Quote for the Week

My recommendation is that the investor choose either his own list of, say, 20 or 30 representative and leading companies, or else put his money in several of the well-established mutual funds…

Many investors would think my prescription too simple. If they can get results equal to the averages in this easy way why shouldn’t they try to get a substantially higher return by careful and competently-advised selection? My short answer has already been given: If the investment funds as a whole can’t beat the averages, even pretty clever investors as a whole can’t do it either. The underlying problem of selection is that the “good stocks — chiefly the growth stocks with better than average prospects — tend to be fully priced and often overpriced.” At the other extreme new stock offerings, when the craze is one, are likely to combine fourth-rate quality with absurdly high price-earnings ratios. There are better opportunities in between these extremes, but most investors don’t look for them there.

As I see it, the fundamental problem in common stocks is the market’s injection of a large speculative element into the strongest and best companies by establishing an untenably high price for them… This has added greatly to the confusion between investment and speculation, because it is easy to tell oneself that the shares of a good company are always a sound investment, regardless of price. — Ben Graham (source)

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A. Newton Plummer was a corporate publicist. He was also a stock promoter. He helped pool operators manufacture huge profits during the 1920s bull market.

A pool was a group of people that pooled their money to buy a stock, manipulate the price higher, and then sell it to the unsuspecting public at a huge profit. At the same time, PR was used to draw up publicity around the stock. That’s where Plummer came in.

Plummer wrote press releases filled with good news about the stock. He sent them to newspapers around the country in the hopes of being published. To guarantee it, of course, he bribed the reporters.

One example of this was the Armour & Co. operation run by Plummer:

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Quote for the Week

The game is getting today as it always has and as it always will, for besides the greed motive in stock speculation there is also the call of adventure, the fascination of danger that, in turn, begets the curious delusion that a man’s profit must always be commensurate with the risk he takes. When a man stands to lose his all he thinks he ought at least to double it. You find this in every business. Even those to whom stock speculation appears immoral or stupid look through equally unreliable telescopes at the colossal fortunes won by the great captains of industry in a short, breathless decade. It was all they could play it for, because the game itself was not always worth much. To create, to do, to win — that is how and why they play it.

But what makes the game of stock speculation the most dangerous of all is the variety of pleasing disguises it is able to assume. Being born of greed, it feeds on greed and thereby waxes greater. If that were all it did, or if it did this openly, it would not be so dangerous; but besides the additional lure of adventure there is the irresistible appeal to vanity, the challenge to pit your wits against other wits, and even against Nature and the vagaries of the weather and the weaknesses of men. It most often masquerades as a legitimate business operation, subject to and governed by the ordinary rules of ordinary business. Of course, one reason for this is that the buying and selling of stocks do not necessarily constitute gambling. The buying or selling of stocks on margin in expectation of immediate and large profits is probably gambling and nothing else, whether or not you have a scientific system that cannot fail. — Edwin Lefevre (source)

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Stock markets, at times, reflect more of what participants want to happen than what businesses are capable of doing. Hope, fear, and greed drive prices in the short run. Business success, or lack thereof, drive prices long term.

Market cycles reflect the shifting mix of the emotional side of market participants and the changing fundamentals of business. At the extremes, emotions carry more weight on market prices.

Behavior follows market prices, unfortunately. Like fanatics with their sports teams, we prefer winning stocks to losing stocks. Winning stocks are rising. Losing stocks are not. And when the market is winning, excitement grows.

The winning is inconsistent, of course. The market rise is pitted with random dips. Each dip a potential turn or pause before a new high. But as more dips lead to new highs, skepticism of a turn in the market cycle grows.

Bandwagon fans jump in as the wins pile up. The longer the market winning streak, the more we expect it to keep winning. In time, hope turns to greed and rising prices are all that matters.

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Quote for the Week

To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country’s businesses and banks. This inventory—it should perhaps be called the bezzle—amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks. — John Kenneth Galbraith (source)

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The biggest risk to a successful strategy might be copycats. Too much money chasing the same thing.

As more and more money pours into the same strategy, the dynamics of asset prices change, and the risk of an unwind grows. The more money, the more violent the unwind could be…especially when debt is involved.

Copycats are not a new concept either. For every Warren Buffett, there are thousands of imitators following his trades, hoping to replicate his past success.

The same is true for any other strategy or financial innovation, however short-lived, that generates an exceptional return. If someone is doing it, and it’s easily replicated, someone else will try it too. Then another and another, until the reasoning behind the initial strategy is lost or replaced with “prices go brrr.” It creates a positive feedback loop that shows up in short-term returns that is, unfortunately, unsustainable.

The latest copycat craze, the crypto treasury companies, harkens back to a time when Wall Street embraced investment trusts in the run-up to the biggest bubble in U.S. market history.

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