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repealed.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 email@example.com