Here is a "message" posted in 1932, at the depths of the depression, by one Ben Graham. It absolutely fascinates me.
<<In recent years financial writers have been unanimous in pointing out how unimportant are asset values as compared with earning power; but no one seems to have realized that both the ignoring of assets and the emphasis on earning can be - and have been - carried too far, with results of the most disastrous kind.
The whole New Era and blue chip madness is derived from this exclusive preoccupation with the earnings trend. A mere $1 increase in profits, from $4 to $5 per share, raised the value of a stock from $40 to $75, on the joyous assumption that an upward trend had been established which justified a multiple of 15 instead of 10. The basis of calculating values thus became arbitrary and mainly psychological, with the result that everyone felt free to gamble unrestrainedly under the respectable title of "investment".
It was this enticement of investors into rampant speculation which made possible the unexampled duration and extent of the 1928-1929 advance, which also made the ensuing collapse correspondingly disastrous, and which - as later appeared - carried the business structure down into ruin with the stock market.>>
And to put us in the environment he was in when he wrote this, the Dow was down about 80% from its peak, and as Graham wrote:
<< More than one-third of all industrial stocks are selling in the open market for less than the companies' net quick assets.
Scores of common stocks are selling for less than their pro rata of cash in the company's treasury.>>
This can't happen today, right? Wrong. This kind of sounds like the Japanese market last year. Mostly concentrated in the small cap arena. Now that there is a whiff of recovery, Fidelity's Japan Small Cap Fun has more than TRIPLED this year. Oh, but this couldn't happen in the U.S. market. Japan at the peak in 1989 was hardly considered some financial backwater, nor was it considered so last year when it was not hard to find Japanese companies trading for less than the cash on their balance sheets. And there were a million reasons not to buy them.
JJC |
