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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Three years of this century have produced three shocksWoodcraft may be defined as the art of finding ones way in the wilderness and getting along well by utilizing Natures storehouse. . . . As for book learning in such an art, it is useful only to those who do not expect too much of it. No book can teach a man how to swing an axe or follow a faint trail. . . . Yet a good book is the best stepping-stone for a beginner. . . . It gives a clear idea of general principles. It can show, at least, how not to do a thingand there is a good deal in thathalf of woodcraft, as of any other art, is in knowing what to avoid. HORACE KEPHART SO, YOU LOST BIG ON TECHNOLOGY STOCKS, and the same Wall Street people who told you to buy them and never told you to sell them now tell you theyre about to come back strong, when the economy comes back. How 20th century of them. The 1990s arent coming back. Neither is Nasdaq. The stock market that enriched corporate insiders beyond their wildest dreams and impoverished retail investors beyond their worst nightmares is no longer rewriting the rules on investing. Three years of this century have produced three shocks: Technology and telecom stocks have experienced a crash of 1929 proportions; the United States fell into a brief recession followed by a problematic recovery, and a War on Terror began on 9/11. Those three shocks combined to produce a major global bear market. And Baby Boomers are three years closer to retirement. So what should you do now? Unlike the successful investment books of the 1990s, this is a Survival Guide. Its modeled on two splendid wilderness books: Horace Kepharts classic Camping & Woodcraft (Macmillan, 1949), and Richard Gravess Bushcraft (Warner Books, 1974). Both those guides were for urban dwellers prepared to assume natures risks in order to reap the rewards of living in the outdoors. They were based on the conviction that wilderness survival depended on knowingand usingwisdom accumulated over generations. This book is written on the same premise: Investors who knewand usedinvestment wisdom accumulated over generations have come through the stock market collapse quite comfortably. Those who invested based on the new rules of the 1990s have been mauled by bears. As you will learn, the Nasdaq crash is a precisealmost eeriereplay of six other crashes, including the Great Crash of 1929 and the Nikkei crash that began 60 years later. Its outcome was totally predictable to students of market lore. Those big-name strategists and pundits who failed to warn investors about the coming collapse chose to ignore history. Because of those past crashes, we know a lot about the financial landscape ahead. It bears scant resemblance to the world of the 1990s. Its rocky out there, not verdant, but that means reduced cover for bears and other predators. There are opportunities for prudent foragers, but rewards wont come easily. Wall Street and Silicon Valley got together in an undeclared partnership to wire the world, enrich themselves, and convince a whole new class of investors into trusting the partners with much of their life savings. It was a great deal for the partners, but a terrible deal for the investors. Never in the history of major stock markets were the rewards so skewed to insiders at the expense of outsiders. This book will tell you how it happened, why it happened, and what you need to do to rebuild your savings. As drab as the investment landscape may appear, its safer for investors than it has been for five years. You didnt know how risky it was then, and you probably dont know how safe it is now. There are no lush and easy pickings like the crops of the 1990s, but there are fewer poisonous mushrooms and fewer bears around the blueberries. You have learned that good times in the stock market dont last forever. You will learn that bad times dont either. THE THIRD MILLENNIUM ARRIVED amid optimism and ecstasy, as leaders in politics, the academy, and business predicted a glorious new era. But then, so had the Second Millennium. The medieval enthusiasts who got themselves into trouble by predicting the onset of a New Age gave us a new word. They are known to historians as chiliasts, derived from the Greek word for 1000the term for those who believed that the arrival of a special date meant special wonders. There were various kinds of cults back then, but all involved an assumption that Heaven was headed for Earthfor good or ill. Many people divested themselves of their possessions in preparation for the Second Coming. Those earlier ecstatics were in trouble when the year 1000 came and went. Those whod sold out cheaply and had given to the less fortunate were understandably upset with the mystics whod misled them. They tended to express their resentment in strong terms. Its different this timein two ways. First, although this time millions of people also divested themselves of all or a substantial portion of their possessions, they didnt give their wealth to the poor. They gave it to a new class of