by Maggie Mahar
2. Edward Wolff, “Reconciling Alternative Estimates of Wealth Inequality from the Survey of Consumer Finances,” AEI Seminar on Economic Inequality, 9 February 2000. See also Louis Uchitelle, “Economic View: The Have-Nots, at Least, Have Shelter in a Storm,” The New York Times, 20 September 1998; and William Wolman and Anne Colamosca, The Great 401(k) Hoax: What You Need to Know to Protect Your Family and Your Future (New York: Perseus, 2002).
3. A comment overheard by the author.
4. According to Daniel Kadlec, Chicago Magazine originally challenged their claim of earning compound annual average returns of 23.4 percent in the 10 years ending in 1993 (“Jail the Beardstown Ladies,” Time, 30 March 1998). The error, Kadlec explained, was due to the fact that the ladies were making incorrect entries into their computer. When the returns were updated through 1997, Kadlec noted, the audit showed that “the ladies have picked up some slack, earning an average annual return of 15.3%.”
5. In addition to paying $400 million to Orange County, Merrill returned $20 million in collateral it had kept after the bankruptcy. See Andrew Pollack, with Leslie Wayne, “Ending Suit, Merrill Lynch to pay California County $400 million,” The New York Times, 3 June 1998, A1.
See also Leslie Wayne and Andrew Pollack, “The Master of Orange County,” The New York Times, 22 July 1998, 1.
6. James K. Glassman and Kevin A. Hassett, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (New York: Times Business, 1999), 110–11, 116; Walter B. Wriston, The Twilight of Sovereignty: How the Information Revolution Is Transforming Our World (New York: Scribner’s, 1992), 9, 45, 170; Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar, Straus & Giroux, 1999), 95, 141. Here I follow Thomas Frank’s excellent discussion of the democratization of the market in One Market Under God (New York: Doubleday, 2000), chapters 3 and 4.
7. Seidman had made the remark on CNBC and repeated it in an interview with the author.
8. Jane Bryant Quinn provided the original numbers in her column in Newsweek, 10 November 1997. In 2002, she updated the numbers using data provided by finance professors Charles Jones and Jack Wilson of North Carolina State University. (“You Bet Your Life,” Newsweek, 1 April 2002, 63.)
9. Clyde McGregor, interview with the author.
10. Gail Dudack, chief investment strategist and director of research, SunGard Institutional Brokerage, 4 December 2002.
11. Edward Wyatt, “Pension Change Puts the Burden on the Worker,” The New York Times, 5 April 2002, 1. On the growth of the 401(k), see also Maggie Mahar, “The Great Pension Raid,” Barron’s, 2 December 1991, 8.
12. According to the Employee Benefit Research Institute’s 2000 report, “On average, employees in the EBRI/Investment Company Institute database have three-quarters of plan balances invested directly or indirectly in equities.” The EBRI report also broke down 401(k) allocation by age, revealing that 401(k) participants in their 50s showed that in 2000 they had 49.2 percent of their savings invested in equity funds, another 19 percent in company stock.” (EBR1, “Plan Year 2000 Activity,” January 2002.)
13. Robert McGough, “Heard on the Street: For Some Stocks Price Doesn’t Matter,” The Wall Street Journal, 16 March 1999.
14. George Kelly, interview with the author.
15. David Tice, interview with the author. Tice testified before the Capital Markets, Insurance, and Government-Sponsored Enterprises Subcommittee of the House Financial Services Committee on June 14, 2001. The 57-page transcript is available on NEXIS, copyright by the Federal Document Clearing House.
16. Interview with the author.
17. David Tice, testimony before the Capital Markets, Insurance, and Government-Sponsored Enterprises Subcommittee of the House Financial Services Committee on June 14, 2001.
18. Byron Wien, interview with the author.
19. In 1999, Carol Loomis distilled remarks from several speeches that Buffett had given that year, including a talk that he had given to a group of friends and a speech given at Allen & Co.’s Sun Valley conference. (“Mr. Buffett on the Stock Market,” Fortune, 22 November 1999, 218–20.)
20. Russ Mitchell and Jack Egan, “How Long Will They Fly?” U.S. News & World Report, 31 May 1999, 54–56.
21. In 1998, Dell rose 241 percent, followed by Apple (up 152 percent), EMC (up 190 percent) Lucent (up 175 percent), and Cisco (up 139 percent).
22. Over the four years from December 31, 1998, through January 2, 2003, WalMart’s returns totaled 29.2 percent, while UT returned 22.9 percent.
23. See Chapter 19 (“Insiders Sell; the Water Rises”).
24. Richard Russell, Richard Russell’s Dow Theory Letter, 6 October 1999.
25. Steve Leuthold, In Focus, February 2002.
26. Sharon Cassidy, interview with the author. (Cassidy’s name has been changed to protect her identity.)
27. Bridget O’Brian, Ianthe Jeanne Dugan, and Randall Smith, “Nasdaq, Falling Again, Is Now 50% Below High: Novice Investors Get a Tough Initiation into the Bear’s Ways,” The Wall Street Journal, 20 December 2000, C1 (updated by author in 2002).
