Bull!

In the book, Bull by Maggie Mahar, she gave a brief commentary (in blue italics) on John Kenneth Galbraith's , A Short History of Financial Euphoria

pg.12.

"For practical purposes," Galbraith wrote, "the financial memory should be assumed to last, at maximum, no more than twenty years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to come on the scene, impressed, as had been its predecessors, with its own innovative genius." (pg 87 of Galbraith's book)

During the period of delirious forgetfulness, no one wishes to think that his good fortune is fortuitous or undeserved. Everyone prefers to be believe that it is the result of its own superior insight into the market.

No wonder, then, that during such periods, doubters are silenced.

Very interesting comment isn't it? When the market is good, everyone thinks they are good!

By 1999, Byron Wien, Morgan Stanley chief domestic strategist, recalled one scene when an analyst stood in his office recommending a stock that was selling at over 100 times earnings.

"How do you arrive at your valuation?" Wien asked. "Show me the parameters you'r using." The young analyst just stared at the 64-year-old market strategist.

"When you're an older person, and you'r cautious, while the market is still going up, you're perceived as out of touch," Wien later recalled. "You just think that a stock is worth $20; you say that, at $30, it's overbought; then it goes to $40. You can begin to doubt yourself."

But Wien had a corner office with its skyscraper views of Manhattan. The young man standing in the middle of the carpet did not. More important, he did not have the thick skin that comes with trying to outguess the market while working your way up to such an office at Morgan Stanley. If Wien doubted himself, he did not show it. He waited for the answer. "The stock is worth what someone will pay for it," said the analyst, stating what seemed, to him, obvious.

The moment crystallized what Wien already suspected: They're letting the tape tell them what a company is worth. No wonder, when a stock took a dive, the analysts who followed it were just as surprised as everyone else.

They're letting the tape tell them what a company is worth!!

Do you let the market price tell you what a stock is worth?
Do you let the market price tell you what is and what isn't a good stock?

As can seen by this simple story from Byron Wien, and of course as mentioned precisely by John Galbraith in his book, A Short History of Financial Euphoria , at the peaks of the markets, whether it is a bull or a bear, folks have this self-belief that they are right, in regardless of what the actual situation might be.

Think of Jan 1975, in which Richard Russell in his newsletter made his finest call, in which the crash of 1973-74 had send the market rock bottom. The Dow was now cheaper than it would be at any time for the rest of the century. Eagerly, Russell trumpeted the good news. It was time to buy stocks, he told his subscribers. (pg 7).

But what was he greeted with? Nothing but hate mail!. "I don't want to hear about stocks!". "How dare you tell us that this is the begining of a bull market".

Or how about as in Wien's example? 1999. Analysts were rating a stock more simply because they knew others were willing to pay more for it!

And as Galbraith puts it: No wonder, then, that during such periods, doubters are silenced.

Ahh... very intresting comments from Wien again, isn't it? Analysts were rating a stock more simply because they knew others were willing to pay more for it!

"Markets go down because they went up," James Grant reminded his readers in the late nineties. "Where the free enterprise system shines is in its treatment of failure," he added.

"Individuals as individuals, are always error-prone... [they] also make collective mistakes. They overinvest, then underinvest. The underinvestment portion of the cycle is dealt with constructively, with new business formations, bull markets, and initial public offerings. The overinvestment problem is dealt with the emphasis on demolition: with bankruptcies, bear markets, consolidations, and liquidations... Without miscalculation there would be no price action, no capital gains, no losses and no commissions. "

Cycles, then, drive markets: three steps forward, two back. Without the alternating rhythms of expansion and contraction, rising prices and falling prices, there would be no movement. In Grant's terms, "A boom is just capitalism's way of setting up the next bust" (James Grant, The Trouble With Prosperity , pg 250)

... The great virtue of laissez-faire capitalism, say its staunchest admirers, is that it allows a boom to run its course, and then lets the bubble collapse. With the hissing sound comes a correction: investment mistakes are repriced and unprofitable companies go bankrupt. "The errors of the up cycle must be sorted out, reorganized or auctioned off," Grant observed.

