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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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By then, growth stock investing had gained the status of the only style for truly sophisticated institutional investorsThe Nifty Fifty version of Shared Mistake was in place by late 1972. By then, growth stock investing had gained the status of the only style for truly sophisticated institutional investors. These were the investment management firms who ran mutual funds or who served the fastest-growing marketpension funds. What made this market so appealing was the switch in funding style. Until the 1960s, many corporations funded their defined benefit pension plans with annuity contracts and/or bond portfolios. By the 1970s, nearly all sizable plans were self-managed, with heavy equity orientation. In that culture, the traditional Graham & Dodd value investing made famous by the published writings of Wall Street icon Benjamin Graham was pass. In particular, looking for low price-earnings ratios was old hat. As one of the stars of that era told adoring audiences, The higher the p/e the more money you make on the stock. A company that grows earnings at 20 percent that trades at 50 times earnings makes you more money than a company with the same growth rate at 20 times. The essence of the Nifty Fifty mania was the belief that some companiessuch as IBM, Xerox, and Avonwere so strong that they could ride out any downturn and gain market share and earnings. Buy and hold was the investment strategy. At the Fanaticism stage, cyclical stocksthose tied more closely to the ups and downs of the economywent far out of favor, creating historic investment opportunities for Warren Buffett and Sir John Templetoninvestors who had drunk deeply of the wisdom of Graham & Dodd. The Japanese version of Fanatical Shared Mistake was, in retrospect, almost inevitable in an ethnocentric nation that had made such astonishing strides after World War II because of internal cohesion, hard work, and high savings. Their remarkable success, and their strong ethnocentrism, ultimately led to the level of pride that is the stuff of great crashes. When the Nikkei was trading at an 80 multiple, I visited Japan and talked to many businessmen. When I asked how their bank stocks could be selling at four times the multiples of stocks in other countries, they pointed out the sustained earnings growth of their banks. But, I objected, at the rate they charge for loans, they barely cover their borrowing costs, and make no provision for loan charges, as will be required under the new Basel Capital Accord. They arent really making money. My hosts demurred, pointing out that the banks were making huge gains from their holdings of stocks and real estate. But, I said, what happens when prices of real estate and stocks go into long bear markets. That cannot happen here, because of price maintenance, they replied. But bear markets come, youd admit, I argued. Never here, they insisted. And indeed, there had not been a sustained bear market in Japan for decades. The Japanese, who had been so cautious since the MacArthur era, became collectively afflicted with hubris after the U.S. stock market crash in 1987. They began buying up trophy U.S. properties, such as Pebble Beach golf course and Rockefeller Center. (Had they thought through the implications of Hubris, as spelled out in Greek tragedy, theyd have known it would have been followed by Nemesis, then Catharsis. But Sophocles wasnt required reading at the Japanese banks.) At the Fanaticism stage, stockbrokers who do not produce buy stories on the red-hot (or absolutely cool, depending on your temperature alignment) equity group lose their clients to those with reputations for aggressive investing. And investment managers who apply rules of prudence to clientsaccounts lose business to managers who show fabulous performance numbers to prospects. I recall, in January 2000, a full-page advertisement for a mutual fund organization showing the results of their Technology Fund, which had more than doubled in 1999. As the law requires, there was a small-print disclaimer saying that past performance is not a guide to future results, yet the entire purpose of this ad was to scream otherwise. Our organization has a reputation for value investing, and in 1999 I was getting insulting phone calls from people who owned the Relative Value Fund I managed, ridiculing me for not knowing where the money was to be made. Although New Era belief seems universal, there are always a few quiet dissenters. They are moving to the exits at this stage, but they choose not to publicize their disagreement with the market. Joe Kennedy and Bernard Baruch were among the wealthy who were even wealthier in 1932 than they had been in 1929. As J. K. Galbraith said in a speech in 1998: If you forget everything else tonight, remember this, that when you hear someone say, We have entered a new era of permanent prosperity, then you should immediately take