 2009 lows, I
have been calling this “the most hated
rally in Wall Street history.” Markets that
are cut in half — as the major indices
were — typically bounce back about 70
percent, and as much as several hundred
percent. Earnings recoveries of 150
percent are hugely bullish for stocks.
Low rates support higher equity prices.
These things did not matter. Investors
Initial public offerings were up 500
percent on their first day of trading.
Many of these companies were merely a
wisp of an idea, and not fully developed
firms with real revenue and earnings. It
was a new paradigm, and all about
“eyeballs” and “clicks” and “registered
users” and “first mover advantage.”
Profit no longer mattered, despite a
century of data that it in fact was the
most important valuation measure.
This time was different.
Only, it wasn’t. Within three years, the
tech-laden Nasdaq, where most of the
high-flying dot-com, tech and telecom
companies listed their stock, fell nearly
80 percent from the March 2000 peak.
Fourteen years later, the Nasdaq remains
20 percent below its 2000 high of 5,100.
The same can be said of the more
recent subprime credit bubble and
housing boom. Despite millennia of
lending based on the credit worthiness
of the borrower, the new metric became
the ability of the lender to sell the debt to
a third-party securitizer. Traditional
measures of median home prices to
median income moved almost three
standard deviations above normal.
Traditional metrics said housing
valuations were historically high and
unsustainable. They subsequently fell 35
percent nationally.
The investor psychology of the credit
bubble was simply to ignore the
traditional metrics. Underwrite that
mortgage to an unqualified buyer, buy
that home despite the huge run-up in
prices. History did not matter.
This time was different.
are many other factors that also impact
valuation: economic growth, inflation,
interest rates, cost of capital, investment
options, etc. And there are countless
variations of how to measure it. Last
year, Merrill Lynch’s quant team looked
at 15 metrics that measured equity
valuation — but the basic formula is
typically a version of price relative to a
profit-related metric.
As we have seen during various
manias, basic valuation measures become
disconnected from historical averages.
During bull markets, P/E ratios often rise
with the stock market. Multiple
expansion was responsible for nearly 75
percent of market gains during the 1982-
2000 bull market. The Standard & Poor’s
500-stock index began that secular bull
market with a P/E of about 8 and ended
with a P/E of over 30.
As the bull turned into a bubble
toward the end of that 18-year cycle, P/E
ratios soared. It was as if valuations no
longer mattered. This leads to the second
part of the math: Mean reversion occurs.
Equity prices eventually revert to their
long-term valuation measures. As prices
fall, P/E ratios often careen far below
that average when panic selling and
margin calls force liquidations.
Now let’s look at the psychology,
which is especially fascinating. When it
comes to risking capital in exchange for
potential returns, human emotions are
two-sided: greed and fear.
Recall the dot-com bubble, when
profitless companies soared in price.
ritholtz from G1
Our last-ditch effort was to pack it into
pints and sell it to the mom-and-pop
grocerystoreswepassedonthewaytothe
restaurants. That’s how we got into that
business.
Can you take me through your legend-
ary marketing battle with Pillsbury?
Greenfield: Sure. We had just started
to package ice cream and sell it to grocery
stores, and Häagen-Dazs had just been
acquired by Pillsbury, so they were now
owned by this large conglomerate. Our
companyhadpartneredwithdistributors
upnorthtostartsellingBen&Jerry’s,and
most of them were carrying Häagen-
Dazs.
At some point, Pillsbury came to the
distributors and told them to drop Ben &
Jerry’s or they would stop selling them
Häagen-Dazs, which was a profitable
item for these distributors. So they were
going to stop selling our products. We
knew that trying to sue Pillsbury, a $4 bil-
lion company, wouldn’t work, so, we de-
cided to take our case to the people with a
campaign called “What’s the Doughboy
Afraid of?”
We took out signs on buses and put an
800 number on our ice cream packaging.
If customers called, they would get an
answering machine message with Ben
and me explaining the situation. And if
they left their address on the machine, we
would send them a mailing kit with a
bumper sticker, and they could order a
“What’stheDoughboyAfraidof?”T-shirt.
It was this classic David-and-Goliath
story, and it got picked up in the press,
and eventually Pillsbury backed down
because they were getting so much public
pressure. That’s really what permitted
Ben & Jerry’s to be distributed across the
country.
