Bull!

by Maggie Mahar

  But the mania for Internet stocks turned out to be only the froth on the cappuccino. The larger story was the broad market’s giddy climb. From 1995 to the end of 1998 the S&P 500 galloped forward, racking up double-digit returns four years running. Ultimately, the major indices rode on the backs of a few big-cap stocks. Not all were technology stocks—and few were dot.coms. On the Dow, in 1998, the top six belonged to the “Old Economy”: Wal-Mart (up 106 percent); IBM (up 75 percent), McDonald’s (up 61 percent), UT (up 49 percent), Merck (up 37 percent), and GE (up 38 percent).

  On the S&P 500 that year, large-cap technology companies like Dell, Apple, and Lucent were among the big winners.21 But Providian Financial (up 144 percent) also placed among the top 10, while The Gap, which climbed 142 percent, ranked number 11. By the end of 2000, some of the most wrenching losses would come on established companies like AT&T, Dell, and Motorola, all of which closed the year down more than 65 percent from their 2000 highs.

  The Old Economy’s stars fell hard. Investors who owned The Gap at the end of 1998 found that by the beginning of 2003 they had lost close to 60 percent of their savings, while those unlucky enough to own Providian Financial were down by more than 80 percent. As for the six companies that led the Dow in 1998, over the next four years only Wal-Mart and UT rewarded investors.22 Those who had invested in the other four lost money. “Buy and hold,” the mantra of the nineties, was beginning to disappoint.

  As the market heated up, experienced investors knew, with a sinking certainty, that the big caps were rising too high, too fast. In the three years ending in December 1998, Dell alone shot up 3,197 percent. With the benefit of hindsight, market watchers would point out that the broad market peaked in ’98 and that the first phase of the bear market began in August or September of 1999. By the fall of ’99, insiders were bailing out en masse.23 Once again, Richard Russell, editor of Richard Russell’s Dow Theory Letter, sounded a warning. “Holding for the long term works beautifully in a bull market. In a major bear market, it can be an absolutely disastrous policy,” Russell told his subscribers in October of 1999.24

  THE INDIVIDUAL INVESTOR

  While insiders bailed out, most small investors did not sell. They did what they were told, “buy and hold,” doubling their bets all the way up. The higher the most aggressive growth funds rose, the greater their allure. In 1999 investors wagered twice as much on these funds as they had in ’96 and ’97 put together. Even after the Nasdaq began its long slide, investors continued to chase the last best thing: at the end of 2000, individuals were investing in aggressive growth funds at more than twice the rate that they had in 1999.25

  As always when a bull market ends, those who could afford it least lost the most. In Massachusetts, Sharon Cassidy, a divorced college professor who had single-handedly put her four children through college, began to step up saving for her own retirement in 1990. By then she was 52, and earning roughly $42,000 a year. Listening to the financial advisors who visited her college, she stashed most of her money in broad-based equity funds, and, by the end of 1998, she had managed to accumulate over $350,000. At that point, she felt she was in sight of her goal: retirement in four years, at age 62, with $500,000.

  When the market skidded, she held on. “I felt I had no other choice,” said Cassidy. Then the bear showed his claws. By the end of 2001, at age 63, she was forced to rethink her life plan. “If I work until I’m 70, I can retire with $400,000,” she said. “I’m lucky—I like my work, and $400,000 is a lot more than most people have. But I’m angry, angry at myself and angry at the people who advised me.”26

  As the bear began to loot 401(k)s, even investors who bought “brand name” growth stocks took heartbreaking losses. In August of 2000, James Garfinkel, a 39-year-old investor in Great Neck, New York, was pounding his desk as he talked to The Wall Street Journal: “It’s just devastating—I’m not a day trader. I did not load up on dot.coms. I picked good, solid blue-chip tech stocks—AT&T Corp., Lucent Technologies Inc., Sun Microsystems Inc., WorldCom Inc. Now, I don’t know what to trust.”27

