In my research and investing I stress three things: people, structure and value. I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.
This post is mostly about people. One Summer is full of great stories of a wide variety of people. The book was actually meant to be a guilty summer vacation read, but there is enough investment related material in it to warrant a post on the Minority Report blog. Bill Bryson is one of my favourite authors and he does a great job with One Summer. It is a very easy read with great insight into many characters that I’ve never heard of before.
For those who are not acquainted with him, Bill Bryson is an Iowa born and UK-based author who writes fact-filled, breezy and funny books. I particularly like the way his books focus on lesser-known people and their backgrounds. One of the key ingredients in my own investment research is people (link here) which is by far the most interesting element out of the three things I look at.
Bryson’s books are typically full of colorful and interesting souls many of whom have largely been forgotten, but nevertheless have many times helped shape the world we live in. For more famous figures - particularly Charles Lindbergh in this book - he provides context, details and new findings that can be amazingly insightful, laugh-out-loud funny, and sometimes bewildering.
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| Cover - USA |
What I found most interesting is the author's observation that some time in the late 1920s Americans collectively realized that Europe was no longer the leader of most things. "It is a little hard to imagine now, but Americans in the 1920s had grown up in a world in which most of the important things happened in Europe. Now suddenly America was dominating in nearly every field - in popular culture, finance, and technology. The centre of gravity of the planet was moving to the other side of the world and Charles Lindbergh's flight somehow became the culminating expression of that."
The vast majority of the book focuses on the more fun and interesting topics such as Babe Ruth, Lou Gehrig and why the 1927 Yankees were likely the world’s greatest ever baseball team; and Lindbergh’s incredible popularity and intense tour around the US after his groundbreaking flight.
Although not mentioned in the book, 1927 was also a magnanimous year in investment history. In that year Benjamin Graham started teaching the now famous class called "Security Analysis", at Columbia University. His class introduced a new method of analyzing securities that emphasized the difference between a company's true or intrinsic value and its stock price and how one can profit from this difference. It would take another seven years till America's great depression, and his flirting with personal bankruptcy, that he and his colleague wrote "Security Analysis". This book is as close to a financial bible, and is particularly liked by value investors. His other classic, Intelligent Investor, was not published until 1949.
While more general in nature, One Summer has quite a few insights for investors. I've copied several passages that I think investors and others in the financial community may find interesting.
In re-reading many of the excerpts below, I kept thinking how similar America in the 1920s is to China today. Stock markets are booming, funding costs are falling, more people were taking on credit, and corruption is not unknown. Cohorts closer to other emerging markets can likely draw similar comparisons (Vietnam in the early 2000s, Indonesia, Thailand and Malaysia in the early 1990s, to name but a few).
Corruption is a good way to get rich. "...(then President) Coolidge kept a light hand on the tiller of state." "His treasury secretary, Andrew Mellon, spent much of his working life overseeing tax cuts that conveniently enhanced his own wealth. According to historian Arthur M. Schlesinger, Jr., with a single piece of legislation Mellow gave himself a greater tax cut than that enjoyed by almost the entire population of Nebraska". "Mellon's personal net worth more than doubled to over $150m during his term of office, and the wealth of his family, which he oversaw, topped $2b.”
"The total cost to the country of all the various acts of incompetence and malfeasance in the Harding administration has been put at $2b - a sum that goes way beyond the stupendous, particularly bearing in mind that Harding’s presidency lasted just twenty-nine months”.
"Appointed to the role of head of the Veterans’ Bureau, (Charles) Forbes managed in two years to lose, steal, or misappropriate $200m. …(he was) fined US$10,000 and given a two-year prison term”
Cheap finance and the carry trade did not work well in the end. “Banks borrowed from the Federal Reserve at 4 or 5 per cent and lent it to brokers at 10 or 12 per cent. They were, as one writer put it, ‘in the position of being handsomely paid simply for existing'.”
“As long as shares kept rising the system worked fine and for much of the 1920s that is exactly what shares did. It was clear to anyone who cared to look, however that there was little correspondence between the prices of many shares and the values of the companies they supported. While national output (as measured by GDP) rose by 60 per cent in the decade, stocks went up by 400 per cent. Since most of these inflated prices had nothing to do with any underlying profits or productivity, all that kept them so giddily buoyant was the willingness of fresh buyers to bid prices up”.
Prevalent share manipulation by the big boys. "Many of the most respected business leaders in the country took part in syndicates in which share prices were shamelessly manipulated for the sake of a large, quick gain at the expense of innocent investors. One such, reported by the financial writer John Brooks in his classic Once in Golconda, involved such luminaries as Walter J. Chrysler of the Chrysler Corporation; Percy Rockerfeller, nephew of John D. Rockerfeller; John Jakob Raskob, national chairman of the Democratic Party; and Lizette Sarnoff, wife of David Sarnoff, head of the Radio Corporation of America (RCA). A broker working for them bought large blocks of RCA stock at selected intervals. This had the effect of driving the price from 90 to 109. The rise attracted other investors. The broker than cashed the syndicate’s holding and the members shared a profit of nearly $5m for less than a month’s work. With the syndicate’s money withdrawn, the shares sank back to 87, leaving other, uninformed investors nursing huge loses. There was nothing to be proud of in any of this, but nothing illegal either. Raskob made most of his fortune through such pools. So, too, did Joseph Kennedy, father of President John F. Kennedy."
Rising stock markets make leaders popular. “With markets constantly on the rise, he (President Coolidge) didn’t need to do anything except keep out of the way. Under Coolidge's benign watch, Wall Street rose by more than two and a half times in value. The success of the economy not surprisingly did wonders for Coolidge's popularity."
