The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [35]
Some bulls went further. Since stocks had “always” beaten bonds over any period of at least 30 years, stocks must be less risky than bonds or even cash in the bank. And if you can eliminate all the risk of owning stocks simply by hanging on to them long enough, then why quibble over how much you pay for them in the first place? (To find out why, see the sidebar on p. 82.)
In 1999 and early 2000, bull-market baloney was everywhere:
On December 7, 1999, Kevin Landis, portfolio manager of the Firsthand mutual funds, appeared on CNN’s Moneyline telecast. Asked if wireless telecommunication stocks were overvalued—with many trading at infinite multiples of their earnings—Landis had a ready answer. “It’s not a mania,” he shot back. “Look at the outright growth, the absolute value of the growth. It’s big.”
On January 18, 2000, Robert Froelich, chief investment strategist at the Kemper Funds, declared in the Wall Street Journal: “It’s a new world order. We see people discard all the right companies with all the right people with the right vision because their stock price is too high—that’s the worst mistake an investor can make.”
In the April 10, 2000, issue of BusinessWeek, Jeffrey M. Applegate, then the chief investment strategist at Lehman Brothers, asked rhetorically: “Is the stock market riskier today than two years ago simply because prices are higher? The answer is no.”
But the answer is yes. It always has been. It always will be.
And when Graham asked, “Can such heedlessness go unpunished?” he knew that the eternal answer to that question is no. Like an enraged Greek god, the stock market crushed everyone who had come to believe that the high returns of the late 1990s were some kind of divine right. Just look at how those forecasts by Landis, Froelich, and Applegate held up:
From 2000 through 2002, the most stable of Landis’s pet wireless stocks, Nokia, lost “only” 67%—while the worst, Winstar Communications, lost 99.9%.
Froelich’s favorite stocks—Cisco Systems and Motorola—fell more than 70% by late 2002. Investors lost over $400 billion on Cisco alone—more than the annual economic output of Hong Kong, Israel, Kuwait, and Singapore combined.
In April 2000, when Applegate asked his rhetorical question, the Dow Jones Industrials stood at 11,187; the NASDAQ Composite Index was at 4446. By the end of 2002, the Dow was hobbling around the 8,300 level, while NASDAQ had withered to roughly 1300—eradicating all its gains over the previous six years.
SURVIVAL OF THE FATTEST
There was a fatal flaw in the argument that stocks have “always” beaten bonds in the long run: Reliable figures before 1871 do not exist. The indexes used to represent the U.S. stock market’s earliest returns contain as few as seven (yes, 7!) stocks.1 By 1800, however, there were some 300 companies in America (many in the Jeffersonian equivalents of the Internet: wooden turnpikes and canals). Most went bankrupt, and their investors lost their knickers.
But the stock indexes ignore all the companies that went bust in those early years, a problem technically known as “survivorship bias.” Thus these indexes wildly overstate the results earned by real-life investors—who lacked the 20/20 hindsight necessary to know exactly which seven stocks to buy. A lonely handful of companies, including Bank of New York and J. P. Morgan Chase, have prospered continuously since the 1790s. But for every such miraculous survivor, there were thousands of financial disasters like the Dismal Swamp Canal Co., the Pennsylvania Cultivation of Vines Co., and the Snickers’s Gap Turn-pike Co.—all omitted from the “historical” stock indexes.
Jeremy Siegel’s data show that, after inflation, from 1802 through 1870 stocks gained 7.0% per year, bonds 4.8%, and cash 5.1%. But Elroy