  In Florida, Ed Wasserman took the bait only at the very end of the decade. In the spring of 2000, the 50-year-old business writer finally broke down and invested in a hi-tech fund. “By disposition, I’m a value investor,” said Wasserman. “I had a lot of skepticism—but finally, I succumbed. In the spring of 2000, I went into my local brokerage firm and said to these guys: “‘Why did I only make 12 percent last year, when other people are making 40 percent.’ And they said, ‘We have this very aggressive fund…’

  “Meanwhile,” said Wasserman, “there’s a generational squabble between me and my 24-year-old son, who is totally scornful of my reluctance to buy companies that have no profits—no revenues—barely a business plan. I don’t think they’re sound investments. Yet I’m watching his profits rise while I’m in a ditch with my wheels spinning. I owned a lot of stocks like Time Warner that had been in the mud for years.

  “This aggressive fund that my broker is offering puts me into companies like Quest, Oracle, Cisco—these aren’t little companies with no revenues—they’re blue chips. So I buy in. It was March of 2000.”

  That month, the Nasdaq began to crater. “I lost two-thirds of the money,” said Wasserman. “The market went into free fall. And these guys who I had invested with were paralyzed. I was paying them to manage my money—and they weren’t managing. Finally I putted out of that fund on my own.” (And what happened to his son? “He got massacred,” Wasserman said cheerfully.)

  At the end of 2001, Wall Street bonuses were slashed by some 30 percent, but Wasserman noted, “The price of first-tier Bordeaux wines, being casked in 2001, has been bid way up, mainly by Americans. Meanwhile Detroit is preparing a new generation of overweight, $40,000-and-up sports utility vehicles, which, in spite of everything—are selling for 9 percent more than last year.

  “And who is buying these top-shelf goodies if not the investment bankers and fund managers?” he asked. “Some of the same people who collected fees for putting my nest eggs in the wrong basket and looking on as they cracked and dribbled onto the ground.”28

  By 2000, many investors began to realize just how long it would take to make up for their losses. Then the recriminations began.

  Wall Street’s analysts served as the handiest targets. Often, their firms’ profits depended on investment banking fees from the very same companies that they covered. No wonder “sell” recommendations were rare. Reporters were quick to point a finger. “Where was the analysis?” they asked. Yet the same question might just as well have been asked of the press. On deadline, few financial journalists did their own research; many took analysts’ reports at face value.

  Arguably, Wall Street’s analysts were served up as scapegoats. Without question, their reports were outrageously optimistic, and their firms’ desire to maintain a cordial relationship with investment banking clients drove many a “buy” recommendation. Nevertheless, the analysts were hired by someone higher up on their firms’ totem poles, and their superiors made the decision to tie their bonuses to how much investment banking business they brought in. While Merrill Lynch’s Henry Blodget and Salomon Brothers’ Jack Grubman were pilloried, their bosses were rarely blamed. Nor did the media dwell on how it had showcased the analysts’ advice. If the media had not turned Wall Street’s seers into stars, their reports never would have carried so much weight.

  THE PEOPLE’S CHOICE

  Yet whatever sins of omission either Wall Street’s executives or the media might have committed, neither made the final decision to buy AOL at 400 times earnings. After an initial round of scapegoating, many observers began to suggest that investors themselves should take responsibility for their investment decisions. It was the same argument that the cigarette industry used, and the analogy was not too far off. Buying stocks and equity funds had become an addiction, but no one had put a gun to the individual investor’s head.

  Here was the dark side of a democratized market:
If the market represented millions of individual choices, then the blame must be laid where it belonged—at the feet of millions of individual investors. Richard Whitney, the fair-haired, aristocratic head of the New York Stock Exchange, gave the same answer in 1932 when Congress questioned him about the cause of the Great Depression: “Ask the one hundred and twenty-three million people in the United States,” he replied, with some disdain. Whitney was later sent to jail, a convicted embezzler.29

