“The structure is not genius; even for the exclusive hedge funds, genius turned out to have been a rising market.” – The Go-Go Years (pp. 348)
One of my goals with some additional time is to embark on “learning projects” across a few domains. Capital market history is one of those domains. That is where this book fits in. Expect more notes along similar lines.
Overall, I personally found the writing style of the author to be difficult to follow, in spite of my interest in the content. The story covers the period including the evolution of mutual funds and the stock exchanges, the rise in prominence of conglomerates, and the “Nifty Fifty” growth stocks.
It is possible that I am over-fitting, but history does seem to rhyme.
Three take-aways from the book:
- The Cause of Investor Amnesia
“Indeed, by 1969 half of Wall Street’s salesmen and analysts would be persons who had come into the business since 1962, and consequently had never seen a bad market break.” (pp. 113)
This sounds familiar to a theme I hear today. Or maybe a theme I believe in today. Many investors today, if they came of age post-Great Financial Crisis (2007 – 2008) have known mostly good times with few meaningful setbacks. That has been a long period of time; close to 15 years, where any setbacks have quickly been reversed.
- Wall Street Crisis
“At the start of December, Wall Street hung by its fingertips. Roughly one hundred Stock Exchange firms had vanished over the past two years through merger or liquidation. Forty thousand customer accounts were involved in the thirteen cases of liquidation, and most of them were still tied up, the customers unable to get their cash or securities.” (pp. 341)
“Legislation to create a federal Securities Investor Protection Corporation, on the model of the Federal Deposit Insurance Corporation to protect bank depositors, was before Congress; it had no chance of passage until the present mess in Wall Street was cleared up, and thus, while it might help in future crises, it was powerless against this one.” (pp. 341)
The details on the crisis within Wall Street itself was all new to me. See take-away #1. And, so were the origins of SIPC.
There were brokerage failures during the GFC. The causes of those were mostly characterized based on bad decisions and investments. Whereas, the brokerage failures during the period covered in the book appear to be based more on a bad business model that was not keeping up with the times.
Regardless, the thought of investors losing their securities or not having access to them for an extended period was a “new” risk to consider (https://www.investors.com/etfs-and-funds/sectors/stock-market-schwab-implodes-money-safe/).
- Fun With Accounting
“Where a series of corporate mergers is concerned, the current earnings per share of the surviving company lose much of the yardstick quality that the novice investor so trustingly assumes. The simple mathematical fact is that any time a company with a high earnings multiple buys one with a lower multiple, a kind of magic comes into play. Earnings per share of the new, merged company in the first year of its life come out higher than those of the acquiring company in the previous year, even those neither company does any more business than before. There is an apparent growth in earnings that is entirely an optical illusion.” (pp. 157)
“Moreover, under accounting procedures of the late nineteen sixties, a merger could generally be recorded in either of two ways – as a purchase of one company by another, or as a simple pooling of the combined resources. In many cases, the current earnings of the combined company came out quite differently under the two methods, and it was understandable that the company’s accountants were inclined to choose arbitrarily the method that gave the more cheerful result.” (pp. 157)
“The conglomerate game tended to become a form of pyramiding, comparable to the public-utility holding company game that flourished in 1928, crashed in 1929, and was belatedly outlawed in the dark hangover days of 1935. The accountant evaluating the results of a conglomerate merger would apply his creative resources by writing an earnings figure that looked good to investors, they, reacting to the artistry, would buy the company’s stock, thereby forcing its market price up to a high multiple again; the company would then make a new merger, write new higher earnings, and so on. The conglomerate need neither toil nor spin – only keep buying companies and writing up earnings. It was magic, until the pyramid became top-heavy and fell.” (pp. 158)
This is why my favorite financial statement is the Cash Flow Statement; a topic for another post. At least investors during the period were focused on earnings. That seems to be a novel idea for current investors.
And a bonus take-away:
“For example, those familiar old forces so long so helpful to business management in getting the most possible work out of low-level employees – company loyalty and personal competitiveness – scarcely seemed to operate on the new breed of back-office employees at all.” (pp. 196)
Apparently they had millennials back in the 1960s too.
A few other recent book notes: