1、 The US stock market has entered a period of adjustment regulation
1. Roosevelt brought the strictest New Deal in history
With the stock market crash of 1929, the United States entered a period of economic depression.
Starting from 1931, the Great Depression began to spread to major capitalist countries, ultimately becoming a global economic crisis for capitalist countries.
The Great Depression also directly led to the competitive depreciation of international currencies. In 1931, Britain abandoned the gold standard, and in 1933, the United States was also forced to abandon the gold standard.
The financial crisis exacerbated the economic crisis, and during the Great Depression, the US economy suffered a heavy blow, with the unemployment rate rising from 3.2% to a maximum of 41%, GDP decreased from $150 billion in 1929 to $108 billion in 1933, with 85000 companies going bankrupt, savings dropping by up to 50%, and industrial production dropping by 45%.
In order to overcome the difficulties, the Republican Hoover administration, which has always advocated for laissez faire freedom, formulated a revival plan and established the Renaissance Financial Corporation The main content is Keynes' trick of increasing federal public spending.
The famous Hoover Dam in the United States was a typical representative of public spending that year.
The Hoover administration also launched an international trade protection war in 1930; In 1931, Fuxing Finance Co., Ltd. was established to provide loans to struggling banks and enterprises; In 1932, the Federal Reserve even carried out open market operations, providing additional capital to some banks.
However, the effectiveness of these measures was minimal, and Hoover failed.
Hoover firmly believed that individual citizens should not be directly subsidized, and that financial resources should be concentrated to save large institutions. However, the daily assistance to financial institutions has depleted people's expectations for wealth and lost the trust of the whole society.
Orson Merrick once said before that there is a term in economics called "expectation", which is a very magical thing. If people generally expect an economic recession, the economy will really decline.
No one dares to spend money, it's not surprising that the economy doesn't decline
On the contrary, it also holds true.
In 1933, Democrat Roosevelt was elected and was tasked with implementing the New Deal in the economy during a crisis. He strengthened government intervention in the economy and Wall Street regulation, and formulated a series of banking and securities reform measures to restore national confidence in finance.
Roosevelt's new policies are all in series, and today we will only talk about his measures in the securities sector.
At that time, in the face of strong opposition from Wall Street's powerful interest groups, Roosevelt unwaveringly reconstructed the regulatory framework of the US securities market, directly regulating the state.
After the Great Rebellion, Roosevelt gained the support of public opinion.
Financial manipulation is prohibited by legislation, and the transparency of information and investor protection of listed companies have become the main themes of Wall Street regulation.
In 1933, after more than 100 years of operation in the US stock market, Congress introduced the first national securities regulation, the Securities Act, which mainly regulated the disclosure of information by securities issuers.
The Bank Act of 1933 (also known as the Glass Steagall Act) was enacted in the same year, which required strict separation between investment banking and commercial banking in the United States. Commercial banks no longer had securities risks, and the position of the Federal Reserve was further strengthened. The deposit insurance system was established.
Banks holding securities licenses must obtain approval from the Federal Reserve, which is the famous model of separating banking and securities operations, which was not abolished until 1999.
In 1934, the Securities Exchange Act was promulgated, which defined securities manipulation and fraud. In securities litigation, the burden of proof must be borne by the defendant. If the defendant cannot prove their innocence, they will be sentenced, which means "suspicion is always present.".
That is to say, if I feel that a listed company has problems, I don't need any evidence to sue it, and it has to find evidence to prove that it doesn't have these problems.
Based on this, the federal government established the United States Securities and Exchange Commission, which is now known as the SEC.
This law and the Securities Act completely violate common law principles, and even today, the criticism in the American economic community has not stopped.
In 1935, the Federal Reserve Act of 1913 was revised, allowing all banks with deposits exceeding $1 million to enter the Federal Reserve system.
The Public Utility Holdings Act of 1935 strengthened the monitoring of public utility institutions.
The Maloney Act of 1938 established the National Association of Securities Dealers, which included over-the-counter trading in its regulatory scope.
Laws such as the Trust Contract Law of 1939, the Investment Company Law of 1940, and the Investment Advisor Law of 1940 were successively promulgated, and the investment behavior of funds and other intermediaries was strictly regulated.
In 1941, insurance companies were once again allowed to purchase stocks.
Regulation clearly comes at a cost. Despite the miraculous performance of the US economy later on, it was not until the 1950s that the market size returned to 1929 levels, by which time the US economy had expanded nearly twice.
Wall Street has paid the price for its unrestricted speculation for at least 30 years.
2. Remembering the pain, the deeper the injury, the more thorough the understanding
Orson Merrick mentioned Edgar Smith's investment theory in "What We Learned from the 200 Years of the American Stock Market (Part 1)". It can be said that it supported the bull market of the 1920s, and the most powerful thing in the world is that not only is it bull, but there are also theories behind it that support it. As long as it can justify itself and be firmly believed by people, it is a good theory.