  Mark Haines, the outspoken co-anchor of CNBC’s Squawk Box, was equally quick to turn his own defense into a good offense. “An awful lot of people find it difficult to confront the reality that they screwed up,” Haines said in a PBS interview on Media Matters in 2001. “Now, they’re looking for scapegoats, and the media is an easy scapegoat. But I’ve got bad news—it was your fault if you lost a lot of money.” Investors who didn’t understand that the “experts” who appeared on CNBC would be biased were simply “too naïve” to be in the game, Haines declared. “It never occurred to us,” he added, with a smile verging on a sneer, “that anyone was sitting home, watching this, thinking it was totally unbiased advice.”30

  Even Arthur Levitt, the chairman of the Securities and Exchange Commission, suggested that those who chased high-flying stocks deserved to suffer the consequences. In January of 2000, Levitt appeared on Wall $treet Week with Louis Rukeyser along with Prudential’s Ralph Acampora. Before the show began, the guests gathered for dinner and, by Acampora’s account, he asked Levitt, “Are you concerned about the Internet?”

  Levitt responded by talking about fraud on the Net—stock scams and bad tips.

  But that was not what Acampora had in mind. He was concerned about the feverish demand for Internet stocks.

  “The Nasdaq is heading for 5000…Arthur, they’ve turned it into Las Vegas!” Acampora exclaimed. “The prices of these stocks…look at the Nasdaq, look at the investors—they’re all gamblers!

  “I’m going on and on,” Acampora recalled, “and Arthur Levitt—who is a lovely man—walked over to where I was sitting and put his hand on my shoulder.

  “‘Don’t worry,’ he said to me. ‘The market will teach those people a lesson.’”31

  The problem is that many of “those people” could not afford the lesson. Moreover, they were only doing what they had been told was prudent. Since the eighties, everyone, from Peter Lynch to Merrill Lynch, had been warning baby boomers that they were not saving enough. Social Security was running out, they were told. If the boomers did not want to wind up selling apples on the street, they needed to make double-digit returns. The only way to accomplish that goal, the market’s promoters advised them, was by investing in stocks. In the nineties, the typical boomer looked in the mirror and realized that it was all true—or at least the part about growing old.

  No wonder middle-class investors sank whatever savings they could scrape together into equities. Much of the money that small investors put into the market of the nineties was what financial consultant and author Peter Bernstein called “blood money.” In the past, he observed, the dollars that investors wagered in the stock market was “money that they hoped to get rich on, or play with, or maybe finance a trip to Europe or something.” But “with jobs less secure and with the wonderful corporate pension funds gone,” small investors were gambling with money that they could not afford to lose—the “blood money” that they had saved for their child’s college tuition, or the nest egg they had accumulated for their own retirement.”32

  If at a certain point the bull market became a con, it worked only because investors gave Wall Street their confidence. Still, it would be unfair to say that small investors were done in by greed alone. Many were motivated, not so much by avarice, as by anxiety.

  The authorities had assured small investors that they were not gambling. The stock market is a piggy bank, the experts said—not a casino. Unfortunately, the metaphor was a mistake. The stock market is a place to make money, but in a runaway bull market, it is not a place to stash it for safekeeping. As a financier who was buying a house in the Hamptons told The Wall Street Journal in 1997, “I have a saying…‘Make money on Wall Street, bury it on Main Street.’ Take it out of harm’s way.”33 But this was not the advice that most investors heard from their mutual fund companies, their stockbrokers, their financial advisors, or the majority of the sages who turned up on CNBC.

  To be fair, many of the market’s most enthusiastic boosters sincerely believed their own advice. Like almost everyone else, the pros and the pundits were caught up in the myth that the New Economy rendered the old rules of investing obsolete. Journalists could not help but catch the fever: many became true believers. Even Fed Chairman Alan Greenspan cross-dressed as a cheerleader. True, in December of 1996, he spoke of “irrational exuberance,” but a month later, when the Fed chairman spoke before the Senate budget committee, what was “irrational” had become “breathtaking.” Before long, Greenspan began to proclaim the wonders of a “productivity revolution not seen since early this century” as he made the case for rational exuberance.34

  In theory, the productivity revolution justified sky-high prices, not just for technology stocks but for the shares of companies using the new technology. By then “everyone knew” that America had entered a “New Era.” Yet as Charles MacKay observed in his classic study, Extraordinary Popular Delusions & the Madness of Crowds, what “everyone knows to be true” often is made of whole cloth.

