It’s the rebound that kills Posted on August 29, 2007 by Richard Beddard
Filed Under
Markets |
A
salutary lesson from crashes past is that it’s not necessarily the bear
market that kills, but the recovery. Not that this market is a bear
market. I’m just thinking ahead 
Having finished my holiday read in the early ours of Monday morning (Glasshouse by Charles Stross, a book I found in
Mark Andreessen’s list of top 10 science fiction authors) I picked up Chris Anderson’s ‘
The Long Tail‘.
It’s been lying in my bookshelf for a couple of months. The Guardian
reviewer quoted on the front cover proclaims it’s, “The natural
successor of the ‘Tipping Point’” in the field of big business ideas.
The Tipping point made quite an impression on me, and I persuaded a
number of friends to read it, so The Long Tail has something to live up
to.
One of the reasons I’ve resisted reading it so long is that the idea
of the long tail is so well established now. Such is the success of the
book, I feel I’ve already read it. However, in a month where we flocked
to Tesco to buy Harry Potter and the Deathly Hallows for a fiver, and
to the opening night of The Bourne Ultimatum, it will be interesting to
read whether Mr Anderson really believes the era of the blockbuster and
mass-marketing is over, or whether it’s been joined by another business
model - the endless choice of the long tail. As the long tail of
MP3’s, music downloads, and Amazon music and movie sales is, apparently, killing
HMV, a company I hold shares in, I have money at stake too. Mr Anderson is a potential role model; the editor of Wired, writer,
blogger and father who still finds time for
wacky projects.
Another book that joins Glasshouse on my shelf of favourites is ‘The
Stockmarket: 50 Years of Capitalism at Work’ by John Littlewood. It
could have been as dry as the dust left on the stock exchange’s trading
floor after the Big Bang but I finished it a week ago, only a little
less desperate to reach the end (1998) than I was with the novel. Mr
Littlewood’s history starts with the Attlee government after the Second
World War and blends politics and economics, the stories of bankers and
politicians, with the ebb and flow of the markets. Reading it brings
back memories that were only peripheral when I made them and leaves the
impression that, financially speaking, Britain now is a very different,
and
largely better, place than at any time in the
previous sixty years. The stock market though, driven by fear and
greed, supply and demand, inflation, interest rates, commodity prices
and government policy is much the same, it’s just accessible to more of
us. Had I been 40-odd in 1975, I doubt I’d have been buying stocks and
shares in companies.
We spent our holiday totally off-line, sandwiched between Skye and
the Scottish mainland on the island of Raasay. I left with my
positions intact.
The probability of a crash, I felt was unlikely, and if it happened,
and I was able to dump my shares, I wouldn’t anyway. Short-term, I’m
vindicated. It’s been a long-standing principle of mine, to invest
while there are business I want to invest in, regardless of the market.
But I was also thinking of John Littlewood’s descriptions of the crash
of 1974, and in particularly
how difficult it was then to profit from the recovery.
In January 1975, with average dividend yields at 12% and PE ratios of four, there was a “
veritable explosion”
of buying. In eight business days, the FT index rose 49%. On one
Friday, it rose 10.1%. Daily turnover rose from an average of £185m to
over £660m. Speculators selling the market short were forced to close
their trades (i.e. buy shares) while institutions that had been
hoarding cash were panicked into buying before it was too late. The
value put on the quoted private sector of the British economy shifted
in eight weeks from £17,000m to £35,000m, says Littlewood, with
merchant banks up 175%…
<blockquote>These eight weeks amount to the most astonishing single
period in the post-war history of the stock market, although few
investors would admit to having enjoyed this frenzied feast while it
was happening. Many simply looked on, paralysed like rabbits caught in
the headlights… Far too many institutions had husbanded their cash
resources for sunnier days, complacently believing that the time would
come when wonderful buying opportunities would be there for the taking
at their leisure. In the event, these wonderful opportunities vanished
like melting snow in a sudden thaw…
Rothschilds… carried the headlines in the 1974 bear market for their
commitment to gold shares and cash, but they were left stranded in
1975, and never recovered their reputation.</blockquote>
It’s worth considering that, as in the case of Rothschilds, it’s often the
rebound that kills:
<blockquote>Perhaps the greatest psychological damage was inflicted
on private investors. Many had sold out on the way down; others who sat
through the recovery were now disillusioned beyond repair and never
wished to own a share again.</blockquote>
That, I think, is an important lesson of history, and suddenly
we’re all interested in history again says the FT in it’s
shorter but broader overview of financial history.
Apparently after years of preoccupation with the short-term future,
this summer’s market swings have induced “a violent thirst for
historical knowledge” among financiers (and journalists, and bloggers,
it seems :-)) Aping Mark Twain’s line that the past doesn’t repeat
itself, but it rhymes, Professor Robert Bruner, who’s just co-written a
book on the 1907 Wall Street Crash, says:
<blockquote>“Crises are like hurricanes. Each is unique, yet we know
enough about them all to be able to generalise - our big generalisation
is that explanations come from a convergence of causes, most of which
are always present in the global economy. [But] when these causes click
into the right combination, financial crisis follows.”</blockquote>
The FT identifies leverage, exuberance and a rocky outlook for the
economy as significant causes. I think history may show that things
weren’t leveraged, exuberant, or rocky enough for a proper crisis in
2007. I’m not alone in that. Tomorrow’s update from Ken Fisher on the
Interactive Investor Mothership (
it will appear here)
urges investors to prepare for an autumn rally. And, according to the
FT again, it seems that canny chief executives took a contrarian view
when hedge funds were dumping their stock. Company directors
borrowed in record amounts to
buy shares in their own companies.
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