Bull!: A History of the Boom and Bust, 1982–2004

by Maggie Mahar

Mark Hulbert,

Hulbert Financial Digest

Dow Theory

buy-and-hold strategy.

The New York...

(See, for example, “The Dow Theory Still Lives,” Forbes, ...

In an interview with the author, Hulbert updated his report on Russell’s progress: “A reader who followed Russell’s ‘buy’ and ‘sell’ signals from June 1980 to December 31, 2001, would have earned 11.9 percent a year. We measure Russell’s returns by keeping his subscriber in an index fund throughout those periods when Russell’s theory signals buy or hold, then putting him into T bills when Russell’s Dow Theory ...

“Russell’s market timing lagged behind a buy-and-hold system over 18 years of those 21 years largely because, in 16 of those years, a bull market insured that a buy-and-hold philosophy would trump any other strategy,” Hulbert explained.

“But at the time, no one could be certain how long the bull market would continue. Making one big bet that this would prove to be the longest-running bull market in U.S. history was 42 percent riskier than Russell’s strategy of trying to buy when the market was low, and sell when it was high. This is why,”

Hulbert explained, “after adjusting for the risk involved in betting on the market’s long-term direction, Russell’s less risky advice actually beat a buy-an...

Maggie Mahar, “The Case of the Vanishing Investor,” Barron’s, 10 October 1988.

While many investors would believe that the bull market did not reach its climax until the spring of 2000, the summer of ’98 marked a major turning point. Both the S&P 500 and the Dow continued to advance following the 1998 meltdown, but only a small group of stocks were carrying the market forward. When they cracked, the indices collapsed. There is an argument to be made that the summer of 1998 was not only a turning point but an optimal time for an investor to cut his losses by selling stocks and buying bonds. See Chapter 16 (“Fully Deluded Earnings”).

John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Whittle Books, in association with Penguin Books, 1990),

Financial Euphoria,

25. James Grant, The Trouble with Prosperity, 250; James Grant, “The Downside of an Upturn,” The New York Times, 9 October 1996.

26. James Grant, The Trouble with Prosperity, xi, 246.

The Great 401(k) Hoax: What You Need to Know to Protect Your Family and Your Future (New York: Perseus, 2002).

“Ending Suit, Merrill Lynch to pay California County $400 million,” The New York Times, 3 June 1998, A1.

“The Master of Orange County,” The New York Times, 22 July 1998, 1.

Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (New York: Times Business, 1999),

Walter B. Wriston, The Twilight of Sovereignty: How the Information Revolution Is Transforming Our World

170; Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar, St...

Thomas Frank’s excellent discussion of the democratization of the market in One Market Under God (New York: Dou...

(“You Bet Your Life,” Newsweek, 1 April 2002, 63.)

Gail Dudack,

Edward Wyatt, “Pension Change Puts the Burden on the Worker,” The New York Times, 5 April 2002,

Employee Benefit Research Institute’s 2000

EBRI/Investment Company Institute database

EBRI

13. Robert McGough, “Heard on the Street: For Some Stocks Price Doesn’t Matter,” The Wall Street Journal, 16 March 1999.

Insiders Sell; the Water Rises”).

Richard Russell, Richard Russell’s Dow Theory Letter, 6 October 1999.

Initiation into the Bear’s Ways,” The Wall Street Journal, 20 December 2000, C1 (updated by author in 2002).

Frederick Lewis Allen, Lords of Creation (Chicago: Quadrangle Books, 1935), 352.

4. John Brooks, The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60’s, foreword by Michael Lewis (New York: John Wiley & Sons, 1973, 1999), 11.

Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Doubleday, 1996), 110.

Warren Buffett, Letter to Partners, 11 July 1968, as quoted in Lowenstein, 110.

Maggie Mahar, “Three Wall Street Truths You Can’t Trust,” Bloomberg Personal Finance, November 2000.

Steve Leuthold, In Focus, April 1999, 20, 121. ( In Focus is private research done by the The Leuthold Group for its clients, primarily institutional investors.)

Steve Leuthold, In Focus, April 1999, 11. Here Leuthold was focusing on the 25 most expensive stocks in the Nifty Fifty—those with the highest price/ earnings ratio. Implicitly, these were the most popular, since investors were willing to pay a higher multiple for this group of 25. Leuthold called them the “Religion Stocks.”

Jeremy Siegel, Stocks for the Long Run, 3rd ed. (New York: McGraw Hill, 2002), 153–55. The difference between Siegel and Leuthold was not so much a matter of numbers as a question of how you applied those numbers to investor behavior in the real world. Leuthold agreed that if an investor had both the psychological and financial wherewithal to hold on to his losers for the very long haul, he would reap double-digit returns. Indeed, if an investor held from the end of 1972 through March of 1999, Leuthold acknowledged that the bull market would have lifted his average annual return on the Nifty Fifty to 12.6 percent a year.

But Leuthold’s more important point is that, in the real world, it is extremely unlikely that the average investor would hold on to his losers for 20 to 25 years.

Some stocks that were popular in 1972 flourished—McDonald’s, Johnson & Johnson, and Merck, to name a few. But even growth stocks with the best fundamentals were overpriced in 1972. McDonald’s, for example, was a solid company: its earnings would grow 253 percent over the next five years. But despite the earnings growth, over the same span, its share price fell by 19 percent—only then did the market find the stock fairly priced.

Stocks for the L...

“the 25 stocks with the highest P/E ratios yielded about half the subsequent return as the 25 with the lowest P/E ratios.”

See Chapter 2 (“The People’s Market”) on exactly what it means to say that U.S. stocks “always” outperform other investments.

Warren Buffett, as quoted in Lowenstein, 161.

The NYSE survey showed that, as of 1970, one third of investors had bought their first stock sometime after 1965. Others came in after 1970, when it seemed that the market had bottomed. Because Buffett had the cash to buy when stocks were cheap—and refrained from buying when they were expensive—his returns rose consistently from 1973 to 1982 (see table below).

Note: Entries in this index, carried over verbatim from the print edition of this title, are unlikely to correspond to the pagination of any given e-book reader. However, entries in this index, and other terms, may be easily located by using the search feature of your e-book reader.

accounting,