Smith, a previously unnoticed businessman, suddenly gained fame for his book "Long term Investment with Common Stock". Businessmen were the ones who were best at turning opportunities into business opportunities. Smith took the opportunity to start a mutual fund company and was also favored by the famous Keynes, who invited him to join the Royal Society of Economics in the UK.
As a result, from 1929 until the economic collapse of the 1930s, people no longer believed in Smith's long-term holding investment strategy because in reality, even long-term holding did not bring them much profit.
The reason behind this is that the bear market has fallen too hard and the government has imposed too strict regulations, resulting in almost the entire 1940s becoming a lost era and the stock market plummeting.
In 1935, a stockbroker and columnist named Gerald Leber published "The Battle of Investment Survival", which immediately made him a hot topic.
This old man used to be a staunch supporter of Smith's investment strategy, but after considering the following issues, he completely turned his fans around:
Which institution or individual can ensure that investments are foolproof?
How many people can always maintain a record of success?
Who can be certain that, in the long-term trend of rising prices, investing at the expense of current purchasing power can yield a high return after a considerable and volatile period of several years?
It is said that before the crisis in 1929, he miraculously smelled danger and sold all his stocks, successfully avoiding a major crash. This way, the divine man naturally became a master in the minds of the lost people.
Leber believes that stock trading requires acting according to the situation, rather than being complacent.
Investment is a battle, and to win a battle, one must be like a rabbit running and drilling at times.
This idea is deeply ingrained in people's hearts, as a large number of investors who have suffered huge losses have been deeply regretful. If God gives them another chance to start over, they must not be greedy to withdraw early. If they insist on adding a time limit, it is immediate.
Although the entire book "The Battle of Investment Survival" did not discuss how to sense changes in the stock market or how to develop an agile skills from beginning to end.
However, readers of that era belonged to a generation known for their high levels of nervous tension, and Leber's strategy was quite psychologically appropriate.
The long-term holding investment strategy that has always been dominant has been replaced by the mentality of rapid withdrawal, and Smith's best-selling book has also been replaced by "The Battle of Investment Survival.".
Leber's strategy includes selling when the price drops by 10% and buying when the price rises, so he always puts one hand on the emergency button and the other holds the phone to call the trading room.
He believes that "it would be safer to buy for $40 and sell for $100, with more than a dozen rounds of trading in between, compared to buying and selling at both prices of $40."
Once he sensed that a bear market was approaching, he would monetize all his investments, even not even bonds, because bonds were not a winning force in his eyes.
However, Smith's creed is still firmly believed by some, such as the famous Selby Davis relying on Smith's strategy to ultimately hold a wealth of nearly one billion assets.
Knowledge tip:
The Greatest Family Investor
The Davis family is one of the few families in the United States with a three generation investment heritage. The first generation of Selby Coulomb Davis was a famous investor in the United States in the 1940s. The second generation of Selby Davis, the third generation of Chris Davis, and Andrew Davis are all famous fund managers on Wall Street.
The first generation Davis, at the age of 38 in 1947, resigned from his position in the Insurance Department of the New York State Department of the Treasury and used his wife's $50000 to invest in stocks, using insurance stocks as the basic portfolio, alongside investments in banks and other financial stocks. By the time of his death in 1994, his assets had approached $900 million. He verified that insurance stocks are a very good long-term investment product, which is consistent with Lin Senchi's bullish view on insurance stocks in "Investment King", where some argue that insurance stocks are a compound interest machine.
The first generation Davis had an annual return on investment of 23% over the past 40 years, making it the only value investor to rival Buffett's investment performance (Buffett's compound return rate for the first 40 years was approximately 24%).
The second-generation Selby Davis, who began operating the Davis New York venture capital fund in 1969, maintained a market beating performance for 22 out of 28 years. Fighting inflation in the 1970s was tricky, but he remained unscathed.
Chris Davis, the third generation, is introduced as an outstanding large fund manager in the book "Winners: Top Wall Street Fund Managers".
According to "Changying Investment", out of 335 funds from 1970 to 2005, only 3 have consistently achieved annual returns exceeding the market by more than 2 percentage points within 35 years, one of which is the Davis Fund.
However, Warren Buffett continued to appreciate Smith's ideas.
At the 1999 Sun Valley Annual Meeting, he held Smith's book "Long term Investment with Common Stocks" to signal to everyone:
"It provides a very solid analysis of the manic stock market of 1929, full of wisdom. This book proves that stocks always yield higher than bonds. Smith discovered five reasons, but the most innovative one was that companies could retain a portion of their profits and reinvest them at the same rate of return, which was the innovative concept of profit reinvestment in 1924."
