*New* When New Beginnings Meet Old Realities
By Laurel Kenner and Victor Niederhoffer
1/27/00 12:09 PM ET
Editor's Note: With this column, we introduce Laurel Kenner
and Victor Niederhoffer. Kenner joins TheStreet.com from
Bloomberg, where she headed U.S. stock market coverage
and appeared regularly on the Bloomberg TV channel. She
began her journalism career with the Associated Press in Los
Angeles, and later won awards for aerospace reporting at
Copley Newspapers.
Victor Niederhoffer is a private investor in Weston, Conn.
Previously a hedge fund manager, Niederhoffer was rated
among the top performers for many years -- and the worst
performer in 1997 when he was stung by bad speculations in
Thailand and U.S. stocks. His 1997 book, The Education of a
Speculator, rose to second place on the Business Week
bestseller list, and was described by Barron's as "a
must-read, essential for any investor's library."
"Bibles and swords!" was Captain Inish Scull's wily strategy
for colonizing native Americans in Larry McMurtry's novel
Comanche Moon. The stock market seems to be following the
Captain's exhortation as it struggles between the beatific
vision of a technological utopia in which earnings grow to the
moon -- and the evil forces of high interest rates and Nasdaq
hype. So far, the evil forces are in ascendance; millennial
celebrations gave way to days of judgment as markets from
Hong Kong to Germany to the U.S. Nasdaq suffered 10%
declines.
It's appropriate to step back for a larger perspective amid
these strong but ephemeral forces, for there's no reason to
suppose that the 21st century will not be as advantageous to
investors and humanity in general as the 20th. The new era
will doubtless see scientific applications just as remarkable as
the harnessing of electricity, which made possible the electric
generators, motors, transistors, refrigeration and lighting so
essential to modern life. Not to mention the 10,000,000%-plus
returns that a mythical investor would have achieved by buying
stock in General Electric (GE:NYSE - news - boards) 100
years ago and holding it until 1999.
The riches conferred on investors by GE and other businesses
that use science to better human life -- Procter & Gamble
(PG:NYSE - news - boards), Minnesota Mining and
Manufacturing (MMM:NYSE - news - boards) and
International Business Machines (IBM:NYSE - news -
boards), to name but a few -- have led millions to embrace the
idea that spectacular gains can be had by buying and holding
stocks, either short-term or long-term.
Unfortunately, confidence in the market has strengthened so
much that some investors believe that so long as a stock has
a good story, it is good regardless of profitability. The strength
of their conviction brings to mind a classic book from 1956,
When Prophecy Fails, by Leon Festinger, which tells the tale
of a group who believed the world was about to end and that
spaceships would come to take them away. The spaceships'
failure to arrive at the appointed hour didn't shake their belief.
One wonders how many people who bought certain Internet
IPOs last spring are still waiting for them to revive from drops
of 80% or more -- no doubt "averaging down" by buying more
and advising their neighbors to do the same.
As the Gestalt psychologists at the beginning of the century
realized, people tend to form a general idea -- a gestalt,
roughly translated as "whole" -- of how something works
without attending to details. What better way to describe how
the average person today buys and sells stocks?
Today, the new millennium opens up a Pandora's box of
uncertainties; the new gestalt may not be as bullish as the
old.
Turns of centuries and decades often create new gestalts in
art and culture. When the 20th century began, Tschaikovsky,
Grieg and Dvorak gave way to Debussy, Stravinsky and
Schoenberg; Picasso replaced Impressionist landscapes on
collectors' walls. Fashions in clothing and popular music
change with the decades.
Markets, too, tend to switch course as one decade gives way
to another. At the end of the 1980s, Japan's Nikkei 225 Index
ended at a record, up almost sixfold for the decade. The index
then dropped 23% in the first three months of 1990, ended the
year down 39% and proceeded to slide to 12,880, a full 67%
below its high. In the U.S., an even worse decline from the end
of the 1920s through 1932 sent the Dow Jones Industrial
Average down 76%.
