Author: A.T.

Oh, please. The only thing more preposterous than this — you have doubtless seen some discussion of a book by this name (by bright people! how could they?!) — is Donald Trump for President. I mean, please.

Sure, the Dow will get to 36,000 — some day. If it rose 5% a year from today’s 10,000, it would get there in 26 years. (That’s how long it took the Dow to get from 1,000 to 3,600.) But Dow 36,000 anytime soon? I sure hope not! As our friends the Japanese would attest, a financial “bubble” is fun only for those lucky enough to get out at the top — and then move to a country not gripped by the hangover.

Is it possible, one wonders, for the Dow to climb so slowly? At just 5% a year?

I wouldn’t be amazed to see something like that happen, albeit with large ups and downs along the way. Remember, for starters, that that’s 5% on top of dividends. (Quaintly, some of the Dow stocks actually do still pay dividends.) So the total return if the Dow were climbing 5% a year might be more like 7%.

For many decades, the Dow provided a total return of more like 9% or even 10%. So even 7% would be pretty lame. But remember, also, the concept of “regression to the mean.” The fact that the Dow — up from 777 in 1982 to 10,000 today — has grown at 16% a year, compounded, may mean this will go on forever. Except a lot of that was achieved as interest rates fell. Long-term Treasuries that yielded close to 15% in 1982 now yield more like 6%. How much lower can yields go? Not below 0% I think — and maybe not even that low in a thriving economy.

So, far from above-normal growth continuing, because we’ve had it so long, we might actually be in for a stretch of below-normal growth, as things even out, regressing to the mean. (That’s mean as in average, not mean as in nasty, though we could have a few nasty moments along the way.)

The Dow first touched 1,000 in 1966 — a heady time for stocks — and first touched 3,600 about 26 years later, in 1993. Then it tripled these past 6 years

(I know: if George Bush and Bob Dole had been in the White House it would have quintupled and we would have added 40 million new jobs instead of just 20 million — and not only would no American soldiers have died in Kosovo, seven would have come back from the dead. But still, it’s been a pretty good run for Clinton/Gore.)

Technology may be lofting the world onto a steeper prosperity curve. And decades’ more experience at the art of global economic management may have improved central banker skills. The traditional 9% (including dividends) may be old news, with a higher number perhaps expected going forward. (Or perhaps not.) But the 16% and 20% annual returns we’ve been seeing . . . well, these are not sustainable.

Dow 36,000 is the kind of book title that lulls sensible people into doing foolish things.

Voila! Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay.

The truth is, having been written in 1841, and in England, it does not read like John Kenneth Galbraith. Apart from the odd spellings, there are loads of references I do not get — any more than a reader would have heard of Jerry Springer 160 years from now. Or Pokemon.

But the preface is quite short, and there is no harm in skipping straight through to the tulips.

Indeed, that’s what I’d suggest. Take a minute or two to read the preface, to meet Mackay, then jump to the tulips. Once you’re hooked, read the other two — the Mississippi Scheme and the South-Sea Bubble.

Missing from all this (97 pages in book form) are the final 627 pages. You would think they would be wonderful — how could tales of alchemists and necromancers not be wonderful? — but really they are more like lists of alchemists and necromancers. Trust me. Especially as regards money and economics, the sections I’ve posted are the ones you want to read. (For the complete book, also free, see Project Gutenberg.)

Yesterday I lauded a book called Extraordinary Popular Delusions and the Madness of Crowds. Tomorrow I will post the highlights for you to read at your leisure. Today let’s talk about tulips. Are tech stocks today’s tulip bulbs?

No — for the simple reason that tulips serve no enriching economic purpose, whereas an invention like the wheel or electricity or the Internet does. Tulips never had any chance to improve the world economy. The Internet is improving it profoundly.

So in that sense, the craze for Internet-related stocks is terrific. It’s great — for consumers — that capital is so readily available to build this amazing new world. Whether it will be great for most investors taking the plunge at these levels I tend to doubt. Did the inventor of the wheel get so terribly rich? Did investors in the early automobile companies — or the later ones, for that matter — get so terribly rich?

