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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Shadows of money laundering and sly foreign operatives figured into my impressions as Mr. C. went down his list of millions of dollars in stocks and bondsHISTORICAL PERSPECTIVE THE NECESSARY REVOLUTION Why We Needed a New Dominant Investment System and How We Got One Although impatient for the morning, I slept soundly and had no need for cheering dreams. Facts are better than dreams. Winston Churchill, The Second World War The sun was not even close to rising, and already the phone was ringing off the hook. As I threw my briefcase under the desk, I saw that it was one of our private lines. It must be an important client, and it must be urgent for them to be calling the office at 5:30 A.M. I was right on both counts. Jim C. had overcome all obstacles with integrity and determination to create his fortune. He was not easily rattled. I want you to help me set up an offshore account, he said. Weve got to do it quickly. He had not slept all night. Shadows of money laundering and sly foreign operatives figured into my impressions as Mr. C. went down his list of millions of dollars in stocks and bonds. The drama was no doubt enhanced by my low caffeine level. This is a man who hung tough as the Dow lost nearly half its value in 1973 and 1974.1 He kept his faith in the economy as the savings and loan (S&L) industry fraudulently sucked billions out of it in the mid1980s. He rode out the junk bond scandals2 and the market crash of 1987.3 So what was this final straw laid atop the pile in 1989? Before you can apprehend the significance of Mr. C.s request, you must learn how brittle the dominant investment system of the Dow had become by 1989. The grand old ladys resilience had diminished. Her tolerance for the rambunctiousness of a capitalist economy was exhausted. This was not the lusty Dow of 30 and 40 years previous. The Dow was in its prime in the 1950s and early 1960s. From its level of 198.89 on January 3, 1950, it more than tripled by January 5, 1960, when it hit 685.47. Look for a date marking the pinnacle of the Dows career as the dominant investment, and you will find February 9, 1966, when it reached 995.15. If the Dow were an athlete, this would have been like Michael Jordans winning shot in the 1998 NBA championship. It was a marker of excellence, followed to be sure by other years of great performance, but none where the necessary pieces fit together as perfectly. The percentage gain from 1950 to 1966 was 400%, or an arithmetic average of 25% per year! The investments of the dominant investment system will always be impacted by unforeseen political and economic events. As with us mortals, the measure of their strength is how they bounce back from them. The Dow rallied quickly from the recessions of 1953, 1957, and 1960. In 1962 the Kennedy administrations clash with the steel industry caused the Dow to fall from 726 on January 3 to 535.76 by June 26. Later that same year the Cuban missile crisis dealt it another blow, but by December 18, 1963, the Dow reached a new high of 767.21 (see Figure 4.1).4 Between 1963 and the Dows peak in 1966, President John F. Kennedy was assassinated; the Vietnam War swung into full force; racial tensions broke into mob violence across the country; and Malcolm X was shot. Still, the Dow only hesitated before barreling upward. Then things changed. The turn was so subtle that we can see it only in retrospect. It was not until December 11, 1972, that the Dow closed above its 1966 high, and then only by 41.12 points. This means that its arithmetic-average annual return between 1966 and 1972 was only .69%. At first this seems understandable. The United States had bombed Hanoi; Martin Luther King Jr. and Robert F. Kennedy had been shot; a recession hit in 1970; and the dollar was devalued in 1971. These events were tragic, but so was World War II, the recessions of the 1950s and 1960s, and the assassination of a President when the Dow recovered just fine. But this time, from 1966 to 1973, the Dow rose a meager 15.43 points and would go no further for 10 years (see Figure 4.2). Why did the Dow get frozen in its tracks after 1966? Chapter 1 explained that the Dows performance correlates with productivity, often measured by gross domestic product (GDP). Here is a simple, common sense, economic concept: Figure 4.1 The Dow in Its Prime, January 1950-February 1966 Note: Closing prices of the Dow Jones Industrials are shown. Figure 4.2 The Dow after Its Prime, 1966-1983 Note: Closing prices of the Dow Jones Industrials are shown. The more productive corporations are . . . The more productive our economy will be (higher GDP) . . . The higher corporations stocks will go. Exceptional productivity growth characterized the years 19501973. Output per hour grew by almost 2.75% per year.5 It is no coincidence that during this period the Dow reached its zenith as the dominant investment system. Why did the energy drain out of the Dow in the 1970s, 1980s, and 1990s? Why did it take a total of 16 years from its peak in 1966 to set a substantial new high in 1983? The answer is that from 1973 to 1983, productivity growth averaged only 1.25% per year (see Figure 4.3).6 The declining trend of productivity, set in motion in 1973, helped to create a chain of events that included a falling stock market, rising inflation, and rising interest rates. Investment gurus advised locking up money in high yielding investments because the future returns on stocks looked dismal. The oil embargo, recession, resignation of President Richard Nixon, and Iran hostage crisis are pointed to as reasons why the Dow could not get out of its own way in the 1970s; however, those events were nothing compared to crises earlier in the century from which the Figure 4.3 Per Capital Gross Domestic Product Note: 10-year annualized growth rate of per capital real gross domestic product (GDP). Note that per capita GDP declines during the 1970s and 1980s. Dow rallied brilliantly. The companies of the dominant investment system that had been firm and productive had become soggy as noodles. |
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