Novel Investor

Quote for the Week

After the violence of a crisis has subsided, it becomes clear that it is not upon Capital, nor even upon legitimate commerce that the blow has fallen heaviest. As a rule. Panics do not destroy Capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works…

Broadly defined, then, Panic is the destruction, in the mind, of a bundle of beliefs. As a first result of that destruction, a mass of paper documents, the outward expressions of those beliefs from which they derived their circulating force, becomes a mere dead residuum, leaving a void which can only be filled by other agents possessing that vital grasp on belief which they have lost. And the void must be filled. The volume of transactions and engagements cannot immediately be reduced. But Panic, the most rigorous of realists, rejects the dead symbols of Credit, and exacts Capital in the mobile form of currency. Suum cuique is now the universal rule, and everybody reclaims his own. The usual magazines of Capital in that form are rapidly drained, and the rate of its hire is proportionately raised. The Panic period is therefore marked by great scarcity of mobile Capital; because, though not less in quantity than before, it is drafted off into a thousand unusual channels to perform the functions commonly exercised by Credit. — John Stuart Mill (source)

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Quote for the Week

Earning power must always be the chief criterion of stock values — exceeding in importance asset backing, financial condition, and even dividend return. For it is the average rate of earnings which determines the real value of the physical assets, which weakens or strengthens the cash position, and which finally must control the dividend policy. — Benjamin Graham, 1922 (source)

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Quote for the Week

Most financial principles and theories have a degree of good sense to them. It may be a large degree, but it never comes close to being absolute. None of them ever has the comforting reliability of Euclid’s comment about the length of the hypotenuse of a right-angled triangle. Consider the observable occurrence and reoccurrence of what economists traditionally call the business cycle. It exists, certainly enough. Stocks never go so high that they don’t fall down, and never sink so low that they don’t eventually go back up again. But the duration of this cycle is figured by some at the mystic and Biblical figure of seven years, and sometimes at six. However, there have been periods when it worked out to other numbers of years, such as three, two, or half a year. Or take the period of two and a half years preceding the morning on which these words happen to be written. (Summer, 1949.) While events of world importance have been taking place, the stock market has done nothing but drift listlessly a little lower, from prices which could be considered low to begin with, in view of corporate earnings at that time. Thus the riddle is propounded: can such a pattern be termed predictable?

It is not likely that this riddle will ever be conclusively solved. It is fair to point out, however, that the tendency of the human heart is to plump for the idea that there is a sensible order in the rise and fall of prices, whether the evidence is good or nonexistent. People do not care for the idea that any important activity which affects them is as beyond their control as a pair of dancing dice. — Fred Schwed Jr. (source)

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