Over the long run, it’s likely that only a few of the hot companies that have been bid into the billions will prove to have been bargains. (A larger group will prove to have been great buys at their first-round venture valuations, and at their insider IPO prices — but even that group will be small compared with the group that will have fallen by the wayside.)

What’s worrisome about today’s mania, to the extent it is a mania, is how not long-run much of the investing is.

Reader Aron Roberts sent me an excerpt of a speech by Vanguard’s John Brennan last Friday, “in which,” Aron writes, “he cited some amazing figures that would not appear to be all that far removed from the [tulip] frenzy.”

To wit:

“Significant numbers of individual investors have turned from long-term investing to trading. Their horizons have shortened from decades to days. Consider that the average share of Amazon.com is held for seven trading days before being sold to someone else. The average holding period for Yahoo! is eight days. For Priceline.com, it is only 72 hours. And these ridiculously short holding periods are not found only in Internet stocks. The average share of Dell Computer changes hands every three-and-one-half months. Shareholders of Microsoft hang on to their issues for about seven months on average — practically an eon in today’s upside-down world. . . . The magazine from which I drew these statistics questioned whether blue chips were becoming poker chips. Last year, 76% of the shares of the average company listed on the New York Stock Exchange turned over. The figure had risen to 82% through May of this year.” — John Brennan

To a certain extent, the faster turnover may be explained by the lower barriers to turnover. In the old days, it cost a fortune to trade 300 shares of stock, both in commissions and taxes. Today, the commissions can be tiny, and the gains are often tax-sheltered within retirement plans. Today, too, it’s just so much easier. The impulse strikes us and — click — we’re in. Click, we’re out.

Crank, the one-armed bandit spins. Crank, it spins again.

When stock in a company with $66 million in earnings is selling at 681 times those earnings (ya-HOO!!!), a lot has to go right. And this is a stock that’s down 25% from its peak. Think of all the high-flying companies that have no earnings to multiply by. Many of them never will.

So is it tulips? No. We’re building a great new, convenient, efficient global economy. But is it a bit tulip-like? Well, sure.

Tomorrow: The book — and Dow 36,000?

I was doing a term paper on chain letters (of all things) at Harvard Business School. I was barely old enough to shave.

My faculty adviser — right off the top of his head — suggested I seek out a volume called Popular Delusions and the Madness of Krauts — published, he said, in 1841. My God, I was impressed. What esoterica! (I was also astonished by the title and surprised to learn that Germans, even back in 1841, were called Krauts — or that anyone would have called them that on a book jacket.)

I subsequently learned that any business professor worth his salt would have had this book at tongue’s tip; and that it had to do with the madness of crowds. But for each of us there has to be that first time we learn of this book, that first reading of it. Perhaps this is yours.

If so [and here I am simply lifting the Foreword to one of the paperback editions that I was subsequently invited to write], you will read of alchemists and crusaders, of witches and haunted houses, of stock speculations and fortune-tellers and, to my mind most wonderfully of all, of tulips. Tulips, in the fourth decade of the seventeenth century in Holland, became the object of such insane and unreasoning desire that a single bulb — about the size and shape of an onion — could fetch a small fortune on any of the several exchanges that had sprung up to trade them. [Not entirely unlike the mania for certain children’s playthings called “Beanie Babies” we saw only last year.] Not to be missed is Mackay’s account of the unfortunate Dutch sailor who, having been sent down to a rich man’s kitchen for breakfast, and having a particular taste for onions, actually consumed one of the priceless bulbs in error.

As with any true classic, once it is read it is hard to imagine not having known of it — and there is the compulsion to recommend it to others. Thus did financier Bernard Baruch, who claimed his study of this book saved him millions, recommend Extraordinary Popular Delusions and the Madness of Crowds in his charming foreword of October 1932.

