Boy, have I had some angst the past few months regarding this
particular link to the site. Why bother writing about the history
of Wall Street, attempting to see if there are any lessons to be
learned, when we are clearly in a New Era, New Age, New
Paradigm of investing? I mean aren”t we entitled to 20% a year,
forever? Actually, I”m just jealous because I went to cash in my
own portfolio, January of ”98, with the Dow Jones around 8300.
“Cash is not trash!” I screamed to anyone who would listen. But,
as of 9:20 p.m. on 5/12, I have returned. I bought a basket of oil
service stocks on March 1st and have treated myself to some
premium beer ever since (but I”m prepared to go back to Coors
Lite, if necessary).
Columnist/Economist James Glassman recently wrote a book
proclaiming that the Dow Jones should be trading at
36000.today! Nothing to worry about, Mrs. Jones. Just stick
all of your money (well, leave some for food and personal
staples) into a S&P 500 or Dow Jones Index Fund and watch the
cash flow in. [I would then recommend giving some to the
poor]. Yes, in this New Age of investing, I guess the study of
Wall Street history is a wasteful endeavor.
Herewith some calculations of the return on investment for
various indexes for the period 12/31/97-5/11/99 (*not including
dividends).
Dow Jones +39.4%
S&P 500 +39.7%
Nasdaq +63.4%
Russell 2000 +2.1%
Gee, that return on the Russell 2000 sure looks awful. Why you
would have been better off in cash than to have stuck with the
small guys since 12/31/97. Well, if you were a small cap victim,
I”ll perk you up. Take a look at how well you have done since
the closing lows of 10/8/98 (thru 5/11/99.again, not including
dividends).
Dow Jones +46.3% (Dow”s closing low was set Aug. 31st)
S&P 500 +41.5%
Russell 2000 +43.9%
Nasdaq +80.8%
In the old days, way back in 1998, I used to give seminars built
around the #”s 11, 5 and 3. 11% being the historic rate of return
on the S&P 500 since 1926, 5% is the return on an intermediate
or long-term government bond and 3% is the rate of inflation,
also since 1926. The point of the exercise was to show how
there were still good investment opportunities in bonds,
particularly from a risk-reward standpoint. I would speak of our
then 1-2% inflation scenario and a 6% government bond as
allowing one to pick up a 4-5% real rate of return [6 – (1 or 2)]
versus the historic real rate of return on stocks of 8% [11 – 3].
And, thanks to the fact that we had the best bond manager
around, Bill Gross (PIMCO), and a terrific sales force, we sold
some bonds. But I can just hear some of the investors today.
“What the hell did I buy bonds for? I should have just invested
in the Vanguard 500 Fund (or PIMCO Stocks Plus).”
Yes, in this era where auto mechanics are day trading eBay while
you thought they were working on your brakes (next time check
the service bill; if you see AOL or AMZN scratched somewhere
on it then you”ve got a problem), why bother with history and
“old” facts when the “new” fact is that it”s all so easy.
Well, something tells me it”s not so simple. There are a lot of
smart people out there (with grade averages double mine) who
are sounding some warning shots. The aforementioned Bill
Gross recently wrote “Death and taxes may be permanent, but a
day trader”s right to retire before 40 is not.” And one Warren
Buffett, who could buy a package of Omaha steaks for every
man, woman and child in America (actually, that”s really about
right) has warned (as I have) of a different danger. That being
the fact that many of our corporations are undoubtedly cooking
the books as they “manage” their company”s earnings.
So while we have been living in investing heaven since
essentially 1982, we all can still profit (or cut our losses) from a
study of the history of Wall Street. I imagine the term
“regression to the mean” will become popular again, just through
the law of averages, and if Warren Buffett is right, I see the
potential of an accounting scandal at a major U.S. corporation
(did a light bulb just go off in your head?) which could lead to a
shattering of investor”s confidence in our market system, if just
for a few days.
And we”ll take a look back at not just the low points but some
high points in market history, as well. Most of the articles I write
will be based on the movement of the Dow Jones Industrial
Average for any given point in time since that is the best known
barometer of market behavior. We”ll also have fun with some of
the characters, and the scandals, that help make the study of the
markets interesting. And to start off we”re both going to take a
look at some pre-Wall Street manias, namely tulipmania and the
South Sea Company bubbles of the 17th and 18th century. I say
“both” because I will be learning right along with you.
Brian Trumbore
Tulipmania.Friday, May 21st.
