It’s the rebound that kills
Posted on August 29, 2007 by Richard Beddard
Filed Under Markets |
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%…
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.
It’s worth considering that, as in the case of Rothschilds, it’s often the rebound that kills:
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.
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:
“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.”
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.
Comments
9 Responses to “It’s the rebound that kills”
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Richard.
As always…interesting reading.
JH
I think it’s a mistake to focus on short term market movements. Whilst things have been very sticky over the last few months a number of my holdings have announced good profit increases and progress. Unless the fundamentals have changed these companies will yield long term share price growth as eventually the share price catches up with reality. In the meantime they are available at bargain prices!
Hi John, Jim
Thanks for your comments
That pretty much sums up my view Jim but you have to keep reminding yourself when all about you are losing their heads!
There is one thing gnawing away at me though. When I read about 1974, which I didn’t experience as an investor (it was so much worse than 2001-2003, which I did experience), it’s possible to envision a time when the fundamentals in most stocks deteriorate rather than a group of sectors (e.g. technology, media and telecoms in 2000). In the UK in 1974 it took economic crisis coupled with anti-capitalist policy to bring about those circumstances. Now it would take global recession, and perhaps a return to mercantilist policies on the part of governments. It doesn’t seem likely, but its not inconceivable. If I saw governments sticking up trade barriers in response to global economic meltdown would I start buying gold and heading for the hills? Can’t say!!!
Hi Richard
Raasay - what a view of the Cuillins - if the sun shines! I was in Kyleakin; sorry to miss you.
Hi Donald
Since you mention it, here’s a picture looking East to Skye. The Cuillins are just out of shot I think but we climbed Dun Caan (highest point on Raasay) on a very special day. The sea was smothered in rolling fog and looking over it, we felt like we were standing on top of the world. The sun certainly did shine. Thanks for reminding me
It does not surprise me to find those who benefit from the markets saying there is still life left in the Bull.
The credit crunch is going to have wide repercussions, as will the grip of interest rates on consumer spending. There is no way the fundamentals look better for 2008.
If there is an autumn rally, it is the calm before the storm.
Hi unslicker. Thanks for your comment. We should be sceptical, you’re right. But Ken Fisher gives more than opinions, that’s why I’m so interested in what he has to say. He gives reasons, often ones that can be measured and tested, and so we learn something - even if he’s wrong! I’m just putting a blog together on Monday that expands on that. I found the evidence of insiders buying interesting because you know what they say - actions speak louder, and perhaps more truthfully, than words
The final comment “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” is also backed up by the excellent Mark Hulbert on marketwatch.com about US ‘insider’ buying during the recent sell off as a bullish sign for markets. This is the link:
http://www.marketwatch.com/news/story/corporate-insiders-bullish/story.aspx?guid=%7BCCB0EEAB%2DF8E6%2D4B6D%2DB8F8%2D3C5CE4B3C57A%7D
AR (Please DO NOT use my email address, or pass it on - thanks)
Thanks Andy. That is a good article. Particularly the observation that selling is normal because share options form such a large part of remuneration these days. It’s the acceleration of selling that is bearish and: “In fact, the last time that the insider sell-to-buy ratio for listed companies was as low as it was in mid August occurred in October 2002, almost precisely when this bull market started.”
Don’t worry, we don’t publish or pass-on emails of people who comment on the blog. I do occasionally contact people directly to talk finance - that’s all!