The Mind of Wall Street
(PublicAffairs, Perseus Book Group, New York, NY, paperback, 2002)
This book is somewhat autobiographical. Leon Levy was one of the founders of Oppenheimer. Because the book starts, in time, where it does, it begins where Lefevre's ends. The two books together make an interesting historical account of the markets.
In this book, Levy makes a strong case for markets being more psychological than being pureIy rational. It is well written and easy to read. Since Levy is his own best explainer I quote below from passages throughout the book:
Talking about the 1990s: ..."As the decade progressed, and stock prices soared to unprecedented levels, it became clear to me that the U.S. stock exchanges began exhibiting more and more telltale symptoms of a market in the grip of speculative mania. At one point, the market value of Priceline.com, which encouraged comsumers to 'name your own price for airline tickets,' exceeded that of the major airlines combined. Buy 2001, it would be worth one one-hundredth of its peak valuation."
"Prices repond to the news of the day, to technical factors pertaining to particular stocks; they respond to political events here and abroad; they respond to market players trying to guess how people will react to events; they respond to technical change and shifts in trade policies; they respond to long-term phenonmena, such as the aging of the baby boomers and trends in capital spending.
"To ignore the psychological component of the flux of the markets is to miss seeing the elephant in the room."
"...perhaps nothing is more preposterous than the explanations commentators give for the price movements on Wall Street on any given day-"
Talking about his father, Jerome Levy: ... "Dad taught me to look for patterns in trading. He told me that in down markets, buyers tend to push stocks up in the morning, while those looking to sell hold out and then dump at the end of the day, hoping to get a higher price - a piece of wisdom subsequently confirmed by a number of technical analysts."
"As good times roll along, people lose sight of risk (and often justify the change with talk of a 'new economy'). Eventually these excesses lead to a point where people can't meet their obligations, and the bad times begin. From his vantage point in the hereafter, Dad would be shocked at the lack of social progress."
"All we can ever do is look at the past to predict the future, but life is dynamic and constantly changing, so the assumptions governing predictions are bound to be wrong. Instead, Dad tried to look at the situation structurally. Given new circumstances, where were profits likely to flow?"
"Once companies have access to markets, they immediately start pouring vast amounts of money into lobbying efforts to convince politicians to erect new barriers to keep others out."
"...in times of universal optimism, most potential buyers of stock are already in the market, whereas in times of deep pessimism, investors are out of stocks, or are trying to get out. This doesn't mean that the professionals are always wrong, but if they are right for a protracted period, they have convinced their followers to invest or sell, and thus must be wrong in the end."
"I could identify a psychological mechanism that brings about a market turn. For example, declining stock prices can ultimately cause people to panic and sell. But the moment they join the panic and sell stock, they also relieve the cause of their fears and become potential buyers. The act of selling removes the anxiety, restores equanimity, and gives the the cash to buy."
"Fear of the unknown blinded people to opportunities; unpleasant memories of past markets caused the public to see essentially conservative strategies as speculative and somehow unsavory."
"Never borrow short term against long-term debt, and beware of the stocks of companies that do."
Talking about the crash of 2001: ..."As stock prices deflated, so did many of the numbers that had propped up their prices. By August 2002, losses by Nasdaq companies had essentially wiped out all profits for the five previous years, according to an analysis by the Wall Street Journal."
"William Lewis of McKinsey and Company has pointed out that productivity statistics mistook a spending spree for increased efficiency. With seemingly insatiable consumers willing to buy higher-priced goods, those selling the goods looked more efficient because their revenues were rising without any increase in their workforce."
"Long after the valuations of the new-economy stocks collapsed, major companies continued to take significant writedowns on their assets - $40 billion for JDS Uniphase and $54 billion for AOL Time Warner - to adjust their balance sheets for the vanished wealth of their investments."
"Risks don't disappear from markets of businesses; they are merely transferred or sold. In the end, Amazon was nothing more than a mail-order house."
"I have a theory that scoundrels are generally more charming thatn the rest of us. After all, they have to be able to purvey unattractive wares in the most attractive manner."
Talking about Levy's friend Andrew Smithers: ..."He treats the rapid rise of debt in the financial sector, which has risen from 32 percent of private debt to 36 percent in just five years, as an indicator of how much corporate debt has been swept under the rug."
"In fact, Enron was still on target to meet its pro forma earnings as late as November 2001, even as the company's stock price was collapsing and it had entered a free fall toward bankruptcy. A Floyd Norris of The New York Times noted, 'It managed to go broke without ever reporting a bad quarter.'"
"Stock prices remain noticeably higher than they would be if the bubble of the late 1990s had never happened. In turn, this means that to some degree, the bubble continues."
"I believe we are in for a protracted period when bonds will be favored over stocks."
"There is no system to beat the market. The future is never a simple replay of the past."
"I believe we are in the early stages of a protracted recession and the value of the dollar will fall."
"As American's financial situation collides with reality, the savings rate will rise and profits will fall. Those who think we are in a recovery will be disappointed."
"Consumers may be irrationally exuberant, but it's a safe bet they won't be perpetually irrationally exuberant. Indeed, they have been spending so much that there is little pent up demand that might spur a surge in purchases."
"Success in finance remains an art rather than a science, if only because of the vagaries of human nature. Therein lies the good news: If investing is an art, it can be mastered."
Leon Levy is a comfortable as an old shoe. He in insightful about people and their behaviors in the market place. This book is a great read.
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