And just one year before the publication of "The Battle of Investment Survival" in 1934, Graham, the pioneer of value investing and a disastrous loser of the stock market, also published his groundbreaking masterpiece "Securities Analysis". However, from the reaction of readers at that time, it was much worse than "The Battle of Investment Survival".
Although traditional value investing was prevalent when summarizing the stock markets of the United States in the 1930s and 1940s, it can be seen from the above introduction that at least from 1934 to 1935, not many people believed in value investing.
After Graham's "Securities Analysis" was published, the neoclassical value investment theory also made a brilliant debut, and its brilliance has been shining until now.
The idea of "safety margin" proposed by him has been proven to be the true core of value investment and the key to successful investment.
In a market environment where the US stock market has just experienced a severe decline and investors are almost desperate about the stock market, Graham led investors back to classical times. He not only brought optimism and enterprising spirit into Wall Street, but also brought a relatively rigorous investment theory system.
Graham first proposed the concept of "intrinsic value" of stocks, opening up revolutionary ideas of investment based on intrinsic value, investment based on business owners, and control investment. His securities analysis and evaluation methods established Wall Street's "probabilistic belief" in stock value evaluation, marking another historic leap in Western stock investment thinking.
(For a detailed introduction to Graham, please refer to "Buffett's mentor, the founder of value investing - Graham".)
Subsequently, in 1936, John Maynard Keynes published his book "The General Theory of Employment, Interest, and Money", proposing the famous "beauty theory" of stock prices. If you want to invest successfully, your stock selection criteria have no meaning, and the best choice is to choose stocks that most people like.
(For Keynes' beauty pageant theory, please refer to "The Efficient Market Hypothesis Says Buffett is a Joke")
In 1938, one of the founders of investment value theory, John Williams, published "Investment Value Theory", which elaborated on the principle of discounting stock value and was also Buffett's core stock selection criterion.
Williams first fully proposed the investment value theory that the value of a company is equal to the present value of dividends and interest received by holders of company securities in future years, which forms the cornerstone of growth investment theory.
(Regarding cash flow discounting, please refer to "Why Buffett's ultimate secret is known but rarely talked about")
Williams' investment value theory and Graham's value investment theory are another significant leap in the history of Western investment thought, marking the maturity of basic analytical theory.
Under their influence, the US stock market began to enter the era of investment, with "value investing" becoming the mainstream investment philosophy during this period. Institutional traders, mainly pension funds and mutual funds, quickly emerged, and pension funds gradually became the main institutional investors on Wall Street.
4、 The Age of Three Martinis in the 1950s with Growth Investment Emerging
Objectively speaking, the real contributor to ending this economic crisis is not the United States, let alone Roosevelt, although the textbook states that it was Roosevelt's New Deal that pulled the United States out of the quagmire of the economic crisis.
However, Orson Merrick believed that the true antidote to the 1929 economic crisis was World War II. In history, the only quick fix to a crisis has always been war.
In 1945, after the end of World War II, the United States once again became one of the victorious countries, not only receiving a large amount of war reparations, but also, like World War I, receiving all the benefits of selling arms without suffering any losses on its own land.
The military production in the war seriously restricts the development of civilian living facilities, and a large number of residents' living needs cannot be basically met. The civilian sector urgently needs a large amount of funds for blood transfusion. Coincidentally, the huge capital accumulation brought about by the war needs to be digested by some investment fields, and the two are in sync.
As a result, after experiencing a heavy blow in the 1930s, the US economy once again entered a new explosive period of prosperity.
Unfortunately, this time the stock market did not keep up with the overall economic situation as usual, until the last day of 1949, when the Dow Jones index only rose from 100 points during World War II to 200 points, it has been hovering around 200 points ever since.
Strangely, at this point, the profits of the listed company have at least doubled, while the stock prices have hardly shown any outstanding performance. The statement that "stocks are economic barometers" is no longer valid.
In 1953, Eisenhower represented the Republican Party and regained the presidency of the United States. Perhaps due to his different background from previous presidents, the tense and depressed atmosphere on Wall Street was finally alleviated.
Eisenhower's policy was to implement a balanced fiscal policy and achieve a balance between fiscal revenue and expenditure.
This policy will directly lead to a decrease in interest rates. There is a natural inverse relationship between interest rates and the stock market, and a decrease in interest rates will bring great positive news to the stock market. The announcement released by Eisenhower has given a shot in the arm to the consistently sluggish stock market.
With the development of the economy, the heavyweight joining of pension funds and mutual funds, Wall Street, the stock market aircraft carrier, finally set sail again in the mid-1950s after a 20-year silence.
On February 13, 1954, the Dow Jones Industrial Average closed at 294.03 points, reaching its highest point since the stock market crash at the end of 1929, marking the beginning of the first "golden age" for the US stock market.
