Microscopes, Telescopes and Satellites (2)

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As opposed to the short term trader, an individual whose time line is longer may be able to avoid some of the randomness of daily price movements.  The long term investor could be thought of as looking through a telescope at a more distant time horizon.  The question then becomes what he or she is looking at.  A person who invests based on fundamental analysis can only look at a company's financial statistics from the past and the present in making an investment decision.  However, a long term investor/speculator investing not on financial statistics but on Wall Street's "story" of a company and the expected success of its product or service may not be much safer than one who is trading on random action.

Adam Smith, in The Money Game, recounted a couple of sad, but true, such stock "stories":

In 1961 the whole world was going to go bowling, but in 1962 Brunswick managed to make it from 74 to 8 with scarcely a skid mark.  In 1965 the whole world was going to sit and watch color television, but shortly thereafter Admiral, Motorola, Zenith and Magnavox collapsed like a souffle on which the oven door has been untimely slammed.  It will happen again.*

One of the more famous eras of "story" investing happened in the 1960s and 1970s and was based on the idea of never ending growth.  Wall Street professionals and individual investors became mesmerized by a group of large capitalization stocks on the New York Stock Exchange whose earnings and, therefore, stock prices were expected to rise for the "foreseeable future."  The group included such companies as Avon, Coca-Cola, GE, Johnson & Johnson, Philip Morris, Sears, Roebuck and Walt Disney.  These stocks were known as the "nifty fifty" and were seen as "one-decision" stocks.  The idea was to buy these stocks and hold them forever since they could do nothing but increase in price.  Just like the tulip bulbs in 17th century Holland, that is not how it played out.  The bear market of 1973-1974 brought all of these stocks trading with price/earnings ratios of 40 and more back down to earth with substantial losses for those who continued to hold them throughout the fall.

Bradford K. Thurlow described this in his book, Rediscovering the Wheel: Contrary Thinking & Investment Strategy, as follows:

The 'one decision' investing philosophy of the early 1970s spread through the industry like wildfire, carrying all favored issues to fantastic heights, virtually without intervening reactions, until the fashion began to abate and the same issues began falling as excessively as they had risen earlier.  The individual wishing to follow this game had powerful assurances of group support in the early and middle stages and could have profited handsomely had he been able to detect when that support was beginning to crumble -- a not too difficult task, in retrospect, if he avoided becoming emotionally involved in the theory.  Contrarily, however, had he failed to become so involved earlier on, it would have been difficult for him to justify buying these stocks in the first place.  Most of those who were early believers merely rode them up and back down again without understanding the nature of the elemental conflict that was taking place.**

In his book, Irrational Exuberance, Professor Robert J. Shiller pointed out that anyone who had purchased members of the "Nifty Fifty" in the early 1970s would have had to wait until the 1990s for the stocks to return to their former prices.  Now that would certainly qualify such an individual as a long term investor, but it is hard to believe anyone kept the faith (and the stock) for 20+ years.

In the next blog we will look at the view from satellites in the market place. 

* Excerpt from The Money Game by Adam Smith, copyright © 1967, 1968 by Adam Smith is used by permission of Random House, Inc.

**  Excerpt from Rediscovering the Wheel: Contrary Thinking & Investment Strategy, Bradbury K. Thurlow, ©1981, published by Fraser Publishing Company, is used by permission of the current copyright holder.

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