Quote for the Week

While all the chatter and excitement is taking place about big stocks, big gains, and “three-baggers,” long-term investment success really depends on not losing — not taking major losses.

We all know that a 50 percent loss requires a double the next time up just to get even, but still we strive for the Big Score, even though we also know full well that accidents happen most often to too-fast drivers; that Icarus got too close to the sun; that Enron Corporation, WorldCom, and many dot-coms had very high “new era” multiples before their obliteration.

Large losses are forever — in investing, in teenage driving, and in fidelity. If you avoid large losses with a strong defense, the winnings will have every opportunity to take care of themselves. And large losses are almost always caused by trying to get too much by taking too much risk. — Charley Ellis (source)

Hype around IPOs is nothing new. You can go back to the 1700s, during the South Sea Bubble, to see it play out.

All it took was a company with wonderous possibilities, a chance to get rich, and a public eager to buy. The booming bull market helped set the stage for crazier offerings. And it worked.

The craziest by far was not the company trying to extract silver from lead or trade in human hair or build a perpetual motion wheel but for “a subscription advertised, and actually opened, for an undertaking, which shall in due time be revealed.” Just think of the possibilities!

The Dotcom Bubble is a more recent, perfect, example of the craziness. In 1999 alone, there were 478 IPOs. Almost 80% percent were tech stocks. Over 70% had no earnings. It didn’t matter.

The average first-day return for IPOs in 1999 was 71%! The environment was perfect. Public enthusiasm was at its peak, the internet brought infinite possibilities, and the stocks brought a chance for instant wealth. And the first-day pop was manufactured.

Quote for the Week

All booms are alike. The stage varies, but fundamentally they are as drops of water. Customs, like costumes, change from force of environment and economic conditions, but human nature remains the same. The autumn boom in Wall Street resembled all other stock booms, because the psychology of the boomers has not changed and cannot change. The Tulip Craze in Holland, or John Law’s Mississippi Scheme in France, or the South Sea Bubble in England in most things were the counterparts of the present speculation in the country. After all, booms are made by men, and not by stocks or flowers or town lots or wheat or mines or war. — Edwin Lefevre 1915 (source)

Quote for the Week

It seems a truism to say that the old-time common-stock investor was not much interested in capital gains. He bought almost entirely for safety and income, and let the speculator concern himself with price appreciation. Today we are likely to say that the more experienced and shrewd the investor, the less attention he pays to dividend returns, and the more heavily his interest centers on long-term appreciation. Yet one might argue, perversely, that precisely because the old-time investor did not concentrate on future capital appreciation he was virtually guaranteeing to himself that he would have it, at least in the field of industrial stocks. And, conversely, today’s investor is so concerned with anticipating the future that he is already paying handsomely for it in advance. Thus what he has projected with so much study and care may actually happen and still not bring him any profit. If it should fail to materialize to the degree expected he may in fact be faced with a serious temporary and perhaps even permanent loss. — Benjamin Graham, 1958 (source)