"Cyclical white elephants must be rounded up and led away." Only then can a capitalist economy resume its progress. The correction clears the way for another cycle.

Bull Mumblings

In the book, Bull by Maggie Mahar, she gave a brief commentary (in blue italics) on John Kenneth Galbraith's , A Short History of Financial Euphoria

pg.12.

"For practical purposes," Galbraith wrote, "the financial memory should be assumed to last, at maximum, no more than twenty years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to come on the scene, impressed, as had been its predecessors, with its own innovative genius." (pg 87 of Galbraith's book)

During the period of delirious forgetfulness, no one wishes to think that his good fortune is fortuitous or undeserved. Everyone prefers to be believe that it is the result of its own superior insight into the market.

No wonder, then, that during such periods, doubters are silenced.

Very interesting comment isn't it? When the market is good, everyone thinks they are good!

By 1999, Byron Wien, Morgan Stanley chief domestic strategist, recalled one scene when an analyst stood in his office recommending a stock that was selling at over 100 times earnings.

"How do you arrive at your valuation?" Wien asked. "Show me the parameters you'r using." The young analyst just stared at the 64-year-old market strategist.

"When you're an older person, and you'r cautious, while the market is still going up, you're perceived as out of touch," Wien later recalled. "You just think that a stock is worth $20; you say that, at $30, it's overbought; then it goes to $40. You can begin to doubt yourself."

But Wien had a corner office with its skyscraper views of Manhattan. The young man standing in the middle of the carpet did not. More important, he did not have the thick skin that comes with trying to outguess the market while working your way up to such an office at Morgan Stanley. If Wien doubted himself, he did not show it. He waited for the answer. "The stock is worth what someone will pay for it," said the analyst, stating what seemed, to him, obvious.

The moment crystallized what Wien already suspected: They're letting the tape tell them what a company is worth. No wonder, when a stock took a dive, the analysts who followed it were just as surprised as everyone else.

They're letting the tape tell them what a company is worth!!

Do you let the market price tell you what a stock is worth?
Do you let the market price tell you what is and what isn't a good stock?

As can seen by this simple story from Byron Wien, and of course as mentioned precisely by John Galbraith in his book, A Short History of Financial Euphoria , at the peaks of the markets, whether it is a bull or a bear, folks have this self-belief that they are right, in regardless of what the actual situation might be.

Think of Jan 1975, in which Richard Russell in his newsletter made his finest call, in which the crash of 1973-74 had send the market rock bottom. The Dow was now cheaper than it would be at any time for the rest of the century. Eagerly, Russell trumpeted the good news. It was time to buy stocks, he told his subscribers. (pg 7).

But what was he greeted with? Nothing but hate mail!. "I don't want to hear about stocks!". "How dare you tell us that this is the begining of a bull market".

Or how about as in Wien's example? 1999. Analysts were rating a stock more simply because they knew others were willing to pay more for it!

And as Galbraith puts it: No wonder, then, that during such periods, doubters are silenced.

Ahh... very intresting comments from Wien again, isn't it? Analysts were rating a stock more simply because they knew others were willing to pay more for it!

"Markets go down because they went up," James Grant reminded his readers in the late nineties. "Where the free enterprise system shines is in its treatment of failure," he added.

"Individuals as individuals, are always error-prone... [they] also make collective mistakes. They overinvest, then underinvest. The underinvestment portion of the cycle is dealt with constructively, with new business formations, bull markets, and initial public offerings. The overinvestment problem is dealt with the emphasis on demolition: with bankruptcies, bear markets, consolidations, and liquidations... Without miscalculation there would be no price action, no capital gains, no losses and no commissions. "

Cycles, then, drive markets: three steps forward, two back. Without the alternating rhythms of expansion and contraction, rising prices and falling prices, there would be no movement. In Grant's terms, "A boom is just capitalism's way of setting up the next bust" (James Grant, The Trouble With Prosperity , pg 250)

... The great virtue of laissez-faire capitalism, say its staunchest admirers, is that it allows a boom to run its course, and then lets the bubble collapse. With the hissing sound comes a correction: investment mistakes are repriced and unprofitable companies go bankrupt. "The errors of the up cycle must be sorted out, reorganized or auctioned off," Grant observed.