“‘Have you ever seen,'” Baruch quoted an unnamed contemporary, “‘in some wood, on a sunny quiet day, a cloud of flying midges — thousands of them — hovering, apparently motionless, in a sunbeam? …Yes? …Well, did you ever see the whole flight — each mite apparently preserving its distance from all others — suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall — did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective.'”

Suddenly, as I write this [I was writing it 20 years ago, in 1979], everyone in New York and California, with the rest of the country perhaps to follow, is on roller skates. I certainly would not call this a form of madness, having just purchased two pairs myself — nor, at least as of this writing, a “great human mass movement.” But all of a sudden there they all are — on roller skates. [“Now it’s roller blades,” I noted in a 1992 update to my foreword, “but I have somehow managed to contain myself.]

Baruch quotes Schiller: “‘Anyone taken as an individual is tolerably sensible and reasonable — as a member of a crowd, he at once becomes a blockhead.'” There are lynch mobs and there are crusades; there are runs on banks and there are fires where, if only people hadn’t panicked, they would all have escaped with their lives. There was “the hustle,” not so long ago, where large groups of young people learned to dance in lemminglike unison. (I have never actually seen a lemming, but I suspect that when I do, I will see more than one.) And there was the mass suicide at Jonestown.

The month Baruch wrote his foreword, perhaps not coincidentally, marked the absolute bottom of the stock market crash that had begun three years earlier, in 1929. Wild speculation had driven the Dow Jones Industrial Average to 381 in October of 1929 on the wings of what had been a panic of greed. Three years later it had fallen not to 300 or 250 or 200 or 150 or even 75 but to 41. Unreasoning greed had turned inside out. It had become unreasoning fear.

“I have always thought,” Baruch reflected on this sorry state of affairs, “that if… even in the very presence of dizzily spiralling [stock] prices, we had all continuously repeated, ‘two and two still make four,’ much of the evil might have been averted. Similarly, even in the general moment of gloom in which this foreword is written, when many begin to wonder if declines will never halt, the appropriate abracadabra may be: ‘They always did.'”

In the late 1960s, stock prices again began to spiral dizzily. Market mania. Synergy was the new magic word, and what it meant, in essence, as various corporate presidents and stock promoters explained over and over, was that two and two could, under astute management, equal five. It was alchemy of a sort and enough to drive at least one stock, in two years, from $6 a share to $140. The talk of the town. Not much later it sold for $1.

By late 1974, stocks generally had fallen, slumped, slid, and otherwise eroded in value to depression levels. The crowd had not just left the party — it was stoning the host. Yet had you had the courage, in December of 1974, to buck the crowd — which in a way is what Extraordinary Delusions and the Madness of Crowds is all about, and why so many investment gurus count it a classic — gains of 500 and 1,000 percent over the ensuing three to four years would have been common in your portfolio. [The same was true in 1982, when the Dow Jones average touched 777, and will be true one day again.]

Not that you must be a stock-trader to benefit from the perspective this book provides. Should the government balance its budget? Should the Fed loosen or tighten credit? Read in the very first chapter a tale of money printing and speculation in early eighteenth-century France that should give any deficit spender, any easy-money advocate, severe pause. (Read, too, of the hunchback who supposedly profited handily renting out his hump as a writing table, so frenzied had the speculation become.) Mackay describes Frenchmen “ruining themselves with frantic eagerness.” And then in the second chapter the lunacy spreads to sober England, where, Mackay says, “every fool aspired to be a knave.” If you read no more of this book than the first hundred pages — on money mania — it will be worth many times its purchase. [Save your money! I will be posting this for you, free, on this site.]

But back to chain letters. Perhaps awaiting the invention of the photocopier, or at least carbon paper, they do not seem to have been big in Mackay’s time. They are missing from his pages. But, oh, how they would fit.

