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Many stories have been written about thethe famous Stock Market Crash of 1929, butI am aware of none that have delved intothe bull market beyond the last few monthsbefore the crash. Countless people havebeen fascinated with the crash and havemade all sorts of false assumptions that thespeculative fever was intensified by marginswhich are only 1O%. That statement iscompletely false and, in fact, many stockswere not available on margin at all. Otherspaint the picture that a vast portion of thepopulation was involved, right down to shoeshine boys. Again, we will see that this wasa gross exaggeration. One book, "The DayThe Bubble Burst," is an excellent account-ing of the social impact of those tryingtimes. The cast of characters is unsurpassedand provides a look into the private lives of some of the people who were the biggestplayers.But from an analytical perspective, theatmosphere that surrounded the market atthat time is a very important area to ex-plore. Far too often, economists and marketanalysts assume that such catastrophes arefreaks in the marketplace and that they willnever happen again. Others try to inject thefamous Kondratieff cycle into the stock market and proclaim that the end is near.Some have been calling for a devastatingcollapse ever since 1982 and each year theycrawl out from under their rocks to pro-claim that this is the year that the marketwill collapse to 10 cents on the dollar as thatinfamous month of October approaches.Other hard-money advocates beat theirchests, warning that everyone must buy goldand claiming that this deflationary wave inthe 1980s is only the beginning of a situationsimilar to that which took place in 1929.But they should go back in history and un-derstand what took place. If they look at asimple chart they would see that the col-lapse from 381 to 40 points on the DowIndustrials took place in the span of threeshort years. Such disasters have alwayscome without warning and the process hasnever dragged out over a period of four tosix years. Normally the pain has always beenswift and to the point and panics are justthat, panics which take their toll in thecourse of one to three years.It is a widely known fact that nearly 90%of money managers have been unable tobeat the Dow or the S&P in performance.It is always easy for someone on the outsideto look in and criticize a money manager forhis performance. When it comes right downto it, most managers are damned if they doout-perform by critics who say they havebeen too aggressive. If they perform lessthan the Indexes their critics say that if theyhad just bought the Dow stocks they wouldhave been ahead of the game.Trading any market is difficult to say thevery least. Judging someone’s performanceon the surface tells little about his system orhis analysis. For example, take two mana-gers who both made money on the stock market rally between September 1985 andApril 1986. One bought the market becausehe felt that the economy was going to heatup and he realizes that inflation brings withit growth for many industries. The othermanager bought the market because hethought there was going to be a discountrate cut. Both may have made money, but
INTRODUCTION
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the gains were based on two totally differ-ent fundamental principles.The difference between the two managersmay eventually show up only when the fun-damental long-term ideas of one trader orthe other prove to be wrong. Then one willcontinue to make money and the other willsuddenly become a net loser. The loser willchase the market, inevitably gettingchopped up back and forth while the otherwill consistently do well if his long-termconcepts remain in the proper perspective.Therefore, we find that trading managerscome and go not merely for small privateaccounts, but for the big institutions as well.People have a tendency to judge managerson a short-term basis and many scrutinizeeach and every trade, when, in fact, it is thelong-term that counts the most.The short-term trading or analysis of thestock market has always been the worst.Sure, some analysts have done quite wellcalling the market for short-term moves,but eventually it turns out to be periodicand lacks consistency. The long-term issomething that most people vacillate over,switching their opinions on a short-termbasis from bullish to bearish. How can aninvestor achieve consistency, or at leastmake sure that if he misses a short-termmove, he is not caught on the wrong side of Wall Street?If you want to know what the future holds,you need a map of the past to at least pro-vide a guide as to what is or is not possible.Far too many people fail to look at theevents of the past as a whole, but single outonly an isolated period to support an un-warranted assumption to arrive at a fore-gone conclusion.While some argue that 1929 is knockingat our door, others laugh insisting that suchevents are not possible in this day and age.Economists, in their efforts to support theirbiased