Interviews with Digital Media Thought Leaders

Experience as Illusion

Podcast Audio | Posted by Phil Leigh on November 19, 2012

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Addicted investors experience a boom-to-bust cycle much like a romance that ends badly. And like such romances, the first is always the most passionate. For me it was the late 1960s, although I was warned almost precisely at the top upon reading “Adam Smith’s” The Money Game in June 1968. But like a naive youth gradually losing his girlfriend to an unknown rival, I kept dating her for another year despite surprising and painful consequences. Fortunately, we broke-up while I still had enough money to finance a graduate education that landed me on Wall Street in the early 1970s.

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But I would never again be so trustful of the market. I had learned my lesson. Or had I? As John Brooks put it in The Go-Go Years when commenting upon the message of Proust’s great book, “man’s apparent capacity to learn from experience is an illusion.” We fall in love again. The cycle repeats as evidenced by the dot-com period of the 1990s or the junk bond takeover era of the 1980s.

Recently I decided to relive my first passion and see what I could learn by re-reading The Money Game. In addition to underscoring key points, I highlighted every stock the author mentioned. While I may have missed a few, I ended up with 58. Only about 12 are still public. The rate of demise is significant because nearly all of the stocks were “Wall Street darlings” during the 1960s. Many achieved triple digit stock prices thereby implying to investors of the period that they would be prosperous – and certainly viable – for years thereafter.

A characteristic example was Farrington Manufacturing whose stock went in one great arc from $10 to $260. The move was not without some justification because the company was a leader in a primitive form of optical character recognition at the time. Without their technology, information had to be laboriously keypunched into computers. But last month – October 2012 – a 100 share canceled Farrington certificate sold on eBay for $3.75. Other stocks popular during the 1960s that vanished or faded to obscurity include, Flying Tiger Line, Kalvar, Leasco Data Processing, Admiral Electronics, Mohawk Data, General Transistor, Packard-Bell, Yale Express, Scientific Data Systems, Western Oil Shale, and Control Data. All might be mentioned in an episode of Mad Men.

Some went bankrupt, but most were acquired or recapitalized years later at prices well below their 1960s valuations. A few, like SDS suckered major corporations into disastrous acquisitions much like AOL and Broadcast.com did during dot-com infatuation. Apparently, Proust’s warning applies to the Titans of industry as much as the rest of us.

The Money Game repeatedly mentioned the six stocks listed below. IBM and Xerox remain viable corporations today, although each has changed significantly. Presently Solitron is an almost-forgotten niche maker of nearly obsolete semiconductor components, although investors during the 1960s felt it could rise to the position of industry leadership held by Intel today. Polaroid went bankrupt around the turn of the century. Presently Fairchild is publicly owned, but it is not the same company traded in the 1960s, which was sold to an oil field service company in 1979 for $425 million. Ten years later it was marked-down fifty percent and sold to a California semiconductor company, which later sold it to private equity and thence public a second time. Motorola was split into two parts with the bigger half recently bought by Google.

Significantly, technology companies were the most frequently mentioned stocks in The Money Game. While investors are probably correct in looking to the sector for the biggest winners, the preference is a compelling invitation for imposters.

In the 1960’s the signature phonies were computer-leasing stocks. They were not technology stocks, but merely finance companies. Typically they would buy IBM mainframe computers and lease them to users at rates below the IBM monthly rental. Their bogus profitability relied almost entirely upon lengthy depreciation schedules. Whereas IBM depreciated its computer rental base over five years, many of the leasing companies would choose ten-year lives. Top accounting firms greedy for audit fees would provide unqualified opinions. The absurdity of a ten-year life was not evident to investors in an era before personal computers.

For a period, computer-leasing stocks were the rage. Examples include Leasco Data Processing, Randolph Computer, Dearborn Computer, Data Processing & Financial General, Computer Investors Group, G.C. Computer, and Continental Computer. Note the propensity of for words like “data processing” and “computer” in the names.

Less than a year after I read The Money Game, Leasco Data Processing made a bid to acquire America’s eighth largest bank by exchanging its stock valued at $140 per share for publicly traded Chemical Bank. The CEO of Leasco was not then thirty years old whereas Chemical Bank was founded 150 years earlier. Although the attempt failed, Leasco’s audacity convinced the imperial four hundred of American capitalism that the end of the 1960s bull market was a “consummation devoutly to be wished.” The Dow Jones Industrial Average declined over 30% during the next year. Stocks like Leasco dropped much more, and never came back.

Upon re-reading “Adam Smith’s” account of the 1960s stock market I better comprehend the aphorism, “We can no better forget those we once loved than to remember those we never met.” Presumably later generations will have similar feelings about the dot-com or junk bond eras.