Quote for the Week

In every bank and brokerage house, in business places, on street corners and in elevators and restaurants — wherever people met — one could hear talk of ”the tip I got on the market.” Token margin requirements enabled anybody to test his luck. Taxi drivers told you what stocks to buy. The shoeshine boy could give you a summary of the day’s financial news. An old beggar, who regularly patrolled the street in front of my office, now gave me market tips — and, I suppose, spent in the market the money I gave him. My cook had a brokerage account and followed the stock ticker closely. Her paper profits were quickly blown away in the gale of 1929, and she had to be rescued from being sold out entirely.

Whenever some cool, calm voice like Sen. Carter Glass’s was raised against this madness, it was jeered. Whenever the market fell back — and there were some sharp setbacks on occasion — assurances that all was well would come from every quarter. Unfailingly the prophets of the New Economics in government and finance promoted the boom and nourished public confidence in it. From the White House itself came President Coolidge’s soothing statement about the mounting loans on stock exchange collateral, that ”five billion isn’t very much.” In those days it was…

There were some who believed that prices would never descend and others who thought that, if they did, it would still be possible to get out in time. But of those who realized that the boom had to end, none knew when the expected break would come. — Bernard Baruch (source)

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August 25, 1987, marked the start of the one of the worst slides in market history. In less than two months, the Dow dropped 983 points — 508 on those on the last day.

Black Monday, as it came to be known, was believed an impossibility. Nothing would ever come close to the one-day losses seen in 1929.

The Friday before finished the week with three straight days of market losses. It also marked the worst one-day point decline in Dow history. The 108.36-point loss equated to a 4.8% decline going into the weekend.

When the NYSE opened Monday, October 19th, international markets were already falling. The Dow was off 67 points at the opening bell.

By 10:30am, 140 million shares had traded. The Dow had fallen another 34 points.

A brief 95-point rally raised hopes around 11:30am. The rally fizzled and the Dow turned lower again by noon to 2103. By 2:15pm, it was in freefall — down 300 points with no end in sight.

At the closing bell, 604 million shares traded, almost twice that of the Friday before, and four times the normal average volume. A new record. The Dow closed 508 points lower. Also, a new record. The 22.6% decline was (still is) the worst one-day loss in history.

The headlines reported it the next day:

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Quote for the Week

The most remarkable feature of the bull market of 1982-87 was not its October meltdown. Rather, this bull market distinguished itself by its duration, magnitude and consistency. It lasted for five years, during which stock prices just about tripled, with only five negative quarters out of 20 and no corrections of as much as 10 percent…

What was the secret ingredient that kept investors buying and buying at higher and higher prices? Was it the myths that this market, like all bull markets, created to justify itself? Was it the belief that the Japanese were coming, that raiders paying stupendous prices knew value best, that buy-backs were a viable substitute for dividends, that portfolio insurance would save the day for risk-takers and, most typical of all, that bull markets always climb a wall of worry?

Although the myths helped keep the pot boiling, the basic explanation for the bull market’s longevity and vitality in the face of so much economic difficulty is simpler, more fundamental and more easily generalized. The same simple, fundamental explanation applies to the bull market’s sorry end as well.

The common thread that runs through all equity bull markets is confident expectations of higher earnings ahead. The common thread that ties the onset of all bear markets together is the loss of those confident expectations of higher earnings ahead. History shows that bull markets can go well beyond rational valuation levels as long as the outlook for future earnings is positive. — Peter Bernstein (source)

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Here’s what I’ve been reading the past three months:

• The Perfect Portfolio — Peter Lazaroff’s recent book breaks down what the perfect portfolio looks like. It’s not a one-size-fits-all allocation. It’s a great book for anyone who wants to build a portfolio for their situation, goals, and behavioral disposition. Advisors may find the stories in the book helpful in explaining these concepts to clients.
• The Daily Thomas Paine — The book is a collection of quotes from Paine, a philosopher, activist, and revolutionary writer. It touches on human rights, revolution, religion, science, education, government, and more. It’s meant to be read one quote per day but could be finished in one sitting. I got a copy from the UoC Press Free eBook of the Month.
• The Way to Wealth — Ben Franklin originally wrote this as a preface to his Poor Richard’s Almanack. It’s more of an essay than a book, told as a story, that sits as one of the earliest works on lessons in personal finance. Free copies can be found online.
• The Greatest Sentence Ever Written — Walter Isaacson breaks down the second sentence in the Declaration of Independence — “We hold these truths…” — word by word and provides a history lesson on the writing/editing process that led to its final form.

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Quote for the Week

Not long ago I was told of a counsel being given by a large Wall Street banking firm to the effect that an investor is foolish to own any bonds at all, since all he can expect from them is a decrease in the value by reason of inflation. This may seem like good advice to those familiar only with the history of the past 12 years, but to one like myself, who has experienced personally the ups and downs of the past 47 years and has studied those of many decades previously, this counsel seems to be short-sighted and rash.

My motto would be taken from my favorite poet, Virgil. It has only three words: “In utrumque paratus” — “Ready for either event.”

Own common stocks, if you wish, in order to protect yourself against serious further erosion of the dollar and in order to participate in the excitement of our spectacular bull market. But be sure you own enough bonds to safeguard both your financial strength and your peace of mind against the inevitable day of reckoning for the now happy breed of stock market speculators. — Ben Graham (source)

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