“The thing that hath been, it is that which shall be; and that which is done is that which shall be done; and there is no new thing under the sun. Is there any thing whereof it may be said, "See, this is new?' It hath been already of old time, which was before us. There is no remembrance of former things; neither shall there be any remembrance of things that are to come with those that shall come after.”
— Ecclesiastes, Chapter 1, Verses 9 to 11
A reader of securities regulations 30 years ago would be surprised to find reams of rules and commentary addressing “hot” initial public offerings. Investment bankers, brokers and investors starting their careers in the early 1970s, though, toiled for a generation hardly seeing a hot issue. It wasn't until November 1993 that the markets finally experienced a hot IPO; interestingly, it was for a mundane business.
Shares of the initial offering of Boston Chicken immediately traded at more than twice the offering price. Don't remember all the fuss or even the company?
That may be because four years after the IPO, the company changed its name to Boston Market while introducing the startling innovation of meatloaf. One year after that, the company went into bankruptcy.
A private-equity firm owns the remaining restaurants you see today.
In the heady days following the Boston Market IPO, investors thought that they had discovered something new, little realizing that they were following in the footsteps of investors 25 years before, right down to being confused by complicated accounting for restaurant franchising.
HAVEN'T WE BEEN HERE BEFORE?
There was nothing new on the rotisserie — relatives of the investors losing their stake in Boston Chicken may have lost money in the stock of Uncle John's Pancake House decades earlier. The rubes who lost everything in Pets.com in 2000 may have older relations whose wealth was devastated by a legion of bankrupt technology companies in 1969 and 1970.
Periodic hot-issue manias recur through the decades, and participants always think that it is different this time.
It is not only manias that recur, however. Investors are manic-depressive, and depressions repeat as well.
People tell us that things have never been this bad, with the eurozone crisis, the fiscal cliff, the debt and the deficit. The game is rigged against us, they believe. But has everyone forgotten about the 1970s, with the resignation of a president, the OPEC oil embargo and accompanying gas lines, and high inflation and unemployment, not to mention the cold war?
And it is only the passing of generations that prevents us from hearing stories of the Great Depression that would shame anyone now claiming: “It has never been this bad.”
There is a temptation to treat the financial markets as a science, subject to precise technical laws. This is a wrongheaded notion.
SENSE SKIPS A GENERATION
Human nature and emotions, not physical forces, drive the markets. We all tend to avoid the mistakes of our parents and repeat the mistakes of our grandparents.
After each crash, the next generation, not scarred by memories of the previous bust, funds the subsequent mania. Although it may seem that investors never learn, the eternal recurrence of these cycles allows the perceptive to glean lessons from history and profit from them.
The good news now is that long-term pessimism is high, as investors punished by the twin bear markets over the past 12 years in technology and real estate are fleeing from stocks to bonds. In the short term, though, investors seem complacent in the face of any number and variety of troubles that easily could beset the markets.
There still are pockets of ebullience — acquaintances pass us on the street and brag about their holdings in Apple Inc. From the golfers, we also appear cursed always to hear about the eagles but never the triple bogeys.
Market volatility is at multiyear lows.
This tells us that while it is unlikely that we are on the precipice of another major bear market, we are likely to suffer additional punishment until those acquaintances on the street inform us that they will never again buy another stock. Ever.
That will mark the bottom.
We are in a period similar to the late 1970s. After a sharp recovery from the 1974 low of a severe bear market, the market chopped up and down between 1976 and 1982, with each downturn driving investors to new lows of despair.
Buyers of stocks in 1978 might have been unhappy a year later, but if they held on, they were delighted a decade later. Not to beat the (chicken) drumstick too loudly, but it was another of those eternal investing recurrences that we have been talking about.
Investor pain creates good investing values.
Although the timing always is unpredictable, gain follows pain — the one impossible without the other.
William A. Berg is the founder and president of Sigma Investment Management Co. This first appeared as a newsletter on the company's website.