Stock Market History from Graham, Buffett and Others
John Chew at Aldridge56@aol.comwww.csinvesting.wordpress.com studying/teaching/investing Page
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The Importance of Studying History
Many outstanding investors have been fanatical students of history because history teaches you to place eventsinto perspective, to understand that industries boom and fade; cycles repeat and human folly is never-ending.
BillGross
of
Pimco
(The Fixed Income Money Manager) said that the history books in his office have been a betterguide to making money in the bond markets than any financial analysis.
Seth Klarman
, value investorextraordinaire, has endowed a history chair (here: http://www.facinghistory.org/ ).
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Warren Buffett
sat for weeks inthe Columbia University Library reading newspapers
—
including the
ads
!--from the 1930s to gain a sense of theGreat Depression
2
.
Jim Rogers
, the peripatetic investor, speaks about the value of studying history as an investor in the foreword to
Financial Reckoning Day Fallout
(2009)
by William Bonner and Addison Wiggin. Jim Rogers: ―The only other
way (besides visiting countries around the world yourself) to know what is going on is to study history. When Iteach or speak at universities, young people always ask me:
―
I want to be successful and travel around the world;
what should I study?‖
I always tell them the same thing: ―Study history.‖
And
they always look at me very perplexed and say, ―What are you talking about….w
hat about economics, what
about marketing?‖
―If you want to be successful, ―I always say, ―You‘ve got to understand history. You will see how the world his
always changing. You will see how a lot of the things we see today have happened before. Believe it or not, thestock marke
t didn‘t be
gin the day you graduated
from school. The stock market‘s been around for centuries. Allmarkets have. These things have happened before. And will happen again.‖
(Editor: The players change, but themusic never stops). Alan Greenspan
went on record before he left his post at the Federal Reserve saying he had never seen a bubblebefore. I know in his adult lifetime there have been several bubbles. There was a bubble in the late 1960s in the
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November 24, 2008:
When hedge fund man
ager Seth Klarman thinks back to his days studying history as a kid in Baltimore, his eyes don‟t exactly light up.“It was rote memorization of dates, wars and facts, and it didn‟t come alive,” says Klarman, 51, co
-founder of Boston-based Baupost Group, a
$12 billion hedge fund firm. “You couldn‟t visualize the people or even the events and why they mattered so much.”
But history is a subject so near and dear to Klarman that he now puts a lot of time (and part of his wealth) into avidly supporting an educational
group called Facing History and Ourselves, whose mission is to train middle school and high school teachers to present history within aframework of civic duty and through lessons on how ordinary people can shape extraordinary events. Rote learning is cast aside in favor ofhelping young people see how what they do matters.
Students gain an awareness of current events, not the least of which are the challenges facing newly emerging democracies. “H
ow do you get justice if half the country gets up
and kills the other half, as in Rwanda?” Klarman asks. “And how do you move past it? Do you havememorials? How do you reconcile? Those are all issues that Facing History teaches.”
The organization was founded in 1976 by Margot Stern Strom, a former high school history teacher who grew up in the segregated South. Its
first focus was the Holocaust and an exploration of how the acquiescence of practically an entire society led to the murder of millions. FacingHistory has since developed a popular training program that can be accessed either online or in person. Topics include anti-Semitism, racism,voting rights, gay rights and immigration. The lessons encompass the current as well as the historical
—
for example, the Armenian genocideof 1915, the American eugenics movement of the early 20th century, apartheid in South Africa and the crisis in Darfur.Facing History has ten offices. Eight are in the U.S., one is in Canada, and the most recently opened is in London. Klarman says demand hasgrown globally:
“Teachers inquire, „How can I learn about this? Can you come to my country? I‟ve got a dozen friends; we all want to teach
your curriculum.‟”
2
See
The
Snowball, Warren Buffett and the Business of Life
by Alice Schroeder
Stock Market History from Graham, Buffett and Others
John Chew at Aldridge56@aol.comwww.csinvesting.wordpress.com studying/teaching/investing Page
2
U.S. stock market; the oil bubble (in the late 1970s); the gold bubble (in the 1980s); the (stock) bubble in Kuwait;the bubble in Japan; the bubble in real estate in Texas. So what is he talking about? Had he not seen those things,
he could have at least read some histories…all these things and others have been written about repeatedly.
Another lesson to learn from studying past market cycles is about market psychology. As the late Peter Bernstein
observed, ―In their calmer moments, investors recognize their inability to know what the future holds. In moments
of extreme panic or enthusiasm, however, they become remarkably bold in their predictions: they act as thoughuncertainty has vanished and the outcome is beyond doubt. Reality is abruptly transformed into that hypotheticalfuture where the outcome is known. These are rare occasions, but they are unforgettable: major tops and bottoms
in markets are defined by this switch from doubt to certainty.‖
The venerable
Ben Graham argued that an investor should “have an adequate idea of stock market history,
in terms, particularly, of the major fluctuations. With this background he may be in a position to form
some worthwhile judgment of the attractiveness or dangers….of the market.”
