The study of change is more helpful in understanding the future of stocks and bonds than the brooding over, or creation of more, intractable analytics

The fluctuations of the financial markets today are made to seem as mysterious as the rites of a secret male society. Its actions are viewed through a screen of complexities, maintained by a variety of forces with their own agendas, and rooted in rigid principles and traditional conventions. This approach is not unappealing to many people. A lot of us prefer the feeling of stability conferred by established precepts, even if we do not understand them. To know they exist inspires confidence, an important requirement for participants in the financial marketplace.

The problem is that the financial markets exist within a capitalistic economy that can only survive through a course of evolution. The markets are a body that is kept healthy only by the continual mitosis and metamorphosis of its cells of stocks and bonds. Its life depends on the process of change. This makes the application of long-lasting, hard and fast rules of security analysis and market performance a lot like nailing down Jell-O: Eventually it will transform itself and follow its own natural course.

All of this makes the study of change more helpful in understanding the future of stocks and bonds than the brooding over, or creation of more, intractable analytics. Placing stocks and bonds in their historic and cultural context afforded us the ability to examine their changes, and we have learned the following (see also Figure 5.4):

There is a process at work that causes an omnipresent method of doing business pick it or ship it; take it, make it, break it; realize, capitalize, customize and the investments that represent that method of doing business; to go through almost human stages of birth and early development. They will thrive during difficult as the mature business model, and the dominant investment that represents it, are no longer strong enough to drive economic productivity.

Curiously, these last 25 years are also a time when old rules are

challenged and an abundance of new innovations are created and developed that will eventually be the new drivers of productivity and result in a new dominant investment system. We call this period the incubation interval.

The convergence of four elements sparks a dramatic and

lengthy economic turnaround that signals the birth of a new dominant investment system: (1) end of the incubation interval; (2) dependable consumer economy, (3) improvement in economic conditions; and (4) surge in foreign exports.

Stewards of the old dominant investment system have told us that it is impossible for the securities markets to cycle in this way because people are so different in the twenty-first century than in the nineteenth or even in the twentieth century. When asked to explain how they came to this conclusion, the response ranged from my gut tells me to its just something everybody knows. One person said with a straight face that he was well acquainted with the habits of nineteenth-century Americans because he never misses a rerun of Bonanza or Wagon Train.

The importance of the written word to the highly literate nineteenth-century American citizen results in a plethora of material giving us insight into their thoughts and feelings. The language is more flowery, but what is expressed is uncannily familiar: The eminent lawyer, the physician in full practice, the minister . . . even the literary workman, or the eager man of science are one and all condemned to an amount and continued severity of exertion of which our grandfathers knew little.43 According to Mark Patterson in The Age of Reason, Even apart from personal ambitions, the very existence of hundreds of objects, once unknown or within the reach of a few, now made widely available and therefore desirable, increased the size of ones expenses and the load of his work.44 W. R. Greg wrote, Not only the tempo of work but the tempo of living had increased with striking impact, so much so that one observer thought that the most salient characteristics of life in this latter portion of the 19th century is speed.45 By the end of the incubation interval in 1896, the rush of human traffic created problems like our own: Parents fretted more about the behavior of their teenagers . . . the concerns focused on the nations youth problem . . . pilfering, vagrancy, roaming the streets, larceny, drinking, begging and fighting46

Cocaine was popular among the upper classes, and morphine was not yet illegal. The term seven-percent solution was coined because it was well known that this was what the famous detective Sherlock Holmes injected himself with from time to time.

The improvement in the economy after 1897 created a higher level of disposable income and some leisure time, but like today, many middle class Americans could play only if they were persuaded they were improving themselves and not wasting time.47

The old health spas of Saratoga Springs and White Sulphur Springs were inundated with a new clientele interested in becoming physically fit through more active pursuits than merely lolling in soothing waters. The health craze instigated the opening of new spas for the middle class in Frenchlick, Indiana; Hot Springs, Arkansas; Colorado Springs, Colorado; and Asheville, North Carolina. A popular diet discouraged carbohydrates and recommended a breakfast of bacon, eggs, beefsteak, or sausage.48

Nineteenth-century investors were as enthralled with companies of the new Dow Jones Industrial Average during its discovery phase as we were with NASDAQ stocks during our own discovery phase. Stocks like American Tobacco rose from $66.50 in 1896 to $221.50 by April 1899, a gain of 233%.49 Their bubble of irrational exuberance burst when Dow stocks plummeted 25% in just the last four months of 1899. We explained in Chapter 2 how this was followed by another decline of 31.76% in 1900, and then another drop of 46% between 1901 and 1903. But these frightening market reversals neither stopped the Dow from becoming the dominant investment nor kept it from nearly doubling in value over the next decade.

