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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Most Investors lose moneyA Taxonomy of Bears The signs animals leave on the ground can be more revealing than any book written by man, but unfortunately few people are able to see these signs and even fewer still can read them. R. GRAVES MOST INVESTORS LOSE MONEY and many are wiped outin bear markets. This chapter, which could as well have been called the Investors Basic Survival Guide for Bear Encounters, describes the different kinds of bears. It can be a matter of life and death for hikers to know which species of bears territory they are invading. Similarly, investors should learn to distinguish the kind of bear attacks the market faces. If youre in the Rockies, you watch out for black bears and, most important of all, grizzlies; in Alaska, you look for kodiaks and polar bears; in Churchill, Manitoba, you know when the polar bears are comingby the hundredsand you prepare accordingly. For investors, there are four basic breeds of bears, but one of them has two subgroups, making five classifications of Furry Financial Furies altogether. One reason so many investors get mauled by bears is that Wall Street not only fails to warn of bear attacks, but even resists labeling a falling market as a bear market until investor losses have already reached painful levels. The Street is like lodge operator who avoids frightening customers by talking of bear risk. The Street has euphemisms for falling markets: They begin as pauses, then become pullbacks, then corrections. The Street forbears saying bear. When Nasdaq was plunging in April 2000, the Street was virtually unanimous that this was merely a correction. I wrote at the time: The term correction is itself interesting. It implies a change from doing something wrong to doing something right. . . . Was the stock market wrong when it went up and right when it went down? Maybe so. The bear groups: Teddy Bears Baby Bears Papa Bears Mama Bears (Mini and Big) Despite their seeming playfulness, these are deadly serious classifications. They can be as crucial for investors wealth as the differences in size, gender, and breed of bear can be for hikers who come upon actual bears. Why try to classify market slumps into such bear categories? Because most of the literature on bear markets lumps all downturns together, and this makes it difficult for novices to understand the nature of bear risks at any given time. Know your bear. TEDDY BEARS Teddy Bear markets are childishly explosive tantrums. The financial outbursts cause temporary fear and pain and look, in retrospect, absurdly overdone. The stock market may change leadership, but it does not change direction, because nothing fundamental is involved, and the outburst is not the culmination of years of speculative excess. Teddy Bears are no picnic; they resemble playground fights, not gang wars. The centennial of teddy bears was observed last year. (Ever alert for a quick buck, The U.S. Postal Service issued four commemorative stamps.) According to the Chicago Tribune, these toys were named for Teddy Roosevelt, who, on a bear hunting trip to Mississippi in 1902, failed to bag a bear. The trip sponsors found a bear, lassoed it, and tied it to a tree, inviting him to shoot it. Teddy shouted Spare the bear! and freed it. A cartoonist drew the scene, depicting a frightened cub. Thus was born the teddy bear industry, which produces one of the four most popular collectibles. Many park rangers see teddies differently. They are appalled that so many city dwellers raised on furry toys expect bears to be cute. Worse, there have been cases of tenderfeet finding cubs and trying to pet them, with horrific consequences. Since teddy bears are named after a president, it is fitting that this history of stock market bears begin with accounts of two outbursts tied to presidents. The Ike Teddy: September 24, 1955 The Ike Teddy (see Chart 1-1) came when President Eisenhower suffered a heart attack while vacationing in Colorado bear country. He was sequestered for seven weeks in Fitzsimmons Army Medical Center. When he returned to Washington, he reassured the nation that he was in good health. The markets brief bout of panic produced the biggest stock market trading volume since 1933. The reasoning behind this emotional outburst was the fear that if Ike died, Vice President Nixon would become president and would be defeated by a Democrat in the 1956 election. At that time, Wall Street was dominated by a Wasp, white-shoe, country-club Republican elite. Basically, their fear of Adlai Stevenson, former governor of Illinois (who had run in 1952 and would run again in 1956), was irrational. The U.S. economy was on a baby-boom roll, and a Democrat in the White House would not have derailed it. The JFK Teddy: March 1962 Another onset of Wall Street Demophobia produced the JFK Teddy (see Chart 1-2). In March 1972, President Kennedy intervened in the steel industry contract negotiations. He pressured the United Steelworkers to accept what he called a noninflationary agreement, which would not only hold back steel price increases but would be a guide to other big pending labor agreements. (Yes, back then