This story was published on Salon.com Oct. 16, 1998. Bottom of the market. The link to the archive is dead so I had to copy it out.
+++++++++++++++++++++++++++++++++++=
Before I became a stockbroker, I was a geologist in the oil business. It was during the ‘70s and ‘80s. In those days even bulldozer drivers (‘catskinners’ we called them) would drive down the dirt rig roads of Alberta in white Lincoln convertibles with cases of Chivas Regal. The oil patch took all comers.
Every time we drilled a well thousands of feet down through the historical record of hundreds of millions of years, the pattern of the stone described some basic truths:
a.) Everything changes. In the moon-like cold and emptiness of January in northern Alberta, we hunted for ancient reefs where oil and gas were trapped. These reefs had flourished in the same spot, which at the time had been the floor of a warm shallow sea like the Caribbean.
b.) Bear markets are short in duration and severe in their consequences. The fossil record that we found in the core samples showed repetitions of the same drama in different epochs. A few examples of a new shell would show up in the limestone. As you moved up the core (later in time) the critters increased. Finally there was an era when they must have been banging into each other in the ocean because the rock becomes a solid mass of fossilized shells.
Then something happens, something climatic and climactic. The rock changes, exhibiting a deluge of sand and silt, and the critters are gone. There is no gradual phasing out, no gentle transition from one life form to the next. You can draw a line with a ruler through the contact between the two types of rock - the two ages. On one side of the line is the culmination of the critter’s dominion, the golden age. The rock is packed with them. On the other side of the line they are gone. None are left.
I became a stockbroker at the beginning of 1986. The price of oil crashed. Hundreds of thousands lost their jobs in the oil patch. But the stock market was a different story. It was in a powerful bull move. People were eager to invest and I did well for the first couple of years.
We had “walk-in” customers as the market kept surging higher. In July 1987, a woman stopped by the office and asked to see a broker, and I was assigned. She told me that she had been a teacher. But after many years in her career she quit and became a real estate agent. The real estate market was even hotter than the stock market. She was making a lot of money for the first time in her life and she liked it.
Her friends told her that she should invest rather than leave her savings in the bank. She didn’t particularly want to identify with any one company, and told me that she didn’t really trust capitalists. And she wanted an investment that wouldn’t keep her worrying at night.
I thought about it and recommended investing in an equity mutual fund. I explained how mutual funds worked, how she would be buying a piece of the market as a whole and spreading the risk over a number of different companies. She didn’t seem wildly enthusiastic but thought it was a reasonably acceptable concept. I told her I would come up with a choice for the best fund and she sent me a check for her savings.
The day she walked in was more or less the top of the market. It was downhill in August, there was a fakeout rally in September and then came the sweat of October. And finally the crash on the 19th.
I had a client who played options. He called me on the morning of the crash and asked me why I hadn’t told him to buy puts. If he’d only bought puts, he would have made a fortune. “Why didn’t you tell me to buy Puts?” He repeated it over and over. He came down to the office as the stock prices were melting on our screens and the brokers sat in stunned silence. “Why didn’t you tell me to buy puts?” he asked me again. The market was only down a couple of hundred points by lunch. Instead of whining because he thought it was too late to bet against the market, he could have bought puts at any time in the morning. The Dow dropped another 300 points in the afternoon and he would have made a fortune.
The day of the crash I called as many clients as I could get a hold of. I apologized for not telling them to lighten up on stocks prior to that day, but I was also bullish as hell. This was a buying opportunity - a gift, I thought. And I told them so. But nobody was ready to buy. They wanted to wait and see.
The next morning I got to my desk at 7:00. The phone rang right away. It was the woman who bought the mutual fund. She shrieked and yelled over the phone. She swore at me and called me a liar. “You never told me it could go down like this. Get me out now!” I was happy to oblige, and she sold out near the bottom.
There is no such thing as guaranteed growth in any business. If businesspeople forget about risk and become complacent their competition will remind them. While investing in a number of businesses as a mutual fund does, mitigates some of the risk, business is still a constant battle, and you can lose no matter how clever you are.
But over the past seven or eight years, new investors in mutual funds have been fed a steady diet of a single truism - in the long term stocks always go up. Just hang on, and don’t worry. The evidence for this philosophy can be recited by any bank clerk when he gladly offers to help you choose a mutual fund. He will tell you that over the past 100 years, the average growth of the value of equities, over good years and bad, has been 10 percent.
But 100 years is the thinnest of pencil lines in geology. An economic pattern that has been in place for only 100 years is too small to represent the levels of growth of commerce over thousands of years. It is statistically invalid to assume that the pattern will persist for even one more year. Everything changes.
Bank clerks and mutual fund ads never mention the reason that investors sell after their holdings have already dropped substantially in value. They sell after the bad news has been accumulating day after day, week after week. They finally break down and sell because they’re afraid of losing everything.
Reading layers of rock taught me that personal experience is an invalid statistical record. It’s simplistic to think that patterns you have lived through will repeat themselves for others. But if there’s a basic truth in my experience of the crash of ‘87, it’s this:
The bear market isn’t over until the mutual fund lady sells. |
