Heroes to zeroes and vice versa

Borrowed the following from the book, “The Money Game” by Adam Smith:

Ben Graham, the classics scholar who was the dean of security analysis, started his text with a quote from Horace: “Many shall come to honour that now are fallen, and many shall fall that are now in honour.”

The markets are more powerful that each individual player. There are reputations made and shattered especially at the time of turn of events. The market cycles have the reputation of making and breaking the reputations (and fortunes) of many.

Read the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” to know about such stories ranging from Sir John Templeton, Warren Buffett, Benjamin Graham, Prof. Irving Fisher, Mary Meeker, Alan Greenspan, Harshad Mehta, Ketan Parekh, Sir Isaac Newton, Julian Robertson, Prof. Irving Fisher ….

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Valuations in the new era

In 1934, the great investment theorist Benjamin Graham wrote of the pre-1929 stock bubble:

Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price. Hence, all upper limits disappeared, not only upon the price at which a stock could sell, but even upon the price at which it would deserve to sell. This fantastic reasoning actually led to the purchase for investment at $100 per share of common stocks earning $2.50 per share. The identical reasoning would support the purchase of these same shares at $200, at $1,000, or at any conceivable price.

(Source: Four Pillars of Investing – Lessons for building a winning portfolio by William Bernstein)

William Bernstein writes further in “Four Pillars of Investing”, “Even the most casual investor will see the parallels of Graham’s world with the recent tech/Internet bubble. Graham’s $100 stock sold at 40 times its $2.50 earnings. At the height of the 2000 bubble, most of the big-name tech favorites, like Cisco, EMC and Yahoo! Sold at much more than 100 times earnings. And, of course, almost all of the dot-coms went bankrupt without ever having had a cent of earnings.

To see a similar pattern across time periods, across geographies and across asset categories, read the chapter on “Valuation” in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”. There were cases of such ridiculous valuations in real estate stocks in India in 2007-08, real estate prices in Japan in the 1980s, tulip bulbs in Amsterdam, technology companies in the 1999-2000 – such events have occurred at an amazingly high frequency.

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Even Big Ben wasn’t infallible

Going back to 1929, it is important to look at what happened to one particular gentleman and what impact it had on the whole society. Benjamin Graham was a young and upcoming investment manager and a professor. He had built good reputation as a portfolio manager and was managing a sizeable sum of clients’ money.

While he seemed to have seen the danger, he continued with his investment portfolio. At one point of time in 1929, while discussing with the legendary Bernard Baruch, young Ben Graham mentioned, “… someday, the reverse should happen.When he reflected on events some years later, Ben found it strange that though he sensed danger, he did not completely sell out of the market. (Ref: “Benjamin Graham on Value Investing – Lessons from the Dean of Wall Street” by Janet Lowe; Published by Penguin Books).

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