The following post is a little lengthy.  We present it here because it was developed as an introspective during the darkest days of the Great Recession.  As we studied company after company with long-term return forecasts of 20-40%, confidence was shaken as the financial crisis brought Wall Street and Main Street to their knees.  The retrospective of what happened during 1974 and 1938 combined to bolster all of us.  The early days of 2009 were a unique moment in time when it truly was time to back up the truck (as many trucks as you could muster) and those who did were rewarded and the long-term perspective fully restored and reinforced.

When would that have been?

I can vividly recall sitting in my office at Better Investing back in late 1998 with Don Danko, the magazine’s sage editor. We were nestled in the middle of that bubbly bull market and Don expressed some concerns that nobody else seemed to be aware of. It had to do with unbalanced, accelerated returns over short periods. In his words, “The comparisons matter … this is going to be tough to compare to … five years — and ten years — from now.” For me, it was an unforgettable moment and lesson.

In other words, the outlook for a roman candle is worst when the audience is going “Oooo … and Ahhh” as the projectile reaches its apogee.

NAIC/BI founder George Nicholson, Jr. CFA had wrestled with these issues a couple of decades ago. The following chart illustrates pretty clearly the last time investors faced a situation similar to 2008:

A nod to MANIFEST subscriber Gary Simon, for providing the inspiration for this graphic. The caption used to say something about 10-year annualized returns basically “never” being negative.

Those words no longer apply.

And Nicholson’s anxiety becomes obvious … the year was 1975.

Check out where the 1985 box “landed” — reflecting the results of the next ten years following 1975. Note the positions of the boxes for 1976, 1977, 1978 and 1979 … ten years hence the Go-Go years of the late 1960s.

Now heed the landings of 1986, 1987, etc. The takeaway is that when roman candles return to ground zero — it’s time to go shopping, even if you have to grit your teeth.

Here’s another look that is eerily familiar as the toppling market in 1974 certainly resembled what we’ve experienced over the last 18 months or so:

Seasoned investors may remember David L. Babson’s cautionary words back in the 1965 and late 1960s as he assailed the gunslingers of the day, market professionals that seemed to be ignoring valuation and chasing momentum stocks. In a speech (attended by a huge crash of rhinos) from March 1968, Babson said and wrote, “The long-range expectations of many investors are becoming increasingly distorted by the speculative atmosphere that pervades the financial community today. Stock trading is the heaviest in history and is a direct result of the growing emphasis on quick profits and rapid portfolio turnover. The successful long-term investor avoids being over-influenced by the emotions of the day. This is the way to achieve really good results without exposing valuable capital to above-average risks.”

Institutional portfolio turnover was approximately 40% at the time!!! (The average turnover for recent years has been closer to 100%.)

In any event, the roman candles of the mid- to late-1960s were setting the stage for malaise ten years later.

Rely on Financial Editors — Nicholson, January 1975

What was on George Nicholson’s mind during late 1974? He was concerned about the irresponsible behavior of the media. Interestingly enough, my colleague Kurt Kowitz brought up the 24/7 nature of the media this very morning: “They’re not helping.” Nicholson wrote a series of commentaries urging patience and responsibility from media leaders … and then he turned his attention on the lessons of history, the environment of 1938 and the experiences of investors as he was just getting started in the realm of investing. Here are some of the highlights:

Paper losses on stocks are no more real than paper profits because prices swing with fickle public opinion.

1830 Prudent Man Rule: “Do what you will, the capital is at hazard.” — Judge Putnam.

Looking ahead to 1975, we know we have to think, work and use self-discipline to make progress.

Look back at 1938, when auto production dropped 50%. (Hitler’s military was nibbling away at Europe)

But 1938 was a good year to invest. The DJIA had fallen 50% from the 1937 high by March and rose 60% before Thanksgiving.

The [stock market participants] who sold their stocks in 1938 missed the boat. 1938 separated speculators from investors.

From 1928 to 1938

By the roman candle logic, the 10-year period following the roaringest of the roaring 20s was destined to be a tough comparison, providing the justification for Nicholson’s retrospective:

Prior to 2008, this was clearly one of the toughest sledding 10-year periods in stock market history.

Here’s a closer look at the 1-year results for 1910-1940:

I think few people realize that some of the best years (including the #1 all-time, 1933) in stock market history came during the Great Depression. One of the things weighing heavy on Secretaries Paulson and now, Geithner, is the entry we see here for 1931. The theory is that too much time lapsed between October 1929 and the ultimate corrective actions attempted. Whether or not we agree with the intervening efforts made to date — this image should help to drive home the import of expedience.

1929, even with the Crash, was not the ugliest year. That “honor” belongs to 1931. 1930 and 1932 (and 1937) were nothing to write home about either. Ted Brooks covered much of this and shared some solid perspective, along with this data. Thanks, Ted!

But pay special attention to 1934-1936 and 1938. This was part of Nicholson’s focus.

The corollaries appear to be strong. His mention of the 1938 auto production swoon is nothing short of “haunting” for those of us at our own version of Ground Zero near Detroit. It also adds fuel to my commentary about when executives lean on “unprecedented” as an excuse. As I’ve suggested before, there is very little “unprecedented” about the situation that the American automotive firms find themselves in. (What appears to be unprecedented is the lack of reserves to sustain during the cycles.)