It should not be lost on us today that as the Dow rose in its early years to become the dominant investment, America was engaged in two wars, the Spanish American War and the War in the Philippines. The assassination of President McKinley and the distrust of the Robber Barons of corporate America surrounded the financial markets with uncertainty. Just as things began to look better, investors had to put up with additional market declines of 48.54% in 1906. The message in this is that none of these setbacks kept the Dow from becoming the new dominant investment then, nor will similar struggles keep NASDAQ-type stocks from thriving as the dominant investment now. The biggest threat to our investment health will not stem from the inevitable crises always striking when we least expect that will temporarily impact stock prices. The real threat lies closer to home and derives from any inclination there may be to dismiss the changes that have occurred.

The twenty-first century investment transformation has already affected pension benefits, 401(k) plans, and the financial services industry. It could materially affect benefits promised by insurance and mutual fund companies. The next chapter explains why individuals, state, and federal regulatory agencies must acknowledge the important reconfiguration of the financial markets and act immediately to address these changes.

NOTES

1. Jeremy Atack and Peter Passell, A New Economic View of American History (New York: W.W. Norton, 1994).

2. Ibid.

3. Historical Statistics of the United States (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975).

4. Ibid., p. 588.

5. Jeremy Atack and Peter Passell, A New Economic View of American History (New York: W.W. Norton, 1994), p. 445.

6. Walt Whitman, Leaves of Grass (New York: W.W. Norton, 1973), p. 480. Reprinted by arrangement with New York University Press.

7. Brooks Atkinson, ed., Walden and Other Writings of Henry David Thoreau (New York: Random House, 1965), p. 81.

8. Jeremy Atack and Peter Passell, A New Economic View of American History (New York: W.W. Norton, 1994), p. 445.

9. Sydney Homer, A History of Interest Rates (New Brunswick, NJ: Rutgers University Press, 1963), p. 282.

10. Ibid., p. 312.

11. Historical Statistics of the United States (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975), p. 735.

12. Historical Statistics of the United States (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975), p. 431. 13. Historical Statistics of the United States (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975), p. 208. 14. Jeremy Atack and Peter Passell, A New Economic View of American History (New York: W.W. Norton, 1994), p. 431.

15. Samuel Morison, The Oxford History of the American People (Cambridge, UK: Oxford University Press, 1965).

16. At a labor meeting in 1886 at Haymarket Square in Chicago, police opened fire on the crowd. Seven police were killed, and a total of 70 people were injured.

17. Henry Adams, The Education of Henry Adams (New York: Random House, 1931), p. 294.

18. Historical Statistics of the United States (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975).

19. Edison perfected the lightbulb in 1879. Electric power lines reached most homes during the next 25 years, but cables had to be installed from homes to the lines at the street. The cost of these cables and the power was paid by the consumer. Chris Scarre, ed., Smithsonian Timeline of Inventions (New York: Darling Kindersley, 1993), p. 43.

20. The telephone was invented in 1876.

21. Jeremy Atack and Peter Passell, A New Economic View of American History (New York: W.W. Norton, 1994).

22. David Traxel, 1989: The Birth of the American Century (New York: Random House, 1998).

23. Benjamin Graham, New York Times (1897, January 12). 24. Dun and Bradstreet, New York Times (1989, January). 25. Milton Friedman and Anna Schwartz, A Monetary History of the

United States (Princeton, NJ: Princeton University Press, 1963), p. 138.

26. Jacques Barzun, From Dawn to Decadence: 1500 to the Present 500 Years of Western Cultural Life (New York: Harper Collins, 2000), p. 615.

27. David Hackett Fischer, The Great Wave (Cambridge, UK: Oxford University Press, 1996), p. 182.

28. Ibid., p. 184.

29. Ibid.

30. Walter E. Houghton, The Victorian Frame of Mind 1830-1870 (New Haven, CT: Yale University Press, 1957), p. 14.

31. Eric Hobsbawm, Industry and Empire: The Birth of the Industrial Revolution (New York: New Press, 1999), p. 142.

32. Historical Statistics of the United States (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975).

33. Ibid.

34. David Hackett Fischer, The Great Wave (Cambridge, UK: Oxford University Press, 1996).

35. Jeremy Atack and Peter Passell, A New Economic View of American History (New York: W.W. Norton, 1994)

36. Historical Statistics of the United States (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975).

37. New York Times (1897, January).

38. Milton Friedman and Anna Schwartz, A Monetary History of the United States (Princeton, NJ: Princeton University Press, 1963).

39. Historical Statistics of the United States (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975).

40. Ibid.

41. Dunn & Co., New York Times (1898, January 1).

42. Eric Hobsbawm, Industry and Empire: The Birth of the Industrial Revolution (New York: New Press, 1999), p. 142.

43. Walter E. Houghton, The Victorian Frame of Mind, 1830-1870 (New Haven, CT: Yale University Press, 1975), p. 6.

44. Ibid., p. 6.

45. Ibid., p. 6.

46. Thomas Schlereth, Victorian America (New York: HarperCollins, 1991).

47. Ibid., p. 209. 48. Ibid., p. 219.

49. Wall Street Journal, May 28, 1996.

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