I read Maggie Mahar's book Bull!.
It's a wonderful read that details, better than any other book I've come across, the stock market mania that swept the nation during the 1980s and 1990s. Warren Buffett even recommended it in his 2003 letter to shareholders.
Here are seven things I learned from the book.
1. Mutual fund managers rode the bull market not because they believed in it, but because that's what they're paid to do:
In other words, it is in the fund manager's interest to follow the herd -- even if he thinks the herd is wrong. In the worst-case scenario, he will go down in flames along with everyone else. No one will blame him. Alternatively, if he dares to think outside of the box, and do what he believes is in the best long-term interest of his clients, he takes the chance of being "wrong and alone." Not surprisingly, as the market climbed, most managers chose investment risk (for their clients) over career risk (for themselves).
2. Saying the bull market was a bubble got old real quick:
"You can only say that price/earnings ratios are too high so many times," reflected a business writer at The New York Times. "Eventually, you lose credibility." Weil agreed: "There was widespread thinking among skeptical financial writers -- this can't go on -- but it has. What are we supposed to do about it? How many times can you say it? The problem is, if you're a daily newspaper, you have to come up with something different to say every day." Moreover, "in a public marketplace, if you write a story that doesn't resonate with the marketplace -- you have to question the story," said The Wall Street Journal 's Kansas. "Reporters can get hesitant about their own convictions."
3. Bull markets draw in the young, poor, and inexperienced:
But the very rich don't fret so much about making money. They have money. Their greatest fear is losing it. This explains why, when the bidding escalates -- whether in a stock market, a "hot" real estate market, or at a Sotheby's auction -- Old Money tends to step aside, letting New Money carry the day.
4. The bull market was concentrated in a small number of companies:
By the end of '98, the S&P would be up 26.7 percent for the year. In the final quarter, however, just five stocks accounted for a little more than half of the surge according to Merrill Lynch: Dell, Lucent, Microsoft, Pfizer, and Wal-Mart. Far too much was riding on too few stocks.
5. Financial advice exploded. Financial wisdom stayed the same:
Throughout the nineties, baby boomers would be overwhelmed with financial advice, yet in hindsight, the counsel that the boomers most needed was the simplest: save just a little more, but save consistently. Start early; spread the money out; and avoid large losses by shunning steep risks. Pass by anything that sounds too good to be true, and let the miracle of compounding do the rest. If an investor earned 8 percent over a lifetime of saving, his money would double roughly every nine years.
6. After the crash, people blamed stock analysts for hyping the market. Some thought this was crazy:
Allan Sloan [a journalist] would have none of it. Sloan did not hold Wall Street analysts in particularly high regard; he did his own research.
But he was struck by the hypocrisy of the media's attack: "WE wrote about these people," Allan Sloan exclaimed, while accepting the Loeb Prize, the Pulitzer of financial journalism, in June of 2001. "And now we say they're guilty; it's their fault. I mean, come on, we're responsible. Instead, it's 'let's-find-a-villain.' And now, supposedly, people like Mary Meeker and Henry Blodget are the villains; they're the people who sowed the madness in America; they're the ones who cost people billions of dollars. "Now, forgive me,"
Sloan continued, "I don't remember reading about Mary Meeker invading a newsroom with a gun and saying, 'Write about me or die.' I don't remember Henry Blodget saying, 'I've got your children hostage and unless you write about my idiotic prediction that Amazon is going to $400 a share, you'll be getting pieces of the kids back in envelopes.' Nobody did any of that."
7. Same as it ever was ...
The most dangerous error investors make, Bernstein and Taleb agreed, is "to mistake probability for certainty." By concentrating on what is most probable, or what happens "on average," investors often ignore the worst-case scenarios. For precisely this reason, said Taleb, investing can be more treacherous than a game of Russian roulette. "Reality is far more vicious. ... First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security.
Go buy the book here. It's great.
For more:
- What I learned from Antifragile
- What I learned from Thinking Fast and Slow
- What I learned from Risk Savvy
