Mar

23

Imagine if you will a very bad year in the stock market with a substantial rise in interest rates. Imagine, too, the elders of the stock market having to go to the Palindrome en masse to beg him to buy back his tremendous line of shorts stock, and begging the bearish insurance company, conglomerate hard landing guy, or media forensic accountant, to say a few bullish things to prevent stock from falling to zero.

That situation sounds somewhat similar to the present except it was 1907 not 2007. In 1907 the S&P fell 40%, from ten to six, and the elders went to Boy Wonder, Jesse Livermore to buy back his shorts. Also, interest rates went to 200% rather than the five percent inversion of today.

I felt that a study of the backdrop and concerns and intricacies of how investors tried to make money in the aftermath of that environment might teach us some lessons about how to navigate 2007. It also might provide some food for thought on what we've learned in 100 years. I turned for guidance, therefore, to the Ticker Magazine of 1908. It was a 50-page monthly edited by Richard Wyckoff, similar in its concerns, articles, and advertisers to many we have today, like Stocks and Commodities, Active Trader, or Futures.

The first issue could have been written today. Except that like most things written 100 years ago, it seems to be focused on a much higher common denominator, i.e., the literate investor population of their day. I find all their articles just as timely today as when they were written, and often their insights seem much more useful than comparable journals of today.

The first issue starts out with an excellent article, Mistakes of Investors. The mistakes are divided into excusable mistakes and inexcusable ones. The excusable ones are what we would call those that occur from the vagaries of change, where the investor has taken all precautions and done his due diligence. "If his reasoning has been wrong, or if unforeseen events bring disaster, it is a misfortune. Not so, however, with "willful mistakes."

Here's Cushing's classification of of willful mistakes to avoid.

  1. Avoid inside information.
  2. Never make an investment on enthusiasm or excitement.
  3. Use your own judgment.
  4. Pay for info rather than getting it for free.
  5. Consider earning value and market value. The man who buys real estate looks to the enhancement of value more than to earnings.
  6. Don't lose confidence. The investor hears rumors of impending disaster, which, if he would reflect upon, he would see would have no effect on his security. This applies to bank runs.
  7. Stay away from names. (Even then there were touts and promoters.) No high sounding titles can make it a success if it lacks the true qualities of success itself.
  8. Don't put too much reliance on advertisements, especially red paints.
  9. The losses through mining investments (not tech) are greatest. Beware of promoters who have no reputation to lose.
  10. The greatest mistake is one of pessimism and doubt. Never let your mind fall into that chasm. Do not think because you have lost money in one investment that all are unsafe.

The most interesting article to me in the first issue was by our old friend Roger Babson, written in 1908 about bank loans. He says that when the proportion of loans to investments gets too high it's bearish and when it's too low, it's bullish, but on a time series basis for all banks, and cross-sectionally between banks within a year. He gives yearly figures from 1860 to 1906 to verify his point and then shows how the panics of 1873, 1894, 1890, 1893, 1898, and 1903, were accurately forecast by the ratio.

The key ratio he uses is 50% loans to assets, which was "In 1873, the ratio of loans to resources first exceeded 50%. Consequently a panic occurred by the spring. Another panic occurred in 1903. Again the western farmer came to the rescue and owing to bountiful crops, the recovery continued until 1897 when interest rates exceeded 2200% a year."

Thus, Babson preceded Boltan Tremblay, Colonel Ayres, the bank credit analyst, the fake doctor, and many other greats in relying upon these credit ratios more than 100 years ago. It's overdue for a test again today.

A final article in the first issue is archetypical of articles of today. A retired engineer has a mathematical way of predicting swings in markets, and shows with a chart how his method caught "the immediate trend of each market, and the beginning and end of the longer price movements, and whether stocks are being accumulated or distributed based on a balance between the volume of price movements and volume of transactions."

He catches the full movement by "eschewing selling on strong rally, and bucking an upward trend, but instead waits until the rally has run its course and the downward movement has actually begun." In that modality, let your profits run. He seems to have captured in 1907, exactly the essence of the main methods of trading futures of today, including the methods used by most CTAs and most of the books written about trading.

In addition to these articles, an excellent article on bucket shops, the harms of short selling restrictions, how a floor trader makes money, and ticker talk rounds out the issue.

I'll augment this with further insights from the subsequent issues, as they're too good to miss.

Peter Earle writes:

After a couple of years (1907 - 1911 or so), Richard Wyckoff's Ticker became the Magazine of Wall Street, which was published until 1970. In all fairness, and perhaps unsurprisingly, in its last 20 or 30 years it was but a shadow of its former self.

Wyckoff lost control of the Magazine of Wall Street in the midst of a messy divorce from his former secretary (and by that time editor of the MoWS), Cecelia, in the late 1920s. After moping about and writing for a few years, he started a small bi-monthly magazine called Stock Market Technique which ran for the last three years of his life, ending in 1935.

They are extremely rare in their original unbound format.

Bruno Ombreux writes:

The inventory at Global Investor Bookshop offers a good flavor of the market in the early 20th century, and it's true it has not changed. Some articles and some books have been reprinted.


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