WALL STREET--THIS WORLD OR THE NEXT?

Those pundits vainly forcasting a stock market decline have become close kin to the religious stalwarts who grimly predict the end of the world. Everyone knows both are coming, but getting the right date seems to lie beyond human intelligence.

I am, or was, a physicist. The so-called laws of physics are never repealed. We use a lovely two-dollar word to describe their behavior by calling them invariant. They never vary, hold time after time and, when they don't, it is due to a circumstantial conditional change of which we are unaware. Look for it, and it is always there.

In contrast, the "laws of economics" do not behave in the same way. Economics is not a hard science and it is significantly influenced by human perception, a subjective and imperfect assembly of observations, half-truths, and emotions. Homo sapiens may believe it is an intelligent, sensible, and logical animal, but we are little more than cerebrally skewed primates. Emotions such as greed and childish anticipation often predominate over good sense, and the ensuing speculation triggers the herd instinct of great numbers of traders, institutional fund managers and stock analysts. All of them buy and forecast still higher prices. This tide becomes a self-fulfilling prophecy.

It is terribly hard to swim upstream against that prevailing current, and few dissenters attempt it very long. After a while, they just wear long faces and ruin promising careers by uttering mumbo-jumbo about fundamentals, price to earnings ratios, and dividend to stock price valuations. Then they slowly fade away. The ancient Greeks, who were at least honest about things, made it a point to consult seers.

The truth is that clairvoyance will beat analysis any day.

My old service buddy, who has been a stock broker since he left the navy, and who has always had whatever little was mine to invest, made the following observation the other day. His comment on the purchase of Salomon Brothers Investment Brokers by the Travelers Company was pungent. "Years ago banks sold at a multiple of around one and a half times book value. Now they sell for two and a half or even three times book value. But the companies are buying them with inflated stock, which is selling at 18 or 20 times earnings, instead of the historical 8 or 9 times earnings.They pay top dollar, in this case $9B, but with cheap, over-valued stock. Overall, the selling price is about right. But any little investor buying that stock with his own cash is paying far too much for it."

The huge debacles of the financial past, two of which were called the Great South Sea Bubble and the Holland Tulip Craze, were caused by rampant speculation and a fascinating philosophy called "The last man out." Most of the investors knew these stocks lacked fundamental value, but were convinced they would be able to ride the speculative and irrational rise in stock prices to a profit, then sell while ahead, leaving the last man out to bear the loss. Many of them actually did make fortunes this way, yet later re-invested them to make still more. They constituted the large crowd of last men out who were ruined.

What is the fundamental difference between a few men with deep religious convictions who so fervently want to believe the world is going to end that they stand on street corners telling us the precise date, and avaricious traders who delude themselves into believing the last man out theme? It is really very simple. The former are sure a reckoning is imminent, while the latter believe it will never come!


Sam Orr sorr@metrolink.net
World Traveler
and Philanthrope
(Location Unknown)