Posted on November 27, 2012
As noted in my last post, I originally read “Adam Smith’s” The Money Game at the peak of a speculative market in 1968. Since then there have been a least three additional frightening collapses: (1) Junk-Bond Takeover Bust of the late 1980s, (2) Dot-Com Bubble at the turn of the century, and (3) Great 2008 Recession. Investors who experienced those events no doubt remember the losses as massive. Yet despite three debacles, the Dow Jones Industrial Average increased nearly 1,400 percent since 1968 providing a compound annual rate of return of almost 6%. Moreover, academic research normally uses the Dow -or similar – index as a proxy for overall stock market performance.
I question whether the six percent figure is valid.
The reason I doubt it is because the Dow Jones appears to be a “rigged” Index. Furthermore, all indexes seem to be similarly “rigged” for two reasons.
Frist, many of the most popular stocks during a speculative boom that later go bust, never get into the applicable index. Two examples are National Student Marketing and MP3.Com each of which once traded at over $100 per share. Both were popular with “performance” mutual funds, which means a great many investors were indirect shareholders. The endowment funds of the University of Chicago, Harvard and Cornell held stock in National Student Marketing as did Morgan Guaranty, Bankers Trust, Northern Trust, and General Electric Pension. Read more…
Posted on November 19, 2012
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.
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. Read more…