Quote for the Week

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.

Bull markets require economic slack so that companies can grow, and positive trends in real business activity to take advantage of that slack. Remember, stock prices show no consistent relationship to interest rates, exchange rates, inflation rates, budget policy, monetary policy or any of the other things we professionals love to discuss. These forces matter only when they matter to the future movement of corporate earnings. — Peter Bernstein (source)

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

• The Lords of Creation – Adding this again because the notes are finally up. It covers the period from the late 1800s to the Great Depression — the rise of big business, monopolistic tendencies, financial shenanigans, shifting social and political views, impact of WWI, invention and innovation, wealth disparity, and bubbles and busts. Lots of similarities to today. If you’re into financial history, this is a good one. (Notes)
• Innumeracy – The book explains why math is important. A lack of understanding probabilities and randomness can bias our perspective and affect decisions. (Notes)
• The Laws of Simplicity – John Maeda writes about the intersection of technology, business, and design with ten principles on creating simpler systems. (Notes)
• The New York Stock Exchange in the Crisis of 1914 (Free Copy) – Henry Noble, then president of the NYSE, offers a first-hand account of the decision to shut down the exchange at the start of WWI, the problems that arose, how they dealt with it, and the decision to reopen four and half months later. It’s a short read and an interesting bit of market history.
• Medici Money – New book started this week. It looks at the rise and fall of the Medici bank.

Quote for the Week

Hard experience has taught me that chasing noise leads me to miss the main trend too often. At the same time, having lived through the bond yield/stock yield shift of the late 1950s and the breakthrough of bond yields into the stratosphere beyond 6 percent in the late 1960s — just to mention two such shattering events out of many — I look with suspicion at all main trends and all those means to which variables are supposed to regress. To me, the primary task in investing is to test and then retest some more the parameters and paradigms that appear to govern daily events. Betting against them is dangerous when they look solid, but accepting them without question is the most dangerous step of all. — Peter Bernstein (source)

Quote for the Week

Never before did so many people make so much money, or spend it so lavishly, as during the late bull market. Prolonged prosperity makes the new-rich seek new ways of spending; and spending for new luxuries gives to money a pleasure-giving power that it did not have in the less affluent days. But as expenses rise, there develops the need of increasing the income to keep pace with the new living standard.

From hardship to comfort, the gap is a million miles wide. From comfort to luxury, the step is only four inches long. Ask any man who has made easy money.

Stock speculation always seems the cleanest way of making easy money. It is legalized gambling masquerading as a legitimate business. It possesses insidious attractions. It tickles the vanity of the speculator to feel that it is his superior judgment, clear vision and financial courage that win the money for him. That is why stock speculators refuse to regard their operations as attempts to get something for nothing. They know that nobody gets that. Speculating, to them, is getting something for something. — Edwin Lefevre (source)