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The only constant in markets is change. Take the 1950s.
The first detailed study the stock market was done in 1952 on shareholder demographics in the U.S. The book is 140 pages of tables and charts breaking down businesses and share ownership in the U.S. (someone shared a link to it earlier this week, don’t remember who).
The most obvious thing that stands out is the huge difference in the sector/ industry breakdown in 1952 compared to today. Continue Reading…
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In 1867, while standing in front of the Manchester Statistical Society, John Stuart Mill delivered the future template for market bubbles.
…that during each of those decades commercial Credit runs through the mutations of a life, having its infancy, growth to maturity, diseased over-growth, and death by collapse; and that each cycle is composed of well-marked normal stages, corresponding to these ideas in nature and succession. And as Credit is a thing of moral essence, the external character of each stage of its development is traced to a parallel change of mental mood…the malady of commercial crisis is not, in essence, a matter of the purse but of the mind.
Mill looked at previous panics thinking that some general pattern would emerge. He was right. He saw a dramatic shift in mindset throughout the cycle: from panic came revulsion, to caution, moderation, then euphoria, and back to panic. Mill hoped that being able to recognize the mood swings could help avoid future disaster.
Mill broke the cycle down into three stages, attaching a mindset to each. Continue Reading…
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It’s been 10 years since the financial crisis. Sometimes it feels like a lifetime ago. There were some rocky moments since, but overall things turned much better than almost everyone predicted. That said, nothing’s ever perfect or permanent.
The advantage of history is the ability to revisit past experiences and keep the lessons fresh in our minds. Being a decade removed, now seems like as good a time as any to do that.
In his 2010 annual letter, Seth Klarman wrote about the 20 lessons he took away from the ’08 crisis. The best part is the lessons don’t require another crisis to be useful.
Below, you’ll find an edited excerpt from his letter: Continue Reading…
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Ben Graham wrote Security Analysis in 1934. The second edition would be published six years later and is heralded as the bible, a beast of a book, on the art of financial analysis. But almost two decades before the first printing of Security Analysis, Graham laid the groundwork for his thought process while writing for The Magazine of Wall Street.
I came across 33 of his articles written from 1917 to 1921 (he wrote for the magazine up till 1927, I believe) and have been reading them over the past two weeks. Combined, they offer some insight into his early investment philosophy, investigative mindset, and process of analyzing companies.
The biggest takeaway is how inconsistent company reporting was back then. There were no rules. The SEC didn’t exist. Graham repeatedly complained about the lack of available information and even goes into detail about how he had to look up war tax records to reverse engineer company earnings.
Another takeaway was his consistency in breaking down the best, worst, and most likely scenarios around a company. He also repeatedly focused on one thing after relating the “story” behind a stock – “Let us see to what extent this opinion is justified by the facts.” Beyond that, was a sense of the impact World War I, and its end, had on companies and the economy.
Rather than diving into the details of each article, I thought I’d share some of the broader wisdom wrapped into his analysis. Continue Reading…
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As mentioned in the last post, Ben Graham contributed to the 1933 Senate hearing Investigation of Economic Problems. His letter was titled “Sounder Money and Better Business.”
I read it the other day to see what he had to say. It’s all economy stuff. So you won’t find wise words on investing, markets, or behavior. But if you have an interest in the Great Depression and a grasp the problems plaguing the U.S. at the time, you might find this interesting too.
Here’s Graham’s take on the problem:
…the plan attacks directly the central paradox of the depression, namely, poverty caused by superabundance, by transforming our surplus of commodities from a cause of national disaster into a source of national strength…
General overproduction has been termed a theoretical impossibility, but it has proved also a practical and disastrous actuality. This has been due to the failure of effective purchasing power to keep pace with increasing production…
Under present conditions, when production in general outstrips consumption, the whole economic mechanism is thrown out of gear. Deflation and depression are the only remedies. The adjustment is always painful, sometimes protracted, and in this instance almost fatal.
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When markets are in free fall, and bargains abound, investors should be elated. The question is: do you buy as opportunities arise or hold out for a better (lower) price?
This question was posed by Bruce Greenwald to a 2008 panel. Here was Seth Klarman’s answer:
I think that you buy one security at time. And if somebody wants to sell you something at at sixty cents, that’s worth par, you buy it because you don’t know if tomorrow someone will sell it to you at 50 or if it will be at 70 or 90.
That’s good advice in general because timing the bottom of anything is impossible without a lot of luck. It’s not even worth trying.
However, I think it helps to remember how investors reacted in ’08. Very few were ecstatic. Almost everyone was nervous, afraid, paralyzed, panicked… How many investors claimed to be “waiting for a better opportunity” while sitting on cash? Continue Reading…