What It Is

What It Is

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.