In 1955, the Senate Committee on Banking and Currency decided a stock market study was in order. The big concern was whether the market was euphoric and what to do about if it was. They didn’t want a repeat of ’29.
So they rounded up all the big names to expound on the market. Ben Graham was one of those people who offered his enlightening two cents.
John Kenneth Galbraith was another.
I think the senators were hoping for a way to stop the market mid-boom – shut the euphoria off like a garden hose spigot – without an ensuing crash. Galbraith didn’t mince words on that possibility and who would be blamed for it:
As I say, once the boom is well underway it cannot be arrested. It can only be collapsed. And the unfortunate feature of that is that the person who does the collapsing is terribly visible.
Shocking that a bunch of elected politicians hated that outcome.
During Galbraith’s testimony, Senator Robertson from Virginia chimed in with a personal story that a lot of new and time-tested investors can relate to in some way. There are many lessons in his story: buying too early, selling too early, letting price volatility dictate action, ignoring value, ignoring research, getting emotional…I could go on.
His story is a lesson in how our early experiences (one bad experience for the Senator) can shape our perspective on the markets and impact future investment decisions.
Senator Robertson: Professor, your reference a while ago, about escape from reality, reminded me of a personal experience I had with stock some years ago and the advice I was asked to give about that stock last summer.
I had a farmer friend who had made some money out of cattle, before the price went down, and he had bought a substantial block of Bethlehem Steel at 50. In July of last year, when the stock had gotten up a little above 68, he called me and said, “This Bethlehem Steel I own is active, and I wish you would find out for me what the prospects are for future advance.”
I wrote a friend in New York and said, “Confer with some of the best posted men up there about Bethlehem Steel.” He wrote me back that the very top stock analyst of one of the best brokerage firms told him without doubt Bethlehem Steel would go to 130. And that was in July of last year.
I made that report to my farmer friend, and I said I did not pretend to know anything about the values of stock, but I did have a little transaction once in Bethlehem Steel. I used to hunt and fish with the former president of Bethlehem Steel, and while I knew that William E. Corey and Charles Schwab bought Bethlehem Steel prior to World War I for $19 million and pyramided it to over $100 million, I knew that the Great Lakes plant is a newer plant that United States Steel. After the market broke in October of 1929, I, a country lawyer, saved up a little bit, figured that at 28 Bethlehem Steel would yield me between 8 and 10 percent, and I bought some Bethlehem Steel stock for that price, not on margin. It was not but a few months until it went down to 11. I held the stock for 10 years before it got back to 28. During that time I did not get a cent of dividend on it. And when it got back to 28, I was so disgusted that I sold it. Now, since that time it has been split 3 to 1.
So when this expert said it would go to 130, I figured that would be $390 for the stock I bought at 28 and that went down to 11. So I did not call his viewpoint an escape from reality — I just said I thought he was crazy.
But he was not crazy. Bethlehem Steel not only went to 130, but one day it hit 131. I just got the quotation this morning, and it is 129 1/2.
Unfortunately for him, my farmer friend had more confidence in my judgment than in the judgment of the stock expert, so he sold at 75. But he said, “Whenever I can make a 50 percent profit on what I have bought, I am not hurt and I am satisfied.” But I do not know how well satisfied he is when he sees it up to 129. I am watching with a great deal of interest to see how long it is going to stay at 129 and 130, or whether or not those who last July, when it was selling at 68 and they said it was going to 130, have started a little quiet movement of letting their stock back into the market and taking the profit, regardless of what you say about the capital gains tax at 25 percent.
That is the only stock I know anything about. I never had but one other transaction on the stock exchange, because after being burnt that badly, I was always afraid of it.
But it did seem to me then, and it seems to me now, that at 130, split 3 to 1, those who are putting their money in it are certainly gambling on a sustained production of steel.
Last summer the industry was operating at 63 percent of capacity, and the former president told me — I do not know how it is now — that Bethlehem Steel could not make net earnings when operating at less than 70 percent of capacity. The entire steel industry now has just gotten up to 86 percent of capacity, which just shows a fair margin of profit on what they are doing. They are way below the 125 million or 130 million tons of steel ingots that they are capable of turning out.
Anybody can pay his money and make his choice as to whether Bethlehem Steel is too high or not. I know how I feel about it.
That is all I have.
John Kenneth Galbraith testimony for Stock Market Study: Hearings Before the Committee on Banking and Currency on Factors Affecting the Buying and Selling of Equity Securities, March 1955
Graham: The Mysteries of the Stock Market