It was the publication of E.L. Smith’s little book entitled, “Common Stocks as Long-Term Investments.” His study showed that, contrary to prevalent beliefs, equities as a whole had proved much better purchases than bonds during the preceding half-century. It is generally held that these findings provided the theoretical and psychological justification for the ensuing bull market of the 1920’s. The Dow Jones Industrial Average (DJIA), which stood at 90 in mid-1924, advanced to 381 by September 1929, from which high estate it collapsed — as I remember only too well — to an ignominious low of 41 in 1932.

On that date the market’s level was the lowest it had registered for more than 30 years. For both General Electric and for the Dow, the high point of 1929 was not to be regained for 25 years.

Here was a striking example of the calamity that can ensue when reasoning that is entirely sound when applied to past conditions is blindly followed long after the relevant conditions have changed. What was true of the attractiveness of equity investments when the Dow stood at 90 was doubtful when the level had advanced to 200 and was completely untrue at 300 or higher. — Ben Graham (source)

If you believe — as I have always believed — that the value approach is inherently sound, workable, and profitable then devote yourself to that principle. Stick to it, and don’t be led astray by Wall Street’s fashions, its illusions, and its constant chase after the fast dollar. Let me emphasize that it does not take a genuis or even a superior talent to be successful as a value analyst. What it needs is, first, reasonable good intelligence; second, sound principles of operation; third, and most important, firmness of character. — Ben Graham (source)

One of the studies that I did for my first book, “Pioneering Portfolio Management,” looked at the behavior of endowments and foundations around the crash in October 1987… There was a huge rally in treasury bonds on October 19, 1987. So, stocks were cheaper and bonds were more expensive. Well, what do you do? You buy what’s cheap and sell what’s expensive. But what did endowments and foundations do? Well, if you look at the annual reports of their asset allocation, in June of 1987, their equity allocation was higher than it had been for fifteen years. The ’70s were a terrible time to invest in stocks, a bull market had started in 1982. We were five years into this bull market and people were getting excited about the fact that stocks were going up and equity allocations were at a fifteen-year high. Of course, the money had to come from somewhere, so bond allocations were at a fifteen-year low.

Fast forward to June 30, 1988 and stock allocations had dropped and, not only had they dropped, they dropped by more than the decline in stock prices associated with this collapse in October 19, 1987. Bond allocations had increased by more than could be explained by the increase in bond prices over the course of the year. The only conclusion that you could draw is these supposedly sophisticated institutional investors sold stocks in November and December and January because they were fearful and they bought bonds in October, November, and December — maybe because they were fearful or maybe because they were greedy. Emotion ruled the decisions, not rational economic calculus. The costs were huge — not just the immediate costs in terms of the move from stocks to bonds. It took these institutions until 1993 — a full six years — to get their bond allocation back down to where it had been prior to the crash in October 1987. And this is in the context of one of the greatest bull markets ever… For a full half-dozen years, in the midst of this bull market, colleges and universities were over-allocated to fixed income relative to where they had been in June of 1987. — David Swensen (source)