Eventually Ben & Jerry’s was sold to a
large conglomerate, Unilever. How did
that sale happen?
Greenfield: It’s still not clear to us
whether the company was approached or
not. Our CEO at the time said he was
approached, though he had quite an in-
terest in selling the company because he
was very incentivized with stock options.
So he’s probably the only guy who really
knows. Once that happened, though, sev-
eral companies showed interest, and we
got into a bidding war. Once the company
was put in play, there was really no
puttingthelidbackonthejar.Honestly,at
points, it was excruciating.
If you could go back to those small-
business years and give yourself some
advice, what would it be?
Greenfield: I think we could have been
more selective in chasing opportunities.
We just felt so much pressure to go after
so many different things when we started
growing: new markets, new products. It’s
hard to do things well when you’re trying
to do so much so quickly.
I would also put even more time into
making sure we put the right people in
place, ones who believed in our social
mission but also had the necessary busi-
ness skills. Those don’t always go togeth-
er. And we knew that’s what would sepa-
rate Ben & Jerry’s: Even more than the
great flavors, it was important for us to
make our social mission a central part of
the company.
jd.harrison@washpost.com
seasonal business problem and the por-
tion-control problem. I started by going
around selling tubs to restaurants. I was
transportingtheminthisinsulatedboxin
the back of my station wagon — the idea
being to drive fast, delivering as much ice
cream as I could before it melted.
I could only hold 16 tubs in that box,
though, and we started selling more than
that, so we bought a really old ice cream
truck with mechanical refrigeration. I
drove that for a while, but our delivery
costs went up because the truck kept
breaking down and would have to be
towed back to the garage.
enough of it.
Cohen: Yeah, come winter, more mon-
ey was going out than was coming in, and
we didn’t really have any cash reserves.
We weren’t making as much money as we
had hoped in the summer, either, because
wewereover-scooping.Wecouldn’tbring
ourselves to scoop smaller portions, be-
cause customers wanted the big scoops.
Harrison: Is that what pushed you into
the wholesale business?
Cohen: Right. We thought we could
drum up extra business by selling tubs of
ice cream, which would solve both the
ing in through the ceiling. Ben spent
hours up there repairing it.
So you’re the ice cream makers and
the repairmen?
Cohen: I had to. It was in bad shape,
andwewereshortonmoney.Iwentbythe
local newspaper, and they had stacks of
thesethintinsheetstheyusedtoprintthe
papers, and they would sell the stacks for
10 or 15 cents apiece. I would tack them
onto the roof, with some tar to cover the
holes.
Thatworkedprettywellforawhile,but
eventually it started to leak. So we put up
this giant sheet of plastic across the top of
the ceiling to catch the water. But then
that started to sag. So we cut a hole where
it was sagging and ran a hose to a sink in
the back.
Greenfield: It wasn’t exactly elegant.
Cohen: Yeah, but it worked — until the
thermostat broke one day and the plastic
melted. The fire department came out,
and we had to really fix the roof.
How did you decide on the name Ben &
Jerry’s?
Cohen: I tried to be cute at first, play-
ing around with ideas like Josephine’s
Flying Machine, based on the old-timey
song.
Jerry said it was traditional for home-
made ice cream parlors to be named after
their owners, and he was right. We played
around with Ben & Jerry’s, Jerry & Ben’s,
andintheend,Ben&Jerry’sjustrolledoff
the tongue a little better. So, we made
Jerry the company president to make up
for coming last.
Greenfield: Not really last. Second.
Cohen: All right, that’s true. Second.
How did you learn the ins and outs of
running a business?
Greenfield: Honestly, we learned a lot
from these little brochures that the Small
Business Administration put out. They
were 20 cents apiece, you could get them
at the post office, and one would be about
how to calculate your break-even point,
another would be about how to manage
your books. That was pretty much our
business education.
What about your hiring decisions?
Greenfield:Itwascompletelyrandom.
We didn’t really know what we were
looking for, and we didn’t have any hiring
skills. Sometimes it worked out, and
sometimes it didn’t. Overall, though, the
people we found were amazing, and some
of them came up with some our best
ideas. Our recipe for hot fudge, for exam-
ple, basically the one we still use today,
wasarecipeoneofourearlyhiresbrought
to us.
