Novel Investor

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Investing Lessons from a 1906 Classic

by Jon

Thomas Gibson had a front-row seat to the speculative madness in Wall Street at the start of the 1900s. He saw traders succeed and (mostly) fail on a regular basis for a decade. In those few successes and many failures, some common themes stood out.

For instance, ignorance, overtrading, and negligence were the main reasons people lost money.

The business method, as he called it, was absent. More often than not, speculators treated the market as a casino rather a place to buy and sell shares of businesses for cash. They knew little about the companies behind the shares they bought — relying on tips over research.

Worst of all, they seemed to do everything backward. The height of speculation was always at market peaks when prices and enthusiasm were highest. But when opportunities were prevalent at lower prices, that interest and enthusiasm had dried up. It seemed as though they wanted quick riches, with little to no effort, or not at all. Slowly wouldn’t do.

Gibson wrapped up those experiences in his first book published in 1906. The Pitfalls of Speculation is a perfect example of how long sound investing principles have been around and how rarely investors heed them. You’ll find some highlights from the book below: Continue Reading…

Bernard Baruch: Delusions of Grandeur and Gloom

by Jon

By 1933 the economic situation in the U.S. was dire. So dire, in fact, that the U.S. Senate did the unthinkable.

It held a hearing!

And so began the Investigation of Economic Problems. The hope was “securing constructive suggestions with respect to the solution of such problems.” Experts like Irving Fisher, Ben Graham, and others offered up letters, statements, and testimony on how to solve the issue of the Great Depression.

Bernard Baruch was first on the docket. His 67 pages of testimony would cover the gamut — inflation, war, tariffs, taxes, the gold standard, productivity, debt, the federal budget, and widespread fear and doubt in asset prices. It included arguing with an adamant senator who believed that extreme devaluation of the dollar was the answer to everything.

But one section of his opening statement, titled “The Great Delusion,” stood out: Continue Reading…

Timeline of the 1929 Market Crash

by Jon

Can it happen again? John Kenneth Galbraith sat before a Congressional Committee, on October 29, 1979, to answer that question.

It was the Great Depression. For all the worry about repeating the depression, the real talk centered on what preceded it — the Great Crash. And Galbraith offered his expertise on the subject.

Not perhaps since the siege of Troy has the chronology of a great event been so uncertain. As a matter of fact, economic history, even at its most violent, has a much less exciting tempo than military or even political history. Days are rarely important. All of the autumn of 1929 was a terrible time, and all of that year was one of climax. With the invaluable aid of hindsight it is possible to see that for many previous months the stage was being set for the final disaster.

Galbraith then set about clearing up the issue. The Great Crash was not a single day but a sequence of events that started many months in advance. Galbraith’s prepared statement offered a clear timeline that culminated in what everyone knows as the 1929 Crash. Continue Reading…

Stupid Money

by Jon

…at particular times a great many stupid people have a great deal of stupid money.

Walter Bagehot has come up with some wonderful lines in his day. That line, in particular, perfectly describes a recurring theme in financial history.

Bagehot wrote that line in 1856 about an event that happened in 1720 — The South Sea Bubble. He was describing human nature’s role in turning smart money into stupid money during manias and panics: Continue Reading…

The 1987 Market Crash

by Jon

Before October 19, 1987, few people believed a one-day decline of 10% was possible. The last time it happened was almost six decades earlier on October 29, 1929, Black Tuesday.

Before Black Tuesday, the worst day was the day before — October 28, 1929. Those two days were the only days of double-digit losses for the Dow prior to 1987.

Of course, those stats perfectly describe the limits of market history — it can hinder our view of what’s possible. Anyone who woke up the morning of October 19th and believed a 10% loss was impossible was shocked by the closing bell.

The SEC’s report on that day offers some insight into the fear: Continue Reading…

Seth Klarman: When Enron Looked Like A Steal

by Jon

Twenty years ago this month, the Enron scandal came to light. It was one of the biggest falls from grace for a Wall Street darling in recent history. It was the largest bankruptcy at the time (2001). That is, until a year later when Worldcom filed and more recently with the financial crisis.

The fraud at Enron destroyed the accounting firm Arthur Andersen. It led to new regulations with Sarbanes-Oxley Act. A book, The Smartest Guys in the Room, was written about it (then made into a movie with the same name). But worst of all, the shareholders were wiped out.

If there is one lesson to take away from Enron’s collapse, it is the risk of having a huge chunk of your net worth tied to the existence of one company. A lot of decent shareholders, including employees, were completely oblivious to the fraud going on at the top. They were all wiped out!

Unfortunately, while bankruptcy often has a nasty ending for stockholders, it’s not the end of the story. Another world of investing exists around failing companies.

A bankrupt company still has assets, which are sold off to pay its creditors. Secured creditors, like bondholders, are paid first. Unsecured creditors, like banks, employees, and suppliers are next, if there’s any money left. The stockholders are always last and typically get nothing. Continue Reading…

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