In 1935, in Denver, nearly a century after Mackay wrote Popular Delusions (and just a short time after, having nothing to fear but fear itself, the nation panicked and mobbed the banks, forcing many to collapse), someone composed a “send-a-dime” chain letter that promised to make participants rich. Just where all this free money was to come from was not explained. It never is. Nonetheless, in Denver alone, postal volume swelled by some 160,000 pieces of mail a day. The craze spread across the country (and across the Atlantic), jumping in many places from a dime to five dollars and more. The Associated Press reported that Springfield, Missouri, had been turned into “a money-mad maelstrom.” To get in on the action, “society women, waitresses, college students, taxi drivers and hundreds of others jammed downtown streets. Women shoved each other roughly in a bargain-counter rush on the numerous chain headquarters [that had been established] in drugstores and corridors, anywhere there was space.” To skirt postal regulations, and save time, the letters were being passed face to face. By the following evening, AP reported, “sad-faced men and women walked around in a daze . . . seeking vainly for someone to buy their chain letters.” Everybody by now had a letter to sell; no one was left to buy.

Chain letters reappear periodically. Just last year one rose to national prominence — only this time at $100 a crack. At the end of twelve days, the letter asserted, if you sold your letter to two people who sold it to four who sold it to eight, and so on, you would surely have more than $100,000. If everyone participated, everyone would be rich. Where was all this free money to come from? And yet against all logic (not to mention several laws), the “Circle of Gold Memorandum,” as it was called, went whipping through the media/arts communities of Los Angeles, New York, Toronto, and points beyond. Virtually everyone lost his money. It had to be so; it will always be so. And if it is not one madness, it will be another.

Once upon a time there was an emperor with no clothes. For the longest time no one noticed. As you will read in this marvelous book, there have been many naked emperors since. There will doubtless be many more.

A.T.
November 1979
New York City

Tomorrow: Are Internet Stocks Today’s Tulips? (Yes and No)

You know what I’m realizing? I speak English, yes, but old English. For example, Friday’s “Goodnight, Irene” title possibly made sense to half of you, who know the song (the song goes: “Well, IiiiiiiiiiiiRENE, good NI-gh-igh-ight, IiiiiiiiiiiiRENE, good night. Good night, Irene, good night, Irene . . .”) — but to the rest of you it must have made no sense at all.

I tested this out. I asked a bright 25-year-old if he knew this song, and he looked at me as blankly as I looked at him when he asked me if I knew what MP3 stands for. (Musical Piracy — cubed.) Yet there are few living 50- to 100-year-olds who would not start humming, drowsily, at the menton of Irene.

So look what’s happening. We are living longer and longer, and everyone on the wired plaNet will soon be speaking English. We’re headed for a time a century or two hence when the question won’t be what language someone speaks — we’ll all speak English — but what decade do you speak?

OK, maybe that’s an exaggeration, but I was at the College of William & Mary, in Williamsburg, Virginia, recently speaking to some of their terrific students and I mentioned something about someone’s having “his 15 minutes” — as in Warhol’s famous phrase — and it occurred to me that the 18-year-old I was talking to might not catch the reference. And she hadn’t! She said she had heard of Warhol — which was something — but had never heard his line about everyone, sooner or later, having 15 minutes of fame.

And then I started asking others in the group — here’s looking at you, kid — had they seen Casablanca? Nope. The Maltese Falcon? Nope. How can you appreciate the word “dingus” without having seen The Maltese Falcon?

I have met bright young people who have never seen Gone with the Wind. Kids to whom 2001 seems quaint. (Gad zooks! 2001 is 62 weeks from now!)

It was reported last week that scientists now believe brain cells may be regenerative. Previously, it was assumed the last brain cell was added the night before the SATs. This is a good thing, because I could really use some more. (“And what about these mice?” the Vice President asked a group at lunch recently, playfully — “Just how smart are these mice going to get?“)

Every day there’s a gigabyte of stuff that passes through my eyeball input device, plus a few megs that come through my aural input, and I have long since run out of brain cells to store all this stuff.