John Templeton in the book,
The Templeton Way
by Lauren C. Templeton, said that understanding the history of the market is a huge asset for investing. This is the case not because events repeat themselves exactly but becausepatterns of events and the way the people who make up the market react can be typical and predictable. Historyshows that crises always appear worse at the outset and that all panics are subdued in time. When panics diedown, stock prices rise.The study of past financial history can be a rich source of inspiration and guidance for investors. A historicalperspective has always underpinned his (John Templeton
‘s
) own impressive achievements as an investor.(Introduction to
Engines That Move Markets
by Alasdair Nairn.The study of market and economic history is excellent preparation for an investor, but the study of past eventswithout a coherent theory for human action can often lead to confusion. I highly recommend downloading,
What Austrian Economics Can Teach Historians
by Thomas Woods at the following link:www.
An excerpt:But no record of facts, no matter how judiciously arranged, interprets itself.
―History,‖ wrote Ludwig von Mises,―cannot be imagined without theory. The naïve
belief that, unprejudiced by any theory, one can derive historydirectly from the sources is
quite untenable…. No explanations reveal themselves directly from the facts‖ (2003,
pp. 107-108).An epistemological dualist, Mises denied that methods appropriate to the natural sciences could be employed inthe social sciences, where man, rather than inanimate objects, was the object of study. For one thing, the historiandid not have the natural
scientist‘s advantage of a laboratory in which he could observe the consequences of
isolating a single factor. ―[H]istorical experience,‖ Mises wrote, ―is always the
experience of complexphenomena, of the joint effects brought about by the operation of
a multiplicity of elements‖ (Mises 1985, p. 208;
Mises 1998, p. 31). With laboratory methods unavailable to him, if he was to make sense of historical events thehistorian could not approach his subject with his mind a
tabula rasa
but instead needed some acquaintance withsocial theory, lest he be overwhelmed by data he was helpless to
interpret. ―The ‗pure fact‘ –
let us set aside theepistemological question whether there is such a thing
–
is open to different interpretations. These interpretationsrequire
elucidation by theoretical insight‖ (Mises 1990, p. 10).
However
—
if you study history, past facts and figures, you must have a theory or latticework of mental models inwhich to understand what you are looking at. If not, you will be lost or even learn the wrong lessons. I stronglysuggest learning about Austrian Business Cycle Theory. Many free books are available at www.mises.org.No
Stock Market History from Graham, Buffett and Others
John Chew at Aldridge56@aol.comwww.csinvesting.wordpress.com studying/teaching/investing Page
3
record of facts, no matter
how judiciously arranged, interprets itself. ―History,‖ wrote Ludwig von Mises, ―cannot
be imagined without theory. The naïve belief that, unprejudiced by any theory, one can derive history directly
from the sources is quite untenable…No explanations reveal themselves directly from the facts‖ (2003, pp. 107
-108 in
Epistemological Problems of Economics
. Trans. George Reisman)Without an economic theory to understand why the Great Depression occurred including its depth of 25%unemployment and length 1929-1946, then you will not gain an understanding of the past to help you anticipateand interpret future events.
(Note the date of 1946 rather than 1939. How can anyone count the sending of men,women and material to war and to destruction as economic growth?)
Since we begin with the Great Crash of 1929
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, investors should understand the true causes behind the marketcrash rather than just view charts or accept the standard historical explanations for the crash.
Paul Johnson‘s introduction to Fifth Edition of Murray Rothbard‘s
America’s Great Depression
(A devastatingcritique on how interventionism and inflationism deepened and prolonged the Depression) is available here:
http://mises.org/rothbard/agd.pdf
Here is Paul Johnson‘s Introduction:
The Wall Street collapse of September
–
October 1929 and the Great Depression which followed it were among themost important events of the twentieth century. They made the Second World War possible, though not inevitable,and
by undermining confidence in the efficacy of the market and the capitalist system, they helped toexplain why the absurdly inefficient and murderous system of Soviet communism survived for so long.
Indeed, it could be argued that the ultimate emotional and intellectual consequences of the Great Depression werenot finally erased from the mind of humanity until the end of the 1980s, when the Soviet collectivist alternative tocapitalism crumbled in hopeless ruin and the entire world accepted there was no substitute for the market.Granted the importance of these events, then,
the failure of historians to explain either their magnitude orduration is one of the great mysteries of modern historiography.
The Wall Street plunge itself was notremarkable, at any rate to begin with. The United States economy had expanded rapidly since the last downturn in1920, latterly with the inflationary assistance of the bankers and the federal government. So a correction was due,indeed overdue. The economy, in fact, ceased to expand in June, and it was inevitable that this change in the realeconomy would be reflected in the stock market.The bull market effectively came to an end on September 3, 1929, immediately the shrewder operators returnedfrom vacation and looked hard at the underlying figures. Later rises were merely hiccups in a steady downwardtrend. On Monday October 21, for the first time, the ticker tape could not keep pace with the news of falls andnever caught up. Margin calls had begun to go out by telegram the Saturday before, and by the beginning of theweek speculators began to realize they might lose their savings and even their homes. On Thursday, October 24,shares dropped vertically with no one buying, and speculators were sold out as they failed to respond to margincalls. Then came Black Tuesday, October 29, and the first selling of sound stocks to raise desperately neededliquidity.So far all was explicable and might easily have been predicted. This particular stock market corrective was boundto be severe because of the unprecedented amount of speculation which Wall Street rules then permitted. In 1929,
1,548,707 customers had accounts with America‘s 29 stock exchanges. In a population of 120 million, nearly 30
million families had an active association with the market, and a million investors could be called speculators.
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