Investment is Keystone — Nicholson, February 1975

Nicholson continued the prodding of the financial journalism world a month later, along with a reminder to the citizens of Better Investing nation that investing is crucial to the generation of future freedom:

In this year of crisis, learning investment has new meaning — that is, restoring the capital markets and the economy.

Has America forgotten to invest? How important is investing to individual Americans? The [media] in their anti-business, anti-investment crusades have overlooked the role of investment [in achieving and maintaining a peaceful balance.] Investing is indispensable to mutual survival …

Three months ago, the media would jump on [Alan] Greenspan for his remarks on the jobless plight of investment personnel. Now both construction workers and auto workers know in general that, when the investment industry breaks down, some of their workers go from private to emergency government payrolls at greatly reduced rates.

(Yes, he’s talking about the same Alan Greenspan that you’re thinking …)

The financial community — institutions … and analysts — are as open to criticism as the media for their shortcoming of wanting too much regardless of consequences. Their standard guideline should henceforth be “better” not “more.”

But in the final analysis the individual investor, not the institutions, has the responsibility for supplying money for big and small businesses. American investors, through individual action and moral persuasion, must make investment work in the world.

Sound topics for your February 1975 club meetings: 1. [Our time-honored principles] 2. [Quality companies] and 3. Triple Play Investing as particularly applicable to today’s market.

I have been investing proceeds in Triple Play situations during 1973-1974 in preparation for the next bull market. If past performance is a guide, the performance should exceed the DJIA by a wide margin.

Triple Play Investing

My instincts on this stuff are generally pretty good … but I have to admit that I smiled a little when encountering this reference to Triple Play investing — considering our recent presentations and efforts at MANIFEST.

Restoring the Capital Markets — March 1975

“Bank director, officers and financial analysts, if they want to avoid another debacle, should understand the 1830 Prudent Man Rule … in its entirety and grasp its essence — which is, that finance must back prudent businessmen, if the Nation is to prosper.

“Manufacturers and labor should speak up — impress their views on the financial community — finance all industries or perish.

“Restore broad and vigorous capital markets. We all need to do our part — savers, investors, labor, management and bankers.

“Thirdly, examine critically Benjamin Graham’s article of Sept-Oct 1974. Does he fail in not separating income from value in a period of inflation?

“Does he stick with the technique of comparison of income to the detriment of using common sense as to value in light of the facts of inflation?

When Harvard Lost But Won — Nicholson’s World, April 1975

In 1831, Harvard lost a law suit. Now it has over a billion dollars.

From 1823 to 1828, the Harvard account balance had declined from $50,000 to $38,000. John McLean died (10/23/1823) and Harvard attempted to recoup the loss via litigation.

The ruling was made in favor of the trustee : “All that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital invested.”

The Harvard Trust was 100% invested in common stocks and in fundamental industries essential to the industrial growth of a Nation: banking, insurance and manufacturing.

Justice Putnam’s decision was far-sighted and good for the Nation.

Prudent Investing

Nicholson wrote often of the Prudent Man Rule, celebrating his alma mater’s defeat in the courts and their victory in learning more about successful long-term investing and accountability.

Diligence matters and Nicholson was convinced that returns could be enhanced by paying attention to the characteristics of opportunistic growth, excellence in management and superior profitability — the very essence of our continuing quest to this day.

For those paralyzed by watching too much media :), bear down … complete your studies carefully — and when you discover a high-quality company that is appropriate for you, with relatively high projected annual returns, become a watchful owner.

Bull Market & Boom Ahead — Charles Allmon, July 1975

Charles Allmon is nearly unequaled as a stockpicker. His commentaries are among my favorites in the Better Investing archives. He was notoriously bearish on any given day. His portfolios achieved high relative rates of return and his outstanding results have been chronicled and hailed by the Hulbert Financial Digest. That he did this — often with massive amounts of cash equivalents — was an irritant to some of my professional investing colleagues and I’ve witnessed some gnashing of teeth over the years. 🙂

His words here are a timeless testimonial to an exemplary Community of investors. Take a bow.

Is this bull market for real? Probably. There are sufficient doubters around to assure that a generally rising stock market might endure into 1977 or even longer.

One particular group of NAIC investors rate high marks in my book. They’re the experienced investors (20 years or more) in the 60-80 age bracket. It was something of a revelation to find that a surprising number held a contrary view during October 1974 … and generally agreed that better days — even happy days — might lie immediately ahead. I spoke with scores of investors at the 1974 convention. Only the “oldsters” seemed to be tuned to my wavelength on this matter of investor psychology and where they thought we’re headed.

So what else is new?

Sticking to the Knitting, 1973-1983

I’ve written previously of the outstanding stock selections made during the 1970s test of the investing mettle of our Community. We’ll take a closer look at some of the specific selections from the monthly stock features in another “report.”

I’ve also written about the virtues of investing regularly in carefully chosen stocks. Much is made of the “flat spot” in the market from 1969-1982. But we don’t invest in markets, we invest in leadership companies when the price is right. And investing regularly has incredible virtues versus tracking a lump sum invested in 1969 in an attempt to suggest that equity investing is futile — or dangerous.

Hog wash. It’s an UGLY urban myth. One of the ugliest.

In the “Throwing of Towels”, I documented the difference between investing regularly and shared that a return of 11.5% was achieved, during a period when the stock market notoriously gained ONLY 2%.

I’ve experienced similar encounters with the multi-decade crowd that Mr. Allmon salutes — and trust me, they’re thinking about the opportunities presented today a whole lot differently than the media is doing lately.