new rich. The beneficiaries, with exquisite timing, exercised stock options on companies they managed whose period of earnings gains was about to turn into a period of earnings collapse. Second, most of todays chiliasts have not been subject to serious abusephysically, financially, or legally. Most retain their jobs, which means they are receiving a new round of stock options at todays depressed share prices, so they stand to win big all over again if stocks recover even modestly. If there is a justification for this process, it comes from words uttered in the 1st century: That unto everyone which hath shall be given; and from him that hath not, even that he hath shall be taken away from him. It took only a few weeks of the new century before the New Era fantasies collided with reality. Since then, the stock market and economy have been badly beaten up. Those injuries came from the collective attempt of the stock markets and economies of the 1990s to defy one law. Gravity. At its peak (March 10, 2000), Nasdaq had a stated price-earnings ratio of 351 (though when the income statements of companies losing money were included, with stock option costs, its real level was more than 500 times earnings). It was bound to fall of its own weight. The question was never if but when. By any measurement, it wasby farthe most absurdly overvalued stock index in the history of finance. Compare that stratospheric multiple with three other crashes: U.S. stocks in 1929 and 1987 and Japanese stocks in 1989. The price/earnings (p/e) ratio on the Dow Jones Industrials at the onset of the Great Depression was in the high 20s, as it was on October 19, 1987, the day the market fell 22.6 percent; at its peak, the ratio on the Tokyo Nikkei Index was 92. Gravity finally took charge. Nasdaqs Moon shot had carried it so far from Earths pull that when it rolled over and began its descent, it moved slowly at first. Then, like a space capsule, it accelerated as it reentered the atmosphere in its plunge toward terra firma. Those with a respect for history found Nasdaqs costly meeting with gravity ironic. Why? Because the first recorded crash since the birth of stock markets inflicted big losses on the man who formulated the law of gravity, Sir Isaac Newton. What happened to England and to the scientist Einstein called the greatest mind of all time is instructive. The South Sea Bubble (1720) was a scheme so preposterous that most historians still find it hard to explain how so many people could fall for the idea that a private companyone of the first joint stock companies could make its investors rich by assuming the national debt. Sir Isaacs experience tells us what we need to know to understand market manias. As president of the Royal Society, Newton was at the epicenter of science, technology, and London society. As the South Sea enthusiasm spread, he joined his friends in taking a flutter on South Sea shares. When those shares rose rapidly in value, Newton decided to take a handsome profit. He had analyzed the scheme and concluded it was, at the very least, highly risky. But South Sea shares kept going up, and the conversations in the coffeehouses and at Royal Society gatherings were all about the huge profits his friends and associates were earning from this new phenomenon of joint stock companies. When Newton admitted he had sold, his friends and fellow scientists smirked, bragging of their own huge gains. He could finally stand the peer pressure no longer, and so he bought back in as the shares were nearing the magic level of 1000 each. Peer pressure proved to be the irresistible force against what should have been the immovable object of the worlds most massive intellect. Newton was among the nations biggest losers as the shares crashed to 135. As he mourned to friends thereafter, he found he could understand the movement of heavenly bodies but not of markets on Earth. There was a parliamentary investigation, and the chancellor of the exchequer (finance minister) and some of the companys board of directors were sent to the Tower of London for their parts in what was declared to be a scheme of fraud. It was convenient for the bruised egos of those who had lost heavily to define the whole game as fraud. But it is doubtful that fraud was the key to the South Sea fiasco. The real cause was the build-up of a critical mass of optimism, faith, and fanaticism that swept the land, seducing the wise and foolish alike. That remains the pattern. In all the great crashes that have succeeded the South Sea, outright fraud has been a relatively minor component. In each case, the cry was, Hang the crooks! and there were show trials and punishments. But in no case, including Nasdaqs collapse, have most of those involved been willing to admit that human frailty, not criminality, was the primary driving force. That these manias recur through history illustrates Santayanas dictum that those who will not learn from history are destined to repeat it. Which elements of the South Sea Bubble and subsequent crashes reasserted themselves in Nasdaq? |
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