  MacKay, who was a friend of Charles Dickens, knew that men and women are social creatures. They like to travel in herds. But when they think in unison, they do not always think clearly. In joining the crowd, each has his or her own motive. At the end of the 20th century, some of those who pursued the fin de siècle fantasy of unlimited wealth were spurred on by “love of gain,” others by what MacKay called “the necessity of excitement,” still others by “the mere force of imitation.” Whatever the cause, the outcome was the same: multitudes became gamblers, willing to risk, not just their money, but their happiness, “on the turn of a piece of paper.”35

  BEGINNINGS (1961–89)

  —3—

  THE STAGE IS SET (1961–81)

  WARREN BUFFETT—THE EARLY YEARS

  The received wisdom has it that Berkshire Hathaway chairman Warren Buffett built his fortune by buying good companies and holding them long term. If it were that simple, there would have been many more beatified, balding billionaires residing on the Western Plains at the end of the 20th century. In truth, patience was only half of Buffett’s secret. An ace market timer, Buffett knew when to hold and when to fold. Granted, he usually held stocks for long periods of time, but he also realized that the stock market was not always the safest place for an investor to stash his savings. Like Richard Russell or Charles Dow, the Sage of Omaha understood that equity markets, like all other markets, are cyclical, and there can be long stretches of time when a prudent investor should get out—and stay out. And in May of 1969, that is exactly what Warren Buffett did.

  He had had a good run. Buffett launched his professional investment career in 1957, when the bull market that began after World War II was still young. It had taken the market nearly 20 years to recover from the Great Crash of ’29, but an investor bold enough to take a position in 1948 would find that by 1968 he had more than quintupled his money.1

  Buffett was lucky enough to set up shop in the fifties. In those early years he managed a pool of money for a group of clients, many of them friends and acquaintances, in his hometown of Omaha, Nebraska, forming what he called the Buffett Partnership. Over the next decade, the Partnership would return a stunning 1,156 percent, leaving the Dow (which gained “merely” 122.9 percent) in the dust.

  As the sixties began, however, the bull market of 1954–68 was starting to look frothy. By 1961, IPOs were popping like champagne corks. Even greenhorns like Edwin Levy, who came to Wall Street as a young stockbroker in 1959, were riding high. As a rookie, Levy had little access to the hottest new issues; nev
ertheless, he was swimming in what seemed to him a sea of cash. At the time, an older broker gave Levy some advice: “You know something, kid,” the veteran said, “you ought to buy something you really like, because when this is over, you’re not going to have anything.” Levy bought himself a Mercedes 190 SL, only slightly used, with an extra top, for $6,100.

  “I took his advice,” Levy, who went on to form a private money management firm, remembered years later, “and he was quite right.” In May of 1962—on a day that would go down in Wall Street history as Blue Monday—the Dow dropped 34.9 points, its largest one-day drop since 1929. “When it was all over, I had $200 and the car,” Levy recalled.2

  In hindsight, the crash of 1962 would be seen as an early warning: investors were beginning to overreach. Nevertheless, at the time the damage was limited. Although the high rollers who had thrown their savings at new issues and hot penny stocks were wiped out, the mutual fund industry, which was just beginning to become a major force in the market, emerged relatively unscathed. The Dow rolled forward, and by the end of 1963 the index hit a new high. In 1964, the U.S. landed a spacecraft on the moon, and the Dow shot for the same heavenly body, crossing 900 for the first time.

  The “go-go” market of the sixties had begun.

  INVESTING À-GO-GO

  On Wall Street, it was a young man’s market, and Jim Awad was one of its stars. “I had hair down to here,” Awad recalled in 2001, pointing to his shoulder, “rock music in the background—and no business managing money. But I did,” added a silver-haired Awad, with something close to a shudder. In fact, he ran one of Wall Street’s hottest growth funds.3