Financial innovation (debt) made the American consumer. “Thanks to a brilliant new financial invention, Americans could suddenly have things that they had never expected to have - and they could have them right now. It was called the installment plan, and it changed more than the way Americans shopped: it changed the way they thought. Installment buying filled American homes with cars. It made America the consumer paradise it has remained ever since. "
Great explanation of the gold standard. "Under it, any paper money in circulation is supported by gold reserves. When America was on the gold standard, a $10 bill could be exchanged for $10 of gold, and vice versa. It was gold, in other words, that gave value to the otherwise worthless slips of paper known as money. A gold standard had certain limitations - most obviously, the amount of gold that had been discovered - but it had many compensation attractions that endeared it to bankers. It made inflation almost impossible since governments couldn’t just print money. It kept the management of exchange rates out of the hands of politicians with their narrow, short-term interests. It promoted price stability and, by and large, kept the heavy wheels of international trade turning. Above all, a gold standard had a huge psychological importance. It worked. It had worked for a long time. It was what was known."
Federal reserve sows seeds of the great depression. "The problem was (the gold standard) wasn’t working very well. Half of all the gold in the world was in the United States, mostly behind a ninety-ton steel door in a five-story vault deep beneath the Federal Reserve Bank of New York in lower Manhattan. This was not actually a terrifically good thing. It might seem like a great idea to have all the gold, but in fact that would make it that other countries couldn’t buy any more of our products because they would not have gold of their own to pay for them. In the interests of trade and a healthy global economy, gold should circulate. Instead, it was accumulating - steadily, relentlessly, in a country that was already better off than all the countries of Europe put together."
"...(the) Federal Reserve sets the stage for the 1929 market crash. It was in America’s interest to keep international trade rolling along. So (than NY Federal Reserve Head) Strong decreed that the Federal Reserve would cut its discount rate from 4 per cent to 3.5 per cent, to encourage holders of gold to move their savings to Europe where they would enjoy higher returns. This in turn would bolster European reserves, help stabilize European currencies and boost trade overall. Strong gambled that the American economy could absorb the stimulus of a small rate cut without going crazy. It would prove to be a spectacular miscalculation. …four of the reserve banks… refused to go along partly in petulance no doubt, but also in the legitimate belief that it was madness to encourage more borrowing with market values so high already”.
“The cut in interest rates had an explosive effect - ‘the spark that lit the forest fire’, in the words of the writer and economist Liaquat Ahamed. The result was the Great Market Bubble of 1928. Over the next year, stocks would more than double from already irrational heights, and the volume of brokers’ loans to investors would rise by more than $1 billion to a tottering and unsound $4.5 billion - all fueled by the patently deluded belief that stocks could keep on rising forever. "
“The cut in interest rates had an explosive effect - ‘the spark that lit the forest fire’, in the words of the writer and economist Liaquat Ahamed. The result was the Great Market Bubble of 1928. Over the next year, stocks would more than double from already irrational heights, and the volume of brokers’ loans to investors would rise by more than $1 billion to a tottering and unsound $4.5 billion - all fueled by the patently deluded belief that stocks could keep on rising forever. "
America was not so free in the past. "America was in the grip of something known as the Great Red Scare. In 1917 and 1918 Congress had enacted two startlingly restrictive laws, an Espionage Act and a Sedition Act. Together these provided severe penalties for anyone found guilty of displaying almost any kind of disrespect to the American government, including its symbols - the flag, military uniforms, historic documents or anything close in which was deemed to repose the glory and dignity of the United States of America."
Like Madoff, Ponzi started out legit. “…he concocted a scheme - in itself perfectly legal - to make a profit by trading in international postal reply coupons.” "The problem with Ponzi’s scheme was that individual coupons were worth only very small sums - 5 cents typically - so it would have been necessary to exchange monumental volumes to make a reasonable return. Ponzi didn’t even try. It was much simpler to pay off early investors with funds paid in by more recent ones." "Altogether, it is thought, Ponzi ended up some $10 million in the hole, equivalent to US$100 million today. About 40,000 people invested with him. "
Fallacy of forecasts. "When people imagined the future of long-distance transportation it wasn’t always highways they thought of but airplanes and giant dirigibles cruising between city centers.” “…skyscrapers of the period began to sport pointed masts - so that airships could tie up to them”. (MM's note - think of all the unused helipads in city centers).
New music will bring down society - “Worst of all was jazz which was widely held to be a spring-board to drug-taking and promiscuity. An editorial in the New York American called jazz ‘a pathological, nerve-irritating, sex-exciting music'”.
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| Cover - UK/HK |
High margin in illegal activities. “Prohibition may be the greatest gift any government ever gave its citizens. A barrel of beer costs $4 to make and sold for $55.” “By 1927, (Al) Capone’s organisation - which interestingly had no name - had estimated receipts of $105 million. The scale of his operations unquestionably makes him one of the most successful businessmen in American history.”
“Doctors could legally prescribe whisky for their patients and did so with such enthusiasm that by the late 1920s they were earning $40 million a year from the practice”.
All that money led to a drawn out failure. “Nearly everybody recognized that Prohibition was a colossal failure, and yet the nation persevered with it for thirteen more years”.
“The national murder rate went up by about a third after Prohibition was introduced”.
American politicians break laws and oppose country. "During the war (WWI), Hoover illegally bought chemicals from Germany. This was an exceedingly grave offence in wartime. Remarkably he did so NOT because the chemicals were unavailable in Britain (where he lived at the time), but simply because the German ones were cheaper."
America as an emerging market/economy. "Nine tenths of all serious crime in America went unpunished... Only about one murder in a hundred resulted in an execution".
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