Do you ever feel that way? No? You must be 25. Rent Casablanca, The Maltese Falcon, Dr. Strangelove and Dr. Zhivago, Gone with the Wind and Inherit the Wind — immediately. When you’re done with those, I’ll suggest some more. (Z, The Ruling Class . . . )

But some of you, I know, are here for the money, not the movies, so tomorrow’s column is on the Casablanca of investment classics — a book, not a movie. Not one William & Mary senior in a hundred has heard of it. Yet it may be the most important investment book you’ll ever read.

(How’s that for hype? Well, it’s true! And, in any event, it’s free.)

Oops. Irene has all the flights from Miami canceled unless I make the 7:30am — doesn’t that change my plan to write this column around two in the morning, sleep til ten, and take my time making the 1:23pm flight.

So just a few quick thoughts in lieu of proving Fermat’s theorum (I came up with an elegant proof over dinner, but now no time to lay it out for you) —

(a) The upgrade to AOL 5.0 installed just fine, and there are a couple of nice things about it. I’m a happy camper, although I certainly look forward to 6.0. If you use AOL: take heart.

(b) Biztravel.com sure seems to be one of those (relatively few) that will become a winner. You really can get great airfares, it really does store your preferences, and if you change a nonrefundable e-ticket you purchased through Biztravel.com, you really can get credit for it when you buy another on the same airline. Of course, you can do that in the real world, too. Except that if you get the crazy low $200-type fares I often do, and then give up the $75 for changing, you’re talking about just $125 or so in credit — and that’s not a great reward for standing in line an extra 40 minutes at the airport within 24 hours of when you made the new nonrefundable reservation, or mailing stuff in to Dallas “just so” — this is easier.

(c) Have you finished Fire and Ice? Just click “Books,” above, and then scroll down to “excerpts” next to Fire and Ice. The whole book is there (minus the photos, coming one of these day), free. Pretty soon I plan to post the 20% of Extraordinary Delusions and the Madness of Crowds everyone needs to read to consider him/herself adequately prepared for investing.

Goodnight Irene. (Not to be confused with an earlier, archived set of columns here by that name.)

RE: IDIOTS AT WORK

Craig Sellers: “Don’t try using an unsigned credit card outside the U.S. If you are lucky, they will simply refuse the unsigned card and request that you use another. If you are NOT lucky, or attempt to sign the card in front of the merchant, they will destroy the card. I first experienced this in Cozumel, Mexico where I was lucky enough to have another signed card to use. I have experienced similar situations and seen others cards destroyed in Europe, including London and Paris. These lessons taught me to always sign my credit cards no matter how ridiculous it seems.”

DON’T TRY THIS IN EUROPE

David Cook: “The comment from ‘Steve’ today prompted me to write about signing credit cards. I write ‘See Driver’s License’ on the signature line. If my card is stolen, the thief will most likely take off running when a clerk asks to see his/her driver’s license. Of course, only one in ten clerks look at the back of the card and ask for my driver’s license. But it gives me some comfort knowing that, within 10 tries, my stolen card will possibly be recovered. What do you think?”

I think it’s brilliant. But based on Craig’s comment, above, I might not try it overseas.

Of course, some credit cards now carry your photo — I don’t know why others have been so slow in adopting this — and that should be a good deterrent, too.

FIFTY BUCKS OFF A POWER SAW . . .

Mark Centuori: “You occasionally highlight certain shopping opportunities. I don’t recall reading about a site called Mercata. It’s a general merchandise site that will give you $50 in Mercata cash if you register (which is free). You can use it for merchandise, I think up to 50% of the purchase price, until Nov. 30. Shipping is currently free. They have things called Powerbuys which can lower the regular price even lower. I have no idea how their pricing usually runs, but with the free shipping & $50, it may not matter. I have no affiliation with Mercata.”

IDIOTS AT WORK

(Steve’s title, not mine — but it does seem apt)

Steve: “I was signing the receipt for my credit card purchase when the clerk noticed that I had never signed my name on the back of the credit card. She informed me that she could not complete the transaction unless the card was signed. When I asked why, she explained that merchants needed to be able to compare the signature on the credit card with the signature I entered on the receipt. So I nodded and signed the credit card in front of her. She then carefully compared that signature to the one on the receipt. As luck would have it, they matched. And that is why that person works as a cashier.”