"Cyclical white elephants must be rounded up and led away." Only then can a capitalist economy resume its progress. The correction clears the way for another cycle.

Myth of Long Term Investing

The myth of long term investing. The myth of buy and hold .

In the book Bull! by Maggie Mahar she explains how market players were taught to buy and hold their stocks for a longer term based on the then investing bible stocks for the long run by Jeremy Siegel, a professor from the famous Wharton School.

Folks were made to belief that if you bought a stock and held it long enough,the stock investment would have otperform all other investments.

Siegel used stocks such as Kodak, Polariod, Avon, Merk and Texas Instrument as the example. Dubbed the Nifty Fifty they were the equivalent of the Microsofts of today.

Siegel declared that if an investor bought these stocks and held it long long term (ze buy and hold) near the end of 1972 and held on to November 2001, the investors' return would average out some 11.76% a year. (see why the investing public were seduced so much by this theory?)

Now Steve Leuthold, a venered Minneapolis money manager, had a research which totally disagreed and contradicted Siegel's view point.

According to Leuthold, Seigel's hypothetical example ASS-U-MEd that an individual who invested in these Nifty Fifty stocks in 1972 had divided his portfolio evenly among the fifty stocks, putting 2 percent of their savings into each company and even if these group of stocks plunge, the investor would still rebalanced their portfolio each month for all these 19 years, cashing out on his profits and then adding money into the losers (fiyoh! Would you accept and follow such an investing strategy?) so that each stock position remained exactly at 2 percent.

Well, according to Leuthold (me too), such exercise is 'wholly unrealistic' to imagine that anyone would plow the gains from say Merck back into a loser such as Polariod, Burroughs or Xerox, year after year. (ahh.. u see Merck climbed a whopping 382%! .. and according to Leuthold, if this exercise did not include Merk, ie the investor failed to pick Merck into their portfolio, their portfolio in the long run would have sank by 12%. Err stock picking is important mah!)

Leuthold pointed out that from 1972 to 1982 the 10 worst performers in the group lost between 37% and 75%.

With losses that much, the commonsense question is that who would continue to send good money after bad money each month, each year? (make sense mah! tiok boh? Who on earth would put more money into a stock whose business is losing more and more money each year?)

And Leuthold argued that the investors who bought such stocks in 1972 would surely have been discouraged long before stocks started picking up again in 1993.

And according to Mahar, these investors would probably have dumped their fallen angels, probably at a much lower point than what Leuthold numbers had suggested.

(much of what's written is based on pages 41-42 of the book Bull )

How what's your opinion on this and long term investing?


ps:

Here is a good review of what Mahar wrote:

How did it happen that the very real risks of investing in stocks were forgotten? Mahar explodes the myth of "stocks for the long run," explaining how the market's promoters crunched the numbers to create the illusion that if an investor stays in the casino just a little longer, he is guaranteed to come out a winner. Casting Warren Buffett in a new light, she explains how a value investor is, in the end, a long-term market timer who understands that success depends on how much you pay when you get into the market -- and when you get out. By putting the bull market of 1982–1999 in a larger historical context, she shows how, over time, longtime bull markets beget longtime bear markets.

The future defies prediction, but the history of financial markets makes one thing clear: markets always revert to a mean. Taken as a single story, Bull! is both an illuminating history and a cautionary tale about investing. Analyzing the economic and psychological forces that drive financial cycles, Mahar shows how an extraordinary influx of cash and credit, combined with the obsessive attention of a new financial media, created a cult of equities. Challenging the notion that stocks always outperform all other investments, she reveals why many of Wall Street's most experienced investors believe that the 21st-century investor needs to throw out the old rule book and make a new beginning as he plans for his financial future.

No investor should keep his or her money in the stock market without first reading this book.