Sunday, July 29, 2007

The Impeding Hangover

I’ve watched the stock market since about 1958. I was about 12 at the time and my grandfather would take me down to the brokerage office and we would watch the stock ticker print out a never ending trail of letters and numbers. One tape printed on a transparent ticker tape which was projected onto a screen and the other was on a regular ticker tape. Now and then one of the workers would tear off about 3 feet of the regular tape and go up to a 10 X 40 foot chalk board and update the quotes. There was seating for about 50 people, and most were as old as my grandfather. The thing I liked was that the workers would give me the short rolls of unused tape to play with. That was my entertainment from 1 to 4 PM.

Later on in the 60’s and 70’s I watched my father and his stock investments. He even formed an investment club that a lot of the neighbors joined. As an investment group they could afford to buy 100 shares of a stock. Remember wages were about $8,000 per year. The investment group deteriorated over time, people just didn’t have the money or they moved away. It was not the road to riches, it was boring.

A bear market started in 1974 that did some damage, but it didn’t really affect the general population (the DJIA went to 607). It affected the rich and the well to do, their net worth dropped considerably.

I got into the market about 1982. The DJIA was about 1100. My broker had a sign on his desk saying “DOW 2000.” It was always good for a chuckle; everyone was hoping that it would happen, we just didn’t know when.

The people making money were the stock brokers. A typical buy or sell transaction on 100 shares was about a $300 dollar commission. A round trip on one stock would cost you $600. It had to go up at least 6 points to break even. There was an additional $35 dollar charge for an odd lot sale of less than 100 shares

In 1985 I started using a discount broker. Round trip on 100 shares dropped to $220 which wasn’t too bad. Plus, everything was going up. Then, the real discount brokers came online with the advent of internet trading. From there, everyone piled into the market. 20 years ago dropping a stock name at a party would have gotten you a blank stare. Today, everyone talks stocks.

There has been no time since 1929 that we have had this percentage of people in the market that know utterly nothing about what they are doing. The Jim Cramer Stock Show has got to be an indicator of a market top (we are all going to get rich). They’re having fun, no need to spoil the party. Have another drink.

The bears are restless, this could be the week.

FYI, the DJIA circuit breaker that would close the market for the rest of the day is now 4,050 points. It’s nice to know that any future stock market panic has been well thought out. So if you feel like jumping, pick a ledge and grab a number.


I'm Not POTUS said...

I have a ramdom sampling to prove your point. Just for fun, I signed up to play BeatTheStreet stock trading game.
All I did was short a basket of the home builders. Today my rank was in the top 1% and my gains are only a 1/3 of the leaders.
This game has 23,000 people registered. I did not do anything but the obvious (short homebuilders) and I am doing better than 99% (23,000) people

Anonymous said...

A bear market started in 1974 that did some damage, but it didn’t really affect the general population (the DJIA went to 607). It affected the rich and the well to do, their net worth dropped considerably.

I disagree. It did affect the general population, in that it mobilized the rich to take back the modest gains that had been made by the poor and working classes, ushering in the "Reagan Revolution", the effects of which we are still suffering through.

Jim in San Marcos said...

Hi Anon 11:35

A lot of times what I think is not exactly what I say, I apologize. What I meant about 1974 was that very few people were in the stock market. You couldn't really buy 10 shares of stock at a time, the commissions would eat you alive. 10 shares of ATT at $15 would cost $150 for the shares and $300 commission plus $35 for an odd lot fee. A hundred shares would cost $1,500 plus $300 commission. So the middle class was not in the market.

A lot of the stock owners in the 74 bear market didn't sell, because the dividends were not cut. In actuality their yield on the investment went up as the stock price went down.

My major point in this article was to illustrate how almost everyone is now involved in the stock market.

Remember, 1929 burned people so bad that they were still not in the market until the early '80's--give or take a decade

Anonymous said...

I'm just an average guy who became a millionaire through hard work. Politics had nothing to do with it.

I accumulated wealth because I was willing to work and I learned about money and finance.

The sad but painful reality is that those who don't understand money, which probably describes the majority of the US popluation, will never accumulate very much wealth, regardless of which political party they choose to support.

Jim in San Marcos said...

Hi Anon 8:08

I think I could cut and paste your remarks into my own biography, we think a lot alike.

The only thing I would add is, don't try to get rich. There are way too many people that want to help you in that endeavor, at your expense.

Sadly as you suggest, most people are too busy working to bother with the investment side. They pay for it in the end.

Life is a lot shorter than you think is is!

Thank you for your comments.