DUMP THAT FUND?

As those of you who have registered at Personal Fund already know, we’ve added a new calculator to www.personalfund.com. It helps you figure out whether it’s worth the costs of dumping one mutual fund for another. (Sure, the new one might do better. But what if you incur taxes selling the old one?) We’ve been getting some nice notices for this site — which I should stress redound mainly to the credit of my partner Stefan Sharkansky, who has done the lion’s share of the work and good thinking. An e-mail I particularly enjoyed came yesterday from a former high-ranking S.E.C. official:

I was [title deleted until we get permission to identify him] at the SEC when we wrote our own web site’s cost calculator. We couldn’t devote the kind of resources to our calculator that you obviously have devoted to yours. By including data, comparisons, and tax effects, you have done a terrific job. We thought about this problem for a long time, and wanted to include such things, but it was beyond the scope of our budget.

Ah, if the United States government only had our resources.

This one’s not about money unless you or a friend or relative happens to need a job to earn some. In that case, it’s about money.

Apparently, George W. Bush recently told a Christian group that, if elected, he would not knowingly hire someone who was openly gay . . . but that, being a compassionate conservative, he wouldn’t fire someone later discovered to be gay. Those mistakenly hired would be grandfathered in.

This is almost breathtakingly bad policy, when you think about it. If gay folks are unfit for responsible posts, why should they be tolerated once discovered? And if they ARE fit for responsible posts, why discriminate against them? Just to narrow the nation’s talent pool?

Could this have been Lincoln’s policy? That Negroes would not be hired . . . but that if some particularly light-skinned Negroes made it through unnoticed, and were later discovered to have some Negro blood, they would be allowed to stay?

Lincoln was a Republican — what would he have made of this policy?

And what exactly would Bush have young gay kids think? That they are unwelcome, second-class citizens unqualified for decent jobs? That they should kill themselves? That they should just work really hard at faking heterosexuality, lying as necessary, committed to lonely, loveless lives? That they should all become priests or dancers?

The power of the presidency is largely the power to lead by example. So is it Bush’s view that IBM and Microsoft and Disney and J.P. Morgan and Chevron and American Airlines and General Mills — and 250 other Fortune 500 companies — are behind the times for explicitly including gays and lesbians in their nondiscrimination policies? That the forward-looking, compassionate, new-vision thing to do is to post notices in all their ads, just above the “Equal Opportunity Employer” logos, saying: “Gays and lesbians need not apply?”

If gay graduates are not fit for government service, are they fit for government-subsidized college educations in the first place?

George W. told USA Today on August 19 that the New Jersey Supreme Court was wrong — that the Boy Scouts should be allowed to exclude gay kids, just as, we now learn, George W. would exclude gay people from his administration. And just as he stood by as the Texas Republican Party barred the gay Republicans from its convention.

How about this — a U.S. Government pamphlet describing just where gay people may and may not apply for work? And in places that do have to employ them (lest millions just go on the dole, which the Republicans surely wouldn’t like), how about separate water fountains?

It would be funny if it were not so profoundly unAmerican.

A lot can happen in 507 years.

Not normally. Normally, nothing happens. Take, for example, the 507 years from 112,520 to 112,003 BC. Nothing happened. So, too, the 507-year period from 21,958 to 21,451 BC. Or even the 507 years from 611 to 1118 AD. Yes, there was great daily drama and suffering and struggle in those years. But in terms of progress . . . imperceptible steps, at best.

No more. Now every ten-year stretch is a pretty big deal, never mind 507 years.

I’m going to take the day off to contemplate just how North America has changed in the brief time since Chris set sail. And it is a brief time. It’s fewer than ten of the stretches of time I’ve been around; and just about five really long lifetimes, laid end to end. (In Detroit, one of the honorees at the dinner I wrote about Friday was 100 years old. And she danced.)

And the pace of our progress is only accelerating.

There will be no column today.