cover, because that shows that financial idiocy has really taken hold and that history, all history, is being rejected. Those seminars in 1998 and 1999 at which leading Shills & Mountebanks dazzled retail investors were powerful emotional experiences. As they flashed up slick PowerPoint presentations showing how ordinary small investors had become millionaires, it was like Billy Graham on a great night in the 1960s, with new converts joining the ecstatically converted. Only this was about Mammon, not GodGreed, not Gratitude. One could feel and smell the lust for sudden riches in those packed halls. As one who was forced to attend some of those lust-ins, I came away scared and appalled. I knew how the next acts of this play went, and I felt sorry for almost everyone in the room except the Mountebank who had drawn the crowd, seduced them, then departed with a large paycheck. He would not be around to help them when the inevitable tragedy began to unfold. The investors hubris, which he had so skillfully stroked to tumescence, was bound to evoke the wrath of the gods of market forces. Nemesis was out there, somewhere, getting ready to inflict fearsome punishment on those who had defied the laws of wealth building. SUDDEN SHOCK: FIRST CASCADE The first sell-off comes without warning. Although it shocks market participants, the news continues to be good, and the players had learned from the Shills & Mountebanks that they profit by buying the dip. (This expression became an article of faith in the Nasdaq Triple Waterfall. Each time the technology stocks succumbed to profit taking or bad news, the media were alive with Shills & Mountebanks who told investors, Buy the dip! They never once said, Sell the top!) So the individual investors buy the dip. That means the corporate insiders with millions of cheap stock options, sensing that the game is over, have someone to sell to as they start cashing in big. (The scale of their profits and sales is discussed in Stock Options and Nasdaqs Triple Waterfall in Chapter 5.) Only this time it is no mere dip, to be followed by another strong rally to another wondrous new high. It is the beginning of a Triple Waterfall crash that will wipe out more than three-quarters of the value of Nasdaq or of the stock market in 1929, or of many of the Nifty Fifty stocks, or of the gold, silver, and oil stocks, or of the value of Japanese stocks in 1989. If a long journey does indeed begin with a single step, then a multiyear journey to financial collapse begins with one failed rally. That first sell-off usually comes at a time central bankers have begun tightening, fearful of the growth of an asset bubble. The Fed kept the spigots open too long in 1929, then tightened forcefully, precipitating the crash. It made the same mistake in October 1998, panicking because of the Russian default and the collapse of Long Term Capital Management, a huge hedge fund whose investors included leading Wall Street insiders; it followed up that brief experience in crony capitalism by unleashing a torrent of liquidity in 1999 because of fear of a banking crisis with Y2K. It then tried to drain the excess liquidity from the system, but foundas had its predecessorsthat all that liquidity had created serious problems of its own, which a sudden drought could not cure. (Mr. Greenspan gave a speech at the Jackson Hole conference in 2002 defending his policies of 1998-1999 but denying that a central bank could ever be sure of the existence of a bubble. Nasdaqs p/e ratio was above 70 when he turned on the hose in 1998, and above 100 when he turned it on again in 1999. And he had trouble seeing a bubble? He was given an honorary knighthood by Queen Elizabeth II in 2002. A writer in the Financial Times suggested he be admitted to the Order of the Bubble.) As the pace of liquidation slows, the Shills & Mountebanks reemerge, proclaiming the appearance of once-in-a-lifetime bargains. They use the sharp drops as buy stories, thereby deflecting the growth of doubt among the true believers: Look! Ciscos at 60 bucks! You wont see Cisco at 60 again! That oft-pitched line made me recall Wall Streets single most honest sales pitch. When the U.S. Treasury issued its first-ever 6 percent 20-year bonds in 1968, Wall Street enthusiastically peddled what it immediately called the Magic Sixes with the following promo: You wont see 6 percent Long Treasurys again! Right. Inflation was already beginning its rise to what would be double-digit levels in the 1970s, and those Long Treasury Bonds never traded above issue price (par). In September 1981 long Treasury yields reached the unheard-of level of 15.75 percent, so the pain of those 1968 buyers was still intense, 13 years after a purchase they had regretted every month since. But Wall Street was right. You didnt see 6 percent Long Treasurys again (until the 1990s, long after the Magic Sixes had matured). And yes, the S&Ms were right about Cisco: You didnt see Cisco at 60 for long, but you did see it at 9. |
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