28. Ed Wasserman, interview with the author. (Wasserman originally told part of his story in the Yale Alumni Magazine ’s 1970 class notes, February 2002, 68.)
29. Frederick Lewis Allen, Lords of Creation (Chicago: Quadrangle Books, 1935), 352.
30. Mark Haines, “Bursting the Bubble,” interview by Alex Jones, Media Matters, September 2001.
31. In an interview with the author, Ralph Acampora recalled the conversation. In a separate interview with the author, Levitt explained that he believed that many of CNBC’s typical viewers understood that stocks were overpriced: “They knew it was a pump-and-dump scheme—they wanted to get in on the pump, and thought they could avoid the dump.”
32. Peter Bernstein, interview with the author. See also interview with Peter Bernstein, “Betting on the Market,” Frontline, 14 January 1997.
33. The remark was made by Paul Scharfer, who specialized in financing biotechnology companies at Sunrise Securities Corp. In 1996, he had sunk $1.4 million into a 4,800-square-foot house on three acres in Sagaponack, Long Island—a part of the Hamptons that saw a boom in development in the nineties. There, his neighbors included Richard Grasso, chairman of the New York Stock Exchange (Patrick McGeehan, “Now Suddenly Rich, Wall Streeters Spark a Very Fancy Boom,” The Wall Street Journal, 10 April 1997.)
34. See Chapter 14 (“Abby Cohen Goes to Washington; Allan Greenspan Gives a Speech”).
35. Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds (1841; reprint, with a foreword by Andrew Tobias [New York: Three Rivers Press, 1980]), xviii, 369.
CHAPTER 3
1. From January 1948 through January 1968 the S&P rose by some 641 percent.
2. Edwin Levy, interview with the author. James Grant originally recounted Levy’s experience in Grant’s Interest Rate Observer, 27 September 2002.
3. Jim Awad, interview with the author.
4. John Brooks, The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60’s, foreword by Michael Lewis (New York: John Wiley & Sons, 1973, 1999), 11.
5. Brooks, 113.
6. Brooks, 212, 279.
7. Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Doubleday, 1996), 110.
8. Warren Buffett, Letter to Partners, 11 July 1968, as quoted in Lowenstein, 110.
9. Lowenstein, 119–20.
10. Bob Farrell, interview with the author.
11. Bob Farrell, interview with the author.
12. Brooks, 262–63.
13. Brooks, 353.
14. Steve Leuthold, interview with the author. See also Maggie Mahar, “Three Wall Street Truths You Can’t Trust,” Bloomberg Personal Finance, November 2000.
15. Steve Leuthold, In Focus, April 1999, 20, 121. ( In Focus is private research done by the The Leuthold Group for its clients, primarily institutional
investors.)
16. Jim Awad, interview with the author.
17. Steve Leuthold, In Focus, April 1999, 11. Here Leuthold was focusing on the 25 most expensive stocks in the Nifty Fifty—those with the highest price/ earnings ratio. Implicitly, these were the most popular, since investors were willing to pay a higher multiple for this group of 25. Leuthold called them the “Religion Stocks.”
18. Jeremy Siegel, Stocks for the Long Run, 3rd ed. (New York: McGraw Hill, 2002), 153–55. The difference between Siegel and Leuthold was not so much a matter of numbers as a question of how you applied those numbers to investor behavior in the real world. Leuthold agreed that if an investor had both the psychological and financial wherewithal to hold on to his losers for the very long haul, he would reap double-digit returns. Indeed, if an investor held from the end of 1972 through March of 1999, Leuthold acknowledged that the bull market would have lifted his average annual return on the Nifty Fifty to 12.6 percent a year. According to his calculations, this still made the Nifty Fifty a relatively poor investment when compared to the S&P 500: $50,000 invested in the Nifty Fifty at the end of 1972 would be worth $295,000 less than $50,000 invested in the S&P 500.
But Leuthold’s more important point is that, in the real world, it is extremely unlikely that the average investor would hold on to his losers for 20 to 25 years.
Some stocks that were popular in 1972 flourished—McDonald’s, Johnson & Johnson, and Merck, to name a few. But even growth stocks with the best fundamentals were overpriced in 1972. McDonald’s, for example, was a solid company: its earnings would grow 253 percent over the next five years. But despite the earnings growth, over the same span, its share price fell by 19 percent—only then did the market find the stock fairly priced.
In 1999, Leuthold noted that in his new and expanded edition of Stocks for the Long Run, Siegel had come to recognize the importance of high price-earnings ratios, observing that “the 25 stocks with the highest P/E ratios yielded about half the subsequent return as the 25 with the lowest P/E ratios.” Siegel also emphasized the importance of the price an investor pays when he gets in, acknowledging that Nifty Fifty–type stocks “should not be considered buys at any price.” Nevertheless, as the bull market came to an end, most investors still clung to the thesis of Stocks for the Long Run, stated in the first chapter: “Accumulations in stocks have always outperformed other financial assets for the patient investor” (5).
See Chapter 2 (“The People’s Market”) on exactly what it means to say that U.S. stocks “always” outperform other investments.