the steel industry was that big and that important to the national economy.) Within days, U.S. Steel boosted steel prices 3.5 percent, which was swiftly matched by most other steel companies. Kennedys response was to unleash the FBI on the industry, sending agents to the homes of steel company executives, threatening antitrust prosecutions and announcing that the Pentagon would switch its procurement from companies who raised prices to those who held the line. Most important for a jittery market, he let the press know of a supposedly off-the-record comment he uttered in the heat of the crisis: My father always told me that all businessmen were sons of bitches, but I never believed it till now. (Joe Kennedys fortune, it is worth noting, was built on bootlegging during Prohibition, so he might have had a jaundiced view of business ethics.) That quotation proved to have more emotional impact than the lofty parallel Sorensenisms in JFKs inaugural address (Ask not what your country can do . . . etc.). It shocked the stock market into paranoia that the Democrats were going to launch a war on the business community. In reality, Mr. Kennedy was much more sophisticatedand had a greater understanding of the workings of the economythan most members of the Wall Street old-money elite. He was the author of the tax cut that got the economy moving, and his intellectual rationale for it would be later used by Ronald Reagan in gaining congressional approval for his more ambitious tax cuts, the key component of the Reagan Revolution. Although leading Wall Street voices warned of a major new bear market, it was, of course, a splendid buying opportunity. The ingredients of a true bear market did not exist. Wall Street was just being childish. The Jimmy Teddy: September 1967 The hot new idea of the mid-1960s was conglomeratescompanies that grew fast by gobbling up other companies, without regard for what industry they were in. The theory was that you achieved synergy by putting together seemingly unrelated companies and industries, so that, in terms of company earnings, 2 + 2 = 5. The conglomerate fad produced substantial overvaluation within one group of equities, and a stock market correction that was a true correction. (See Chart 1-3.) It was not a major bear market, because it was (1) localized, and (2) not part of any broader economic and financial deterioration. It was a warning that the market was getting frothy and that concept stocks were becoming all too voguish, but it was not the Beginning of Something Big. That conglomerates could have threatened the American business establishment and become the glamour stocks of Wall Street would seem absurd to todays generation of investors, accustomed to believing that glamour means technology. Companies such as Ling-Temco-Vought and ITT built themselves a cachet in the go-go stock market of that erathe first in which mutual funds were significant players. Bernie Cornfeld, a great mountebank, was wowing investors with his pitch, Do you sincerely want to be rich? Slick operators like Jimmy Ling understood that as long as their own companys stock had a higher price-earnings ratio (p/es) than the broad market, it could grow seemingly endlessly by buying up companies with much lower earnings multiples. Each new acquisition was accretive to earnings. They told the gullible that they werent just acquisitors: The head office supervised capital spending budgets and provided legal and accounting services to all parts of the empire. These last-listed services, seemingly innocent, were crucial, because they needed to ensure that per-share earnings rose every quarter to merit the label growth stock, even though their diverse collection of companies was deeply exposed to cyclical organizations. That was why they had such low p/es that they were vulnerable to takeovers by the conglomerators. A packing plant whose stock had never sold at more than nine times earnings could be bought by a conglomerate whose p/es was 22, and it gave the conglomerate an immediate gain in earnings per share. Ling kept expanding LTV with buyouts. At the peak, his company included a major airline, a huge sporting goods company, a major defense contractor, the third biggest meat packer, and many smaller corporations. He finally blew it by bidding to acquire aging, adipose, polluting Jones & Laughlin Steel at a price that suggested the company was really an alchemical marvel that could turn iron ore into gold. The bubble burst. The Teddy Bears stuffing was exposed, and soon the floor was littered with the detritus of a market promotion gone bad. As painful as the conglomerate collapse was to the stock market, however, it did not create a true bear market, because the pain was localized. Furthermore, there were so many serious market analysts and investors who had ridiculed the conglomerators claims of synergy that they enjoyed the humiliation of the fast-buck boys and saw this as the stock market punishing miscreantsprecisely what healthy markets should do. Teddy Bears are vexing, but theres no need to give up on stocks because of them. Theyll eventually scuttle off and leave you to picnic in peace and prosperity. |
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