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.
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