The Corner for Feb. 28, 2014

On August 3, 2000 this column stated, “Twenty years ago the majority of the American public did not feel a compulsion to invest in the stock market. After nearly 18 years of a generally upbeat market, with the past five years being rip-roaring, Americans have once again ‘fallen in love with the stock market.’ However, Andrew Smithers and Stephen Wright, in their book entitled “Valuing Wall Street,” persuasively argue that stock prices in America are severely over-valued and are set for a serious fall, not unlike those of the past. While Smithers and Wright strongly believe that for most of the time the stock market is the right place to be, they, in a hard-nosed and historical way, understand that there are a few times when the market is not the place to be.”

“Valuing Wall Street” is one of those timeless books, like Edwin Lefevre’s “Reminiscences of a Stock Operator,” that should be read and reread. The book raised the hair on the backs of most stockbrokers’ and advisers’ necks who read it when it was written. You could almost hear the lot of them poking fun at Smithers and Wright as they did with other serious bears of the time such as Wall Street and business chieftains Barton Biggs and Lawerance Tisch, respectively. Both are now deceased. “Valuing Wall Street” is one of those writings that takes apart one, by one, most of the gobbledygook that investors internalized during the heyday of the dot-com bubble. This, in fact, may be the best part of this book. Few, if any, writers take on the traditional claptrap that becomes the mantra of the majority of “investment experts,” from high powered mutual fund managers to your local investment boards. Not so with these folks.

Smithers is not a Wall Street lightweight. He is the founder of Smithers & Co., Ltd. “which provides economics-based asset allocation advice to 100 of the worlds largest fund management companies.” He is also a widely recognized columnist.

“Valuing Wall Street” lays out why it is important to invest with the idea to eventually sell. While all great bull markets usually top out with most of the public believing in “buying and holding” and they are all in the same boat stating that they are “long-term investors,” the facts are that there are important times to harvest your gains by learning how to sell your holdings at crucial times. Even more importantly “Valuing Wall Street” professes that if you have the courage to sell your holdings; cash will be king when, and not if, the market downturn arrives.

Smithers and Wright argue that through the combination of unbridled investor optimism, based on wild times and assumptions stemming from Wall Street analysts, investors often come to expect “unsustainable returns.” This creates (as it did during the dot-com bubble) an investment environment in which many Americans pile their money into stocks, drawing down their cash savings and taking on very high debt loads. This all adds to the dynamics that powers the market and making it appear as if all is right. In addition, Smithers and Wright use a well known valuation method, created by Nobel laureate James Tobin, to demonstrate that an “asset bubble” was allowed to develop through the good graces of the then Federal Reserve Chairman, Alan Greenspan.

Finally, the book was absolutely timely. Unlike the doomsayers books that are typically written during non-excessive periods on Wall Street, this book came out during a time when the word “mania” was becoming an everyday word in the Wall Street lexicon. Interestingly enough, the NASDAQ stock market, which was source of stocks that led the dot-com bull run, topped out slightly above 5132 about the time the book came out. It has now been fourteen years and the NASDAQ still has never reached that level.

For those who might think that with all the high speed networks, information and technology available we must have an edge on past investors; all one has to do is consult the history books on pioneer technical analyst William Hamilton who operated back in the early 20th century. Or better yet, read the relatively new and very popular book on the recent financial mess by Reinhart & Rogoff entitled “This Time is Different.”

Finally, “Valuing Wall Street” was not a doomsayer book at all, it was simply a well thought out expos on how important the concept of buying and selling is. In short, it is a road map on how to avoid the pitfalls of overstaying a giant speculative bull market and to have the funds available to buy at a time when stock prices are on the cheap. Sounds pretty dumb, doesn’t it – buying low and selling high.

Quote of the Week: “The lessons of history are therefore clear and harsh. Bubbles should be avoided. The results have invariably been bad in the past.”__Smithers & Wright, Valuing Wall Street

Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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