A Warning to Wall Street Amateurs...

If last week’s market action left your head spinning over the holiday weekend, it’s time to take a break…

Here’s a quick story for you:

A guy calls his broker and asks to buy 400 shares of an obscure tech firm called Ultrasonics Precision.

The curious broker asks what’s so special about Ultrasonics. His customer tells him he’s not sure– his barber told him to buy it.

Two weeks later, this same investor calls back.

He made a mistake.

His barber had instructed him to buy Ultrasonics Industries, not Ultrasonics Precision. So he asks the broker to sell his Precision shares and buy the correct stock. The broker does as he’s instructed, only to find that his clueless client booked a profit of $800 on his original, “wrong” investment.

Now, this story wouldn’t be out of place in the 80s, 90s, or even today (maybe Ultrasonics Precision is a hot new tech stock?).

But the story doesn’t belong to any of these decades…

I actually paraphrased this anecdote from an article called “A Warning to Wall Street Amateurs” that was published in Harper’s Magazine in 1961. In the article, the author asserts that the reckless behavior of inexperienced investors will drive the bull market straight off a cliff. And aside from some dated language, Barron’s could replace the numbers and dates and run the piece tomorrow.

Here are some of the article’s sticking points:

A new breed of speculator is putting serious investors in danger. Trading volume and the Dow both surged to record highs during the spring of 1961, possibly triggering a “wave of mass speculation that would have been impossible in the 1920s”

I can’t even imagine what the author would think of folks logging into their accounts via mobile phone and trading stocks during their lunch breaks…

There are too many new stock offerings with flashy names involved in futuristic industries. The author highlights melodramatic new issues like “Datamation” and “ElectroSonic Laboratories” and some of the outrageous short-term gains from various IPOs as proof of market froth.

Sound familiar? We could make the same case about 90% of the tech firms Silicon Valley is pumping out these days…

No one is valuing stocks properly anymore. A “cult of growth stocks” has convinced investors to disregard valuations. “In today’s market, with attention focused on so-called growth stocks,” the author writes, “people clamor to buy stocks which have no yields and sell at fifty or one hundred times earnings.”

This “cult” of growth stocks hasn’t budged more than 50 years later. Through booms and busts, investors are still willing to pay a premium for growing companies that capture their imaginations.

Has anyone valued Amazon correctly over the past 20 years?  Beats me. All I know is the stock has jumped nearly 50,000% since it went public.

The market is rigged. Too many stocks are sprinting higher under “mysterious circumstances”. The market might be propped up by artificial demand. Recent SEC crackdowns prove that there are too many dishonest firms and individuals on Wall Street ready to take advantage of the unseasoned investor.

Of course, all of these dishonest people haven’t gone anywhere. And new technology like high frequency trading has given folks even more to worry about these days…

So why should we care about what some business writer thought of the markets more than 50 years ago? Perspective.

Hardly anything happening in the markets today is new or unique. The same hopes and fears drive stocks in 2016 just as they did in 1961 or 1901. This exact noise continues to cloud investors’ judgment today—except they’re reading these concerns on a laptop instead of a magazine at a newsstand…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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