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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Mike M2 who wrote (50577)	3/8/1999 3:04:00 PM
From: Peter Singleton	Respond to of 132070

Mike, Here's a link (and selection quoted from it) poached from LongWaves. The article's from the introduction to a 1934 book on Security Analysis. It evaluates investment strategies pre-1929 in the light of what happened after. It's an absolutely, positively, must-read for folks today. Peter thegreaterfool.com Distinctive Character of the 1927-1933 Period.- Economic events between 1927 and 1933 involved something more than a mere repetition of the familiar phenomena of business and stock market cycles. A glance at the appended chart covering the movements of the Dow-Jones averages of industrial common stocks since 1897 will show how entirely unprecedented was the extent of both the recent advance and the ensuing collapse. They seem to differ from the series of preceding fluctuations as a tidal wave differs from ordinary billows and, as such, would undoubtedly be governed by special causes and produce unparalleled effects. ... SPECULATION It can hardly be said that the past six years have taught us anything about speculation that was not known before. Even though the last bull bear markets have been unexampled in recent history as regards both magnitude and duration, at bottom the experience of speculators was no different from that in all previous market cycles. However distinctive was this period in other respects, from the speculator's standpoint it would justify applying to Wall Street the old French maxim that "the more it changes, the more it's the same thing." That enormous profits should have turned into still more colossal losses, that new theories should have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair are all in strict accord with age-old tradition. That out of the very intensity of the debacle there will arise new opportunities for large speculative gains appears almost axiomatic; and we seem to be on firm ground in repeating the old aphorisms that in speculation when to buy-and sell is more important than what to buy, and also that almost by mathematical law more speculators must lose than can profit. NEW AND DISTURBING PROBLEMS OF INVESTMENT But, in the field of investment, experience since 1927 inspires questions both new and disturbing. Of these the least troublesome arise from the misuse of the term "investment" to cover the crassest and most unrestrained speculation. If that were the only cause of our investment difficulties, it could readily be cured by readopting the old-time, reasonably clean-cut distinctions between speculation and investment. But the real problem goes deeper than that of definition. It is bound up not with the grotesque failure of speculation masquerading as investment but with the scarcely less calamitous failure of investment itself, conducted in accordance with time-honored rules. It is not the wild gyrations of the common-stock averages but the precipitate decline in the bond averages (see Chart B below) which constitutes the really novel and arresting feature of recent financial history-- at least from the standpoint of investment logic and practice. The heavy losses taken by conservative investors since 1928 warrant the serious question, is there such a thing as sound and satisfactory investment? And also the secondary question, can the investor rely upon the care and good faith of investment banking houses? ... If we were to regard the record of the bond list since 1927 as indicative of what the future has in store, the considered conclusion would be warranted that sound investment as formerly conceived-meaning generally the purchase of bonds at prices close to par-no longer exists. For while it is true that a good many bond issues have come through this period without alarming depreciation in either price or quality, their number is "relatively too small-- nor was their superiority sufficiently manifest in advance-- to warrant the belief that careful selection would have restricted commitments to this group and protected the shrewd investor against the losses suffered by others. The decline in the general bond averages was caused in part by an unwarranted lack of confidence and in part also by the depressing influence of large sales by banks intent on maintaining liquidity at all costs. But besides these temporary and psychological factors, it has reflected an undeniable and disconcerting impairment of safety in many individual cases. The theory that a sound bond will be unaffected by a period of depression has suffered a rude shock. Margins of safety considered ample to withstand any probable shrinkage in earnings have proved inadequate; and enterprises one regarded as depression-proof are having difficulty in meeting their fixed charges. Hence if our judgment were based primarily on recent experience, we should have to advise against all investment in securities of limited value (excepting possibly short-term government bonds) and voice the dictum that both bonds and stocks should be bought only as speculations, by people who know they are speculating and who can afford to take speculative risks.