Keynesian conclusions, attack theprotectionism acts as the cause of the GreatDepression. Others blame the massive col-lapse on the over-speculation that pre-ceded it. In all, most accounts are totallyinaccurate and others lack the details of thereal events during that era because theyhave merely skimmed the surface.On the contrary, the events which took place between 1921 and 1929 are very im-portant. The fundamentals in many areasare the same as we see today and there areundoubtedly many parallels between thepast and the present. However, was theblame for the Great Depression justifiablyput on the stock market? In fact, is the stock market the almighty leading indicator tothe economy as it was believed then and asit is still perceived today? Should we belistening to the "warnings" of impendingdisaster or are we on the verge of a new erawhere the Dow industrials will soar to 3500or beyond? How does one get a feeling forwhat the future holds? Should we wait andwatch for moves in the discount rate? Doesthe first up tick in interest rates mean dis-aster cannot be avoided?One of the best ways to get a grip on thesituation is to clearly define what the mar-ket has done under what conditions. Analy-sis is supposedly the art of taking a knownrelationship or a proven technical methodfrom past performance and projecting whatthe future performance may be. If this is theonly means by which we can objectivelytake a shot at the future, then perhaps it isbest to sort out those fundamental relation-ships and make certain that the stock mar-ket does react in the manner that
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"generally" accepted beliefs would have usassume.One huge problem for most people is anunderstanding of just which fundamentalstruly move the market. At times you findanalysts cheering for deflation and lowerinterest rates, which, in their minds, willentice people to buy stocks. But just think about it for one minute. If deflation is thesituation and the economy cools down,doesn’t business in general also cool off,thereby reducing corporate income?The generally accepted relationship of thestock market to interest rates has beenhigher rates mean lower stocks. Thethought behind this is that higher rates in-crease the cost of margin. Accordingly,people will buy fewer stocks and thereforestocks must go down. The emphasis hasbeen placed upon the speculation and notthe true economic impact. During the early1920s prior to the crash, the generally ac-cepted fundamental relationship was thatstocks rise with higher rates and declinewith lower rates.It is true that interest rates collapsed be-tween 1929 and 1932 along with the market.Interest rates collapsed from 1919 to 1921and so did all commodities and stocks aswell. Each depression had been marked bya decline in interest rates and each bullmarket took place when business expandedand borrowed more to fund their expandedlevels of business. It is true that interestrates bottomed in 1976 and rose into 1981while the stock market held the 1974 lowand moved up with the inflationary cycleinto 1981, peaking only slightly ahead of interest rates. There was no direct relation-ship to the contrary.So what is the answer? Does the marketrally with lower rates all the time? Obvi-ously not! So under what conditions will thestock market rally when higher rates exist?This is just one vital question that needs tobe answered.The past has a tremendous amount of knowledge to offer if one merely takes thetime to study what took place. For example,did you realize that foreign loans were alsoa major concern in the 1920s? Did you alsorealize that the economy has always ex-panded only during inflationary times andnever during periods of deflation? But thenwhy do most people say that the stock mar-ket doesn’t do very well against inflation if true industrial expansion takes place duringinflationary periods? Is the stock marketoverbought because it stands at its all-timehighs or is it in fact the best buy in 50 years?What about all the takeovers? Is that goodor bad for the market? There was a tremen-dous number of takeovers and mergers be-tween 1927 and 1929 just before the crash.Does that parallel mean it is a warning of impending disaster?Many people are trying to forewarn of amassive collapse in the stock market. Oth-ers say it will remain bullish as long as inter-est rates decline. Still others have honestlyprojected that interest rates will continue todrop into 1989 and the Dow will reach inthe "thousands." A few doom and gloomguys crawl out from under their rocks everyyear to proclaim that October will collapse just like 1929. Widows and orphans will becast into the streets and suicides will be-come a common everyday event on yourlocal street corner. Earthquakes will strikeWall Street itself and man will be punishedfor being so presumptuous as to have evertaken the Dow above 1,000 in the firstplace.Well perhaps if those people (who are justoutright mad at the rest of the world for
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