Bull!: A History of the Boom and Bust, 1982-2004by Maggie Mahar
In 1982, the Dow hovered below 1000. Then, the market rose and rapidly gained speed until it peaked above 11,000. Noted journalist and financial reporter Maggie Mahar has written the first book on the remarkable bull market that began in 1982 and ended just in the early 2000s. For almost two decades, a colorful cast of characters such as Abby Joseph Cohen, Mary
In 1982, the Dow hovered below 1000. Then, the market rose and rapidly gained speed until it peaked above 11,000. Noted journalist and financial reporter Maggie Mahar has written the first book on the remarkable bull market that began in 1982 and ended just in the early 2000s. For almost two decades, a colorful cast of characters such as Abby Joseph Cohen, Mary Meeker, Henry Blodget, and Alan Greenspan came to dominate the market news.
This inside look at that 17-year cycle of growth, built upon interviews and unparalleled access to the most important analysts, market observers, and fund managers who eagerly tell the tales of excesses, presents the period with a historical perspective and explains what really happened and why.
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A History of the Boom and Bust, 1982-2004
The Market's Cycles
January 1975. When Richard Russell squinted, he saw the silhouette of a bull emerging against a bleak horizon. The author of Richard Russell's Dow Theory Letter, Russell had been writing his financial newsletter since 1958, and by now he had a wide following -- at least among those still willing to read about stocks. Over the past two years, the Dow Jones Industrial Average had lost nearly half of its value.
The Dow had last seen blue skies in 1966 when it grazed 1000. Two years later, it flirted with 1000 again, but in fact, the bull market that began in the fifties was peaking -- much as the bull market that began in the eighties peaked at the end of the nineties.
After reaching its apex in the late sixties, the Dow rallied and plunged, rallied and plunged without getting anywhere -- until finally, in January of 1973, the benchmark index smashed 1000, setting a new high at 1051.69. It seemed that a new bull market had begun. In fact, the bear was just baiting investors, luring them in so that they could be impaled on the spike of a final bear market rally. What followed was the crash of 197374.
When it was all over, in December of 1974, both the Dow and the S&P 500 had been slashed nearly in half; trading volume had all but dried up; mutual fund managers were grateful to find jobs as bartenders and taxi-cabdrivers, and Morgan Guaranty, the nation's largest pension-fund manager, had lost an estimated two-thirds of its clients' money. As for individual investors, the public was shorn. Between December of 1968 and October of 1974, the average stock had lost 70 percent of its value.
Nonetheless, at the beginning of 1975, Richard Russell could all but hear the bull snorting. At last, he believed, the bear market had bottomed. And he was right, just as he would be in the fall of 1999, when he warned readers that the first phase of a bear market had begun. By then, Richard Russell's Dow Theory Letter was the oldest and one of the most widely read financial newsletters in the United States.
Russell based his predictions on "Dow Theory," an analysis of stock market cycles invented by William Peter Hamilton and Charles Dow. (Co-founder of Dow Jones & Company, Charles Dow also lent his name to the benchmark stock market index.) At the end of the century many investors would assume that "market timing" meant day trading, buying and selling stocks in a matter of hours, days, or, at most, months. But Dow Theory does not attempt to predict the highs and lows of particular stocks, nor does it strain to forecast the market's short-term gyrations. Instead, it focuses on longer trends -- cycles that can last for years. Each cycle is the peculiar product of a particular moment in economic and political history, but in Dow's view the force behind each go-round was the same: human nature.
Most descriptions of investor psychology reduce human behavior to a series of simple knee-jerk reactions: rampant greed followed by blind fear. Charles Dow sketched something subtler in The Wall Street Journal editorials that he wrote between 1899 and 1902. He recognized that investors do not rush into a bull market, and when it ends they do not swoon in surrender to the bear. Both bull and bear cycles begin slowly, he observed, because "[t]here is always a disposition in people's minds to think the existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance. When prices are up and the country is prosperous," Dow added, "it is always said that while preceding booms have not lasted ... [this time there are] 'unique circumstances' [which will make prosperity permanent]."
Because human beings are slow to embrace change, these cycles can run a decade, or longer. In fact, as Gail Dudack, chief market strategist at SunGard Institutional Brokerage, shows in the table below, the history of the S&P 500 from 1982 through 1999 can be broken down into alternating "strong" and "weak" cycles that average nearly 15 years. During the booms, investors who plowed their dividends back into their portfolios reaped returns averaging nearly 18 percent a year -- even after adjusting for inflation. During the dry spells, by contrast, average "real" (inflation-adjusted) total returns dropped to less than 2 percent. Without dividends, investors lost nearly 3 percent a year.
In the final third of the twentieth century, the market's returns fit the pattern with ruthless precision: from January 1967 through December 1982, investors averaged 0.2 percent annually -- and that was if they reinvested their dividends. Those who became discouraged and stopped plowing their dividends back into the market lost an average of nearly 4 percent a year -- year after year, for 16 years. Finally, in 1982, the cycle turned: from January 1983 through December 1999, real returns averaged 12.1 percent. If an investor reinvested his dividends, he was rewarded with annual returns of 15.7 percent.
"Few investors realize how much dividends have contributed to the stock market's performance," Dudack observed. "Nor does the public realize that in this century, there have been three separate periods, ranging from 16 to 20 years, when inflation-adjusted capital gains on the S&P have been negative."
Inevitably, any attempt to break the past down into cycles involves choosing beginning and ending points that are, to some degree, arbitrary. Others might well divide the market's cycles somewhat differently. But virtually every market historian agrees on the larger picture: the history of the market is a story of bull and bear markets that take place against a backdrop of much longer waves ...Bull!
A History of the Boom and Bust, 1982-2004. Copyright © by Maggie Mahar. Reprinted by permission of HarperCollins Publishers, Inc. All rights reserved. Available now wherever books are sold.
Meet the Author
Maggie Mahar is the author of Bull! A History of the Boom and Bust, 1982–2004, a book Paul Krugman of the New York Times said "makes a devastating case against the contention that the market is almost perfectly efficient." In his 2003 annual report, Warren Buffett recommended Bull! to Berkshire Hathaway's investors. Before becoming a financial journalist in 1982, when she began to write for Money magazine, Institutional Investor, the New York Times, Bloomberg, and Barron's, Mahar was an English professor at Yale University. She lives in New York City.
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