1929 letter has lessons for investors

By DAVID MOON, Moon Capital Management
March 2, 2003

On October 28, 1929, the US stock market suffered its second worst single day percentage decline. (October 19, 1987 was the largest.) The carnage that day is often thought of ushering in the Great Depression. The next day, Earnest Calkins, a New York resident, penned a letter to the New York Times. In the letter, Calkins argued that investors were overreacting to the apparent short-term decline in wealth.

"I have a feeling that fewer persons are affected by the stock market drop than one would infer from the figures, just as fewer persons were affected by the previous rises. As far as I am concerned a group of men, technically known as the Stock Exchange, gets together and decides that my Telephone Telegraph stock is worth $310 a share, and I experience a momentary glow of elation. A few days or weeks later they get together and decide it is only worth $232, and I have a feeling of disappointment, also momentarily. It is unlikely that the slump will affect the continued use of the telephone or that the company will be unable to continue to pay the $9 a share [dividend.]'

Calkins would be right at home in today's market.

The overall stock market is down significantly in the past three years. We always have a logical ending point to which measure our performance: the present. But determining an appropriate beginning point is a bit more difficult. How is the market doing? Since March 2000, it is down 45 percent. But in the last 4 ' months, it is up eight percent. And since 1982, the market is up more than 300 percent. So how is the stock market doing?

Mr. Calkins' letter goes on. "Doesn't it seem probable that mine is the situation of a great majority of holders of this and other good stocks? That they have merely lost some of their spectacular gains? My profits the last few weeks have been paper profits, and my losses the last week are paper losses, and one cancels the other."

Sure, Calkins' logic may make sense if you actually enjoyed the paper profits. But what about the number of people who only bought stocks after missing the paper gains enjoyed by others? Now that the losses have arrived, they have no paper gains against which to cancel those losses.

Those people need to look forward, not back. If you bought some crazy Internet fund in 1999, you simply paid significantly more for that asset than it was worth. You screwed up. You can't change that now.

But what if instead of a crazy Internet fund, you decided to finally take the stock plunge and purchase the S&P 500? You had been waiting, thinking stocks couldn't go any higher. Then you gave in. You thought you were being safe by purchasing a group of well-known, large businesses. But the problem is that even many of those businesses were overpriced. It was simply the wrong time to buy those stocks. And trying to time the market - either looking for market tops or bottoms - is almost always a losers' game.

The end of Mr. Calkins' letter is an especially good parable for us today:

"It reminds me of the farmer who told a neighbor that Josh Stebbins had offered two hundred dollars for his horse."

"'Josh Stebbins ain't got two hundred dollars.'"

"'Yes, I know, but ain't it a good offer?'"

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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