19. Warren Buffett, as quoted in Lowenstein, 161.
20. Lowenstein, 149.
21. The NYSE survey showed that, as of 1970, one third of investors had bought their first stock sometime after 1965. Others came in after 1970, when it seemed that the market had bottomed. Because Buffett had the cash to buy when stocks were cheap—and refrained from buying when they were expensive—his returns rose consistently from 1973 to 1982 (see table below).
(See Chairman’s Letter, Berkshire Hathaway Annual Report, 2002, dated March 6, 2003, page 3, for a comparison of gains in Berkshire Hathaway’s per-share book value versus the S&P 500 with dividends reinvested; see also Gail Dudack, SunGard Institutional Brokerage, “Weekly Update” July 3, 2002, for gains on S&P 500 without dividends reinvested.)
22. The story that follows is based on an interview with the author. For the story of how Allyn fared in the late nineties, see Chapter 16, “Fully Deluded Earnings.”
23. It could be argued that since the seventies was a period when inflation was unusually high, “real returns” distort the market’s performance. But the fact is, in the real world, only “real returns” (after inflation) measure the concrete value of money: its purchasing power. Moreover, just as inflation was much higher in the seventies than it would be at the end of the century, dividends were also much higher than they would be in 2000. When the bull market of 1982–99 ended, investors did not have to worry about inflation eating their savings, but they also had little in the way of dividends to reinvest.
What the stretch from 1966 to 1986 illustrates is that success in the market is not simply about being patient—everything turns on when you got in. 1954 was a good beginning point; 1968 was not. 1974, on the other hand, presented the buying opportunity of a lifetime. But for most investors, the bottom came too late. By then, they had no money left.
24. Bob Farrell, interview with the author.
25. “The Death of Equities: How Inflation Is Destroying the Stock Market,” Business Week, 13 August 1979, 54. Note these numbers are all before inflation. Returns on the EAFE are from October 1970 through October 1980. See also Marc Faber, Tomorrow’s Gold (Hong Kong: CLSA Books, 2002), 33, for a table showing how real assets trumped both U.S. stocks and bonds from June 1970 to June 1980.
On the whole, the only investors who made money in the stock market in the seventies were those who traded small caps. But a trader had to be nimble enough to move in and out of the small-cap market, buying in the valleys, selling at the peaks, tripping from peak to peak.
26. “The Death of Equities,” 54. Not everyone agreed with Business Week. A month later Forbes ran a cover story that challenged Wall Street’s obituary. “Back from the Dead?” asked the cover. The article that followed reminded readers that the great bull market of 1954–1969 “was born in an atmosphere of gloom and doom differing from today’s only in its rationalizations, not its intensity.” When Forbes published its story, the Dow was hovering in a more promising range, vacillating between 850 and the high 880s.
27. “The Death of Equities,” 54.
28. These numbers are after adjusting for splits. Marc Faber makes the point in his newsletter, The Gloom, Boom and Doom Report, June 2001.
29. “Up & Down Wall Street,” Barron’s, 23 August 1982; “Barron’s Mailbag,” Barron’s, 6 September 1982, 45.
30. Warren Buffett, Chairman’s 1981 letter to Berkshire Hathaway shareholders, 26 February 1982. As 1982 began, Buffett remained pessimistic: “We applaud the efforts of Federal Reserve Chairman Volcker and note the currently more moderate increases in various price indices,” Buffett wrote in his 1981 letter to investors, dated February 26, 1982. “Nevertheless, our views regarding long-term inflationary trends are as negative as ever. Like virginity, a stable price level seems capable of maintenance, but not of restoration.”
CHAPTER 4
1. As always when dividing history up into neat periods, beginning and ending points are subjective. One could easily argue that the first phase of the bull market ended in 1987, and that the second phase did not begin until 1992. But the recession of 1990–91, coupled with the Gulf War, marks a clear economic and political turning point. In retrospect, one could say that those two events inspired political and economic policy for the next 13 years. Meanwhile, the fact that the market bounced sharply in 1991 confirms that the underlying trend was positive. The bull was still in charge of the market.
2. “The Rebirth of Equities,” Business Week, 9 May 1983, 120.
3. Dennis Slocum, “Stock Markets Update: Rally Indicates Portfolio Managers Switching from Defence to Offence,” The Globe and Mail, 21 August 1982, B5.
4. Dow Jones News Service, “Barron’s Four Technical Analysts See Start of Big Bull Market,” 11 October 1982.
5. Bob Farrell, interview with the author.
6. Most of the new IPOs traded “over the counter” rather than on one of the major exchanges, and by the fall of 1983 Farrell reported that at least 20 percent of the 5,254 over-the-counter stocks that he watched had tumbled more than 50 percent from their peaks earlier that year. See Dow Jones Newswires, “Many Unlisted Stocks Suffer Big Decline from Earlier Highs,” 10 November 1983.
7. Bob Farrell, interview with the author. Over the course of 1983, the S&P gained more than 19 percent, but by the end of the year it was stalling out.
8. Herb Greenberg, “Individual Investors Taking Little Stock,” The Chicago Trib
une, 19 May 1985.
