I have been reading The Lords of Finance off and on for the better part of a year. Typically I’ll pick it up during bedtime and I make it through a few pages before it puts me right to sleep. Alas, one of these days I hope to finish it.
I believe the author’s interpretation of a Jesse Livermore quote was a fantastic way to describe the way that stocks over and undershoot their theoretical “correct” value.
The great bear of Wall Street legend, Jesse Livermore, once observed that “stocks could be beat, but that no one could beat the stock market.” By that he meant that while it was possible to predict the factors that caused any given stock to rise or fall, the overall market was driven by the ebb and flow of confidence, a force so intangible and elusive that it was not readily discernible to most people.
The Lords of Finance, Liaquat Ahamed
After pushing through the early parts of the industrial revolution as it pertains to finance, I’m finally into the 1920s and on the heels of the 1929 crash. It truly is fascinating to read how similar some of the actions of market participants, from the Federal Reserve to “homemakers,” rhyme with the actions of the past few years to today. Just a few to note:
- The market started the 20s bifurcated between old economy and new economy stocks (textiles, coal and railroads vs cars, radio, and consumer appliances)
- Earnings growth drove the initial major upwards push in the stock market in the 20s
- The Fed eased rates into a generally strong market
- On the back of Fed easing, the market as a whole started decoupling from earnings growth
- The least informed investors were making the most money, while fundamental investors were considered out of date
While these features have been present in most bubbles, I nonetheless find it interesting to refresh on the topic as we have seen similar signs of excess form in crypto assets, software / tech stocks, and renewable energy stocks.
I continue to stay the my own course by paying a reasonable multiple to earnings (~10x earnings or a 10% earnings yield) for very well capitalized companies that tend to take advantage of market dislocations.