A bull market was unstoppable, and by the end of 1954 alone, the Dow Jones index had surpassed the stock market peak of the 1920s, approaching the 400 point mark.
Only two years later, on May 12, 1956, the index broke through 500 points for the first time, and stock prices surged at an average annual rate of over 10%.
The glory of the stock market gave Wall Street brokers a temporary opportunity to enjoy, and most brokers could comfortably enjoy a "three martini lunch," so the New York stock market in the 1950s was also known as the "three martini era.".
During this period, people not only dared to buy and sell stocks, but also dared to pursue value stocks such as American Steel, Motorola, HP, and Polaroid.
Later, someone described that the probability of winning a falling stock in the stock market at that time was almost the same as the probability of winning a big prize in the lottery now.
The 1950s was a period of rapid development in the American computer industry, and today IBM officially entered this field from the typewriter business.
In 1954, IBM's stock price hovered around $20, but in the following years, its performance, like other companies in the IT industry, began to rise in a straight line. But what's different is that the stocks of other companies are rising synchronously with the company's performance. Only IBM's stock price increased nearly five times when the company's performance only grew less than twice. By the time the stock market crisis hit again in the 1960s, IBM's market value is almost 10 times its original value, which means the growth of IBM's stock price is close to 900%.
In 1958, the yield of long-term government bonds exceeded the dividend income of common stocks for the first time in the history of American stocks, and for a long time thereafter, the stock market's stock interest rate did not exceed the yield of long-term bonds. This marked the end of the era of traditional value investing and the emergence of long-term investments.
In the same year, Philip Fisher published the book "How to Choose Growth Stocks", which further developed the thinking system of growth investment.
As Orson Merrick once introduced in this book, the writing style was not very good, verbose and repetitive, but the investment ideas conveyed and the publication time were quite in line with that era.
I don't know how many readers have actually finished reading it, but because its name carries "unusual profits" and the content mainly focuses on discovering growth stocks, which directly pointed to the core demands of bull market investors at that time, the book quickly sold well and became the cornerstone of the growth investment school. Fei Xue is also undoubtedly revered as the founder of this school.
Although in general, it is just an important branch of value investment;
Although Fisher's investment performance is not particularly outstanding, he held a maximum of 30 stocks in the early stages and mainly concentrated on 6 stocks in the later stages. In his later years, due to lack of clear thinking, he often made operational mistakes.
However, flaws do not hide the truth. His most outstanding contribution is to make people understand that choosing stocks is choosing enterprises, and examining enterprises is the core key. Examination is to go to reality, to go to the side of enterprises, and directly engage in small talk with enterprises, customers, partners, etc., to discover the most authentic.
Later, Peter Lynch, a representative figure of growth oriented investment, further explored the full potential of enterprises in reality.
Meanwhile, Orson Merrick believes that his fifteen principles for finding good common stock are truly a motto for business operations and provide direction for future venture capitalists.
In 1959, Harry Markowitz compiled and published the book "Asset Selection: Efficient Diversification of Investment", which systematically expounded modern asset portfolio theory, thus giving rise to the theory of financial investment.
As mentioned earlier, the 1950s was also a period of rapid rise for American institutional investors, especially for mutual funds, which also needed theory to support their appearance in order to attract investors.
Markowitz's theory is simply the effect of giving a pillow when dozing off, especially suitable for fund managers whose investment performance is determined by stock market trading prices.
The goal of Markowitz style portfolio management is to establish a balanced asset portfolio that maximizes utility for investors, rather than selecting a few stocks that appear to have high returns. Rational investors will change their investment method of choosing only one or a few stocks, and instead choose a "management portfolio" to establish a diversified portfolio that maximizes risk adjusted returns, in order to achieve maximum utility for themselves.
In the 1960s, William Sharpe, Lintner, and others proposed the CAPM capital asset pricing model. Using the basic conclusion of Sharpe's (1958) separation theorem, they not only simplified the calculation of Markowitz's optimal portfolio, but also proposed that the optimal risk asset portfolio for all investors under the equilibrium state of the capital market is the market portfolio, and any combination that does not use the market portfolio or risk-free borrowing and lending will be located below the capital market line. They also provided an accurate definition of the relationship between asset risk value, risk, and expected return, and established the capital asset pricing model.
In 1990, Markowitz and William Sharp were awarded the Nobel Prize in Economics, and these theories, along with the efficient market theory proposed by Fama and others, constitute the core of modern theoretical financial investment theory.
Their philosophy emphasizes the modern financial investment theory of equilibrium analysis, and from the perspective of financial asset allocators, they propose investment methods for portfolio management, asset selection, and asset allocation, enriching investors' understanding of risk, return, and financial market efficiency. This represents the fourth major theoretical breakthrough in stock investment thinking. From then on, financial asset allocation investors were placed in prominent positions in the stock market.