Bull! A History of the Boom, 1982-1999: What Drove the Breakneck Market-and What Every Investor Needs to Know About Financial Cycles,
HarperBusiness, 486 pages, $27.95.
Between the spring of 2000 and February 2002, individual investors lost $5 trillion in the stockmarket.Those losses continue to haunt the 100 million Americans who poured their savings (and borrowed cash) into equities in the late 1990’s.
In Bull! A History of the Boom, 1982-1999, Maggie Mahar seeks to explain what went wrong. A former Yale English professor and financial journalist, Ms. Mahar presents an amusing, thoroughly researched story. She ventures beyond the I.P.O. and dot-com manias commonly blamed for the disaster, and focuses instead on the individual regulators, bankers and media figures who contributed to the period’s perilous investing environment.
Ms. Mahar comes to the conclusion that investors need to be smarter next time around. A combination of mob behavior and a complicit media inflated the stock-market bubble. It’s possible to invest intelligently under those circumstances, she believes, by timing the market and resisting the blind “buy-and-hold” approach espoused by financial advisors and the mutual-fund set.
“Cycles appear to be as inevitable as the seasons,” she writes. “Investors who understand these cycles are more likely to survive the winter of a bear market and to avoid its final phase-despair. They know that eventually, summer always returns.” A comforting thought. But if investors faced a corrupt financial system badly in need of reform-and even a cursory glance at the newspaper would suggest that that’s the case-her advice wouldn’t have helped much.
Warren Buffett, the star of Ms. Mahar’s book, proved in 1969 that stock-market timing is important. Sensing a speculative bubble in that year, Mr. Buffett wrote to his shareholders, “The game is being played by the gullible, the self-hypnotized, and the cynical.” He liquidated his investment trust and sat out the brutal 1970’s bear market, and most of the heady 1980’s. “Buffett behaved like Old Money,” Ms. Mahar writes. “The majority of investors agonize over the prospect of getting out too early and missing out on the profits that would have made them rich. But the very rich don’t fret so much about making money. They have money. Their greatest fear is losing it.” In other words, don’t gamble with the rent check.
The trouble is that most people on Wall Street didn’t behave like Mr. Buffett at all; they’re driven by greed and fear.
Ms. Mahar describes one morning in 1999, when the Merrill Lynch Internet analyst Henry Blodget was greeted with a nasty voice mail from a fund manager: “You are so pathetic. I listen to you and I am disgusted. You don’t own these fucking stocks. We own these stocks. You have something to say? Shut up. You hear [Mary] Meeker saying anything negative? No. You hear anyone else? No.”
Mr. Blodget is portrayed here as a victim of circumstance, a fall guy who stumbled into the business and was manipulated by the sharks around him. In 1994, frustrated and broke at age 27, he enrolled in a training program at Prudential Securities. Five years later, he was an anointed “Internet analyst” and was setting $400 price targets for Amazon.com. Investors could have avoided traps like this, Ms. Mahar would argue, by recognizing that AMZN was overvalued. Sounds easy.
Once things went south, “Henry Blodget became the designated scapegoat for the entire analytic community. Of the thousands of analysts who recommended lemons, Blodget was singled out to wear the scarlet A.” Mr. Blodget and a handful of others were indeed singled out, and it’s interesting to hear someone tell his side of the story. But our pity is too much to ask; no one forced him to take that $13 million salary.
The chapter devoted to mutual funds is an enlightening primer on the current scandals, although it doesn’t address them directly. Managers of growth funds, beneficiaries of the empty promise of the 401(k), were neurotic and shortsighted throughout the 1990’s. “The investment risk inherent in buying the high fliers was evident. But in a runaway bull market fund managers had to worry about another type of risk: career risk. If they could not match the index, they could forget about fat bonuses. Indeed, in some cases, they could forget about their jobs.” They were also victims of their own success. “Investors panted after the hottest funds,” and as more and more cash flowed in-$208 billion in 1996 alone-the managers had to put the money somewhere, chasing the same overinflated Cisco’s and AOL’s as everyone else. At the same time, “more than a few began moving their personal nest eggs into bonds and cash.”
Though Ms. Mahar characterizes fund managers as self-serving, she’s too lenient with the equity analysts and experts who gushed over earnings reports and guesstimated share prices into the stratosphere. True, these seers were expected to bring investment-banking business to their firms and feared losing their jobs. But it’s too convenient to suggest, as Ms. Mahar does in hindsight, that their prognostications were intended only for sophisticated professionals. For the fact that everyone else listened to them, too, she blames the media: “The press continued to quote Wall Street’s top analysts and market strategists without drawing any distinction between the two audiences-as if a professional running $1 billion and an individual with a $250,000 401(k) shared the same risks and priorities.” If analysts didn’t want retirees and car mechanics following their advice, they shouldn’t have been broadcasting it daily on CNBC, Wall Street Week with Louis Rukeyser and in USA Today.
One comes away from Bull! laden with historical perspective and recommendations for portfolio diversification (try gold, commodities or inflation-adjusted government bonds). Ms. Mahar also conveys a strong sense of the predetermined nature of stock-market cycles. John Kenneth Galbraith, the Harvard economist cited throughout Ms. Mahar’s book, wrote in 1990 that “the financial memory should be assumed to last, at a maximum, no more than twenty years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind.”
Dementia of the financial mind certainly contributed to the boom-and-bust cycle 1980’s and 90’s, but after watching yet another (pick one: corporate executive/board member/governmentregulator/fund manager/banker/analyst) resign in flames and face a possible jail sentence, one is tempted to believe that investor foolishness is only part of the story.
Sheelah Kolhatkar, now a freelance writer, was once vice president of a hedge fund.