Sunday, October 12, 2008

Learning from history


I haven't been purposely looking for an explanation of what is happening to global stockmarkets and what might happen to economies around the world but I stumbled on the following article from the Wall Street Journal when I was googling around for some info on Warren Buffett.

For me the following article puts the whole market frenzy and it current fear mode into sharp focus and gives some perspective, from history, about where we could be heading.

Here is a n extract from the article discussing Benjamin Graham's analysis of the US stockmarket in 1932:

Just eight days before the Dow hit rock-bottom, the brilliant investor Benjamin Graham -- who many years later would become Warren Buffett's personal mentor -- published "Should Rich but Losing Corporations Be Liquidated?" It was the last of a series of three incendiary articles in Forbes magazine in which Graham documented in stark detail the fact that many of America's great corporations were now worth more dead than alive.

More than one out of every 12 companies on the New York Stock Exchange, Graham calculated, were selling for less than the value of the cash and marketable securities on their balance sheets. "Banks no longer lend directly to big corporations," he reported, but operating companies were still flush with cash -- many of them so flush that a wealthy investor could theoretically take over, empty out the cash registers and the bank accounts, and own the remaining business for free.

Graham summarized it this way: "...stocks always sell at unduly low prices after a boom collapses. As the president of the New York Stock Exchange testified, 'in times like these frightened people give the United States of ours away.' Or stated differently, it happens because those with enterprise haven't the money, and those with money haven't the enterprise, to buy stocks when they are cheap."

After the epic bashing that stocks have taken in the past few weeks, investors can be forgiven for wondering whether they fell asleep only to emerge in the waking nightmare of July 1932 all over again. The only question worth asking seems to be: How low can it go?

Make no mistake about it; the worst-case scenario could indeed take us back to 1932 territory. But the likelihood of that scenario is very much in doubt.

WSJ.com

The great Crash of 1929 was not the low for the Dow though, that came 3 years latter, when on July 9 1932 the index hit 41.63. It was down 91% from its level exactly 3 years earlier.

Out of the 1929 crash came Benjamin Graham and David Dodds Security Analysis, the handbook or bible for subsequent Wall Street practitioners. It is a shame that modern Wall Street types seem to have ignored the main message of this book though:

While we were writing,we had to combat a widespread conviction that financial debacle was to be the permanent order; as we publish,we already see resurgent the age-old frailty of the investor-that his money burns a hole in his pocket. But it is the conservative investor who will need most of all to be reminded constantly of the lessons of 1931-1933 and of previous collapses.

Security Analysis - From the preface to the 1934 edition

Graham went on to say that "fixed value investments" can only soundly chosen if they are approached form a viewpoint of "calamity".

The last part of Benjamin Grahams advice is perhaps the most poignant and relevant to today's situation:

In dealing with other types of security commitments, we have striven throughout to guard the student against overemphasis upon the superficial and the temporary...this overemphasis is at once the delusion and the nemesis of the world of finance.

Quaint English but nevertheless well worth remembering.

I will finish this piece with something that I was watching on Voice of America last night.

It was from an individual which I cant remember but a female who has studied the 1929 crash and the subsequent depression.

She said that the crash itself needn't have caused a depression but the reaction of President Herbert Hoovers administration did. At first the government did nothing and then when it realised things might be bad it did all the wrong things.

It will be interesting if the current Bush administration has learnt from history and whether the next President, probably Barack Obama, will copy Democrat President Roosevelt's blanket socialism of the 1930s and spend taxpayers money to stimulate future prosperity.

Given this it would be curious to know why the current Labour Government in New Zealand are doing nothing in the face of massive economic uncertainty.


Related Links

Graham and Dodds Security Analysis: A review- buy it or download a free copy


Related Amazon reading

The Great Bust Ahead: The Greatest Depression in American and UK History is Just Several Short Years Away. This is your Concise Reference Guide to Understanding Why and How Best to Survive It

The Great Bust Ahead: The Greatest Depression in American and UK History is Just Several Short Years Away. This is your Concise Reference Guide to Understanding Why and How Best to Survive It by Daniel A. Arnold
Buy new: $8.95 / Used from: $22.19
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c Share Investor 2008




2 comments:

  1. Hi Darren

    Interesting article.

    I've been reading a bit about this 'security analysis' book in the last week or so. I guess not surprising that a lot of people go back to history when things like this happen.

    What I found interesting was the lack of NZ listed companies with an abundance of cash or even assets mentioned in this book. Other than the listed property trusts and GPG I struggled to find NAV/price of 1/1 or greater. (In the case of GPG I'd guess the asset value being used is also overstated given the last week or so)

    Do you think this suggests there's further to fall for the NZ market?

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  2. Get a copy of Security Analysis below. You can either buy it or download a free 30MB copy.

    http://everythingwarrenbuffett.blogspot.com/2008/07/superinvestors-of-graham-and-doddsville.html


    It has no references to New Zealand but is relevant in its basic message that assets bought should be carefully analyised for their "value" before purchase.

    I really dont know what is going to happen to the New zealand Stockmarket except to say it isnt going to improve any time soon.

    Thanks for reading, Darren

    ReplyDelete

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