What was your greatest challenge in
the first years?
Greenfield: Money. We didn’t have
BY J.D. HARRISON
In summer 1978, two friends opened a makeshift ice cream parlor in a converted gas
station in northern Vermont. Using a single five­gallon ice cream maker, they churned
outbatchafterbatchofwackyflavorssuchasChunkyMonkeyandHeathBarCrunch.¶
In the decades that followed, Ben Cohen and Jerry Greenfield built Ben & Jerry’s into a
legendary ice cream company, with more than 600 scoop shops in 35 countries around
the world and annual sales now topping $500 million. ¶ And to think it all happened
because one of them couldn’t get into medical school and the other couldn’t sell his
pottery.¶Duringajointinterview,CohenandGreenfieldtookusbacktotheearlyyears
at the company. What follows is a transcript, edited for length and clarity.
ON THE MONEY
BARRY RITHOLTZ
Think this time is different? Take your temperature. Then check the data.
ON SMALL BUSINESS
The scoop on Ben & Jerry’s start
How the numbers pile up. Is this time really different?
Price/
Earnings
17.35
17.34
24.13
15.28
7.33
Price/
Sales
1.7
1.54
1.9
0.69
n/a
10-year
yield
2.60%
4.02%
5.11%
8.07%
7.40%
S&P dividend
yield
1.85%
1.89%
1.23%
3.74%
5.43%
12 month
CPI% change
1.50%
2.80%
3.40%
5.40%
11%
TOBY TALBOT/ASSOCIATED PRESS
ASSOCIATED PRESS
Q.
J.D. Harrison: How did you
meet?
Ben Cohen: Jerry and I met in
junior high, when he fainted in
gymclass.Itmadequiteanimpressionon
me, and we quickly became friends.
Some years later, I had dropped out of
college and was trying to become a potter,
butnobodywantedtobuymypottery,and
Jerry had finished college and was trying
togotomedicalschool,butnobodywould
let him into their medical school. So I was
delivering pottery wheels and working as
a taxi driver, and he was a lab technician,
working on rat brains and cow livers in a
research lab, and neither of us really liked
what we were doing. So we decided to try
to start something together.
Why ice cream?
Jerry Greenfield: What Ben didn’t
mention was that we were both fat,
dumpy kids growing up, and we liked to
eat. So we knew we wanted to do some-
thing with food. We thought about a
whole bunch of foods — bagels, fondue,
others.
In fact, we priced out bagel-making
equipment from a used restaurant equip-
ment supplier, but we realized it was
more money than we had between us.
When we found out ice cream would be
cheaper, we picked ice cream.
How did you learn to make it?
Greenfield: We took this $5 correspon-
dence course from Penn State. I think we
splitit,paying$2.50apiece.Theysentyoua
textbook in the mail. We read through the
chapters, and all the tests were open book,
so we actually did pretty well on those.
How did you find your first location, in
Burlington, Vt.?
Cohen: We were looking for a spot that
we could afford, and we came across this
old, run-down, dilapidated gas station,
across from the City Hall Park, that had
parking where the pumps used to be. The
roof had failed, though, and there was
about four inches of ice on the floor
inside. But, you know, we went with it
because of the location.
How did you finance the start of the
business?
Cohen: We were both supposed to
come up with $4,000. Jerry came up with
his $4,000, and I came up with $2,000,
andthenImanagedtogetanother$2,000
out of my father.
Greenfield: Then we got another
$4,000 from the bank, so we started with
$12,000. Our initial loan request was for
$18,000,butbecausewehadsignedonlya
one-year lease, they didn’t think that was
very prudent. So they gave us $4,000, and
we had to make it work.
What was your next move?
Greenfield: We had to start with the
roof. I mean, you could see daylight com-
Today
2007
2000
1990
1974
Sources: BLS, Damodaran
DAN KRAUSS/ASSOCIATED PRESS
Top, Jerry Greenfield, left, and Ben Cohen pose with their Scoopmobile in
Burlington, Vt., in 1986. Middle: The orginal Ben & Jerry’s shop, a
converted gas station in Burlington, draws a crowd in 1978, the year it
opened. Above: In early 2000, a Ben & Jerry’s in San Francisco is mobbed by
people who really don’t want the company sold to a major corporation.