The problem with the anecdotal method (indeed, the problem
with most stock market commentary) is that it explains
everything and proves nothing. The question is whether stocks
behave differently in years ending in certain numbers.
Unfortunately, we cannot address this question for the turn of
the century, because only two meaningful data points are
available. But we can compare moves of the Dow average in
years ending in zero -- we'll call them the naughties -- with all
other years.
Over the past 110 years, the 11 yearly percentage changes in
the Dow average and a 10-stock predecessor in the naughty
years shows seven declines and four rises -- a 64% chance of
falling -- with an average change of negative 4%. This
compares with an average change in nonzero years of 8%,
with a 68% chance of a rise. (Differences as large as this are
a one-in-10,000 shot by chance.)
It's also noteworthy that of the five years during which the Dow
dropped more than 30%, two were in naughty years:
Worst Annual Drops in the Dow:
1931: down 53%
1907: down 38%
1930: down 34%
1920: down 33%
1937: down 33%
Like investors today, our ancestors in the year 1900 looked
forward to achieving unprecedented personal and material well
being. In ebullient, optimistic language more likely to elicit a
groan today than a hurrah, The New York Times on Jan. 1,
1900, had this to say:
The mines that give up their treasures, the
looms and mills that impress utility and value
upon crude products, the rushing trains and
steamships that enable communities to share
and contribute to the world's exchangeable
surplus of commodities, the industrious banker,
sitting on his aggregated deposits and paying
them out upon careful scrutinized vouchers,
even the loud resounding broker upon the floor of
the Exchange fixing investment values by his
vociferous wagers -- all these help to lay the
enduring foundation of the Nation's wealth upon
which depends its capacity to produce and
enjoy the fine things of life, in arts and letters,
and science and learning, and the highest social
enjoyments.
Today, we are just as optimistic about the prospects of the
Internet and biotechnology. Yet if the rewards at the beginning
of the 21st century look similar to those at the start of the
20th, so do the risks. In 1899, a rise in the Bank of
England's discount rate to more than 6% aroused much
concern among U.S. stockholders, just as the recent move of
the 30-year U.S. bond yield above that level does for today's
investors.
Back then, an all-out panic occurred in December 1899,
taking the Dow average down 23% from the end of November
through Dec. 18. Investors, according to a contemporary
account in the Wall Street Journal, sold "regardless of price."
When it was all over, The Commercial & Financial Chronicle,
the Barron's of the day, wrote soberly that at least investors
were better off because that awful decline was behind.
Fast forward to the present: The 15% decline in Nasdaq 100
futures in the first three sessions of 2000 and the 8% decline
in the first three days of this week have left the market in
stronger hands. While indices in the U.K., Belgium, Greece,
Australia and New Zealand are still down 7% or more,
Germany and Hong Kong have bounced back. We will pass
over the performance of the other Asian Tigers -- Singapore,
South Korea, Taiwan, Malaysia, Indonesia, Philippines and
particularly Thailand -- as our crystal ball and memories of this
region are both highly suspect and colored (as in blood-red.)
In this new environment, it seems prudent to step back and
consider some of the epic declines that have occurred as new
decades began. But any trepidation thus gained must be
balanced against the prospect of another 10,000,000% return
for the average stock bought and held for 100 years. And with
biotechnology, our children may very well live that long.
Speculator's Scorecard
The things ordinary people know the most about are often
statistical in nature. The average person knows the poll
numbers in four elections. The average fan of the national
pastime knows the averages of 50 batters to the nearest 10
points. When you go to a game, glance at the number of fans
keeping a scorecard of each play. When you go to the races,
look at the statistics on workouts and past performance that
the average punter studies before making a bet. It makes the
speculator feel small to contemplate how much better versed
these average fans are in their field of interest and how low the
returns of the average bettor are even after such study.
Our initial contribution towards narrowing this difference can
be found below: It being winter, we'll start by adopting the
format used in reporting basketball figures, rather than the
much more refined data assessment employed by the average
baseball fan. This will be a regular fixture.
thestreet.com
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