I recently came across an old US TV news clip from the 1950s that featured Ben Graham, the mentor of Warren Buffett, and the author of the highly influential investing texts, The Intelligent Investor and Security Analysis. In the clip, Graham was leading a seminar at Columbia University together with Dean Courtney Brown. The two men gave a short speech and answered questions from the crowd.
The news clip also featured a short interview of Senator William Fulbright, who at the time, was commissioning a study on the US stock market after stock prices had advanced near the heights of the 1929 peak just before the Great Depression of the 1930s reared its ugly head. (The study was conducted and published in 1955.)
I was fascinated by the news clip, because Fulbright and the people asking questions to Graham and Brown, had worries about the stock market that are similar to today. For example, Fulbright was concerned that stock prices were too high and might collapse drastically yet again, similar to the great crash that happened during the Great Depression. In another example, the question at the 21:09 mark was concerned about inflation that was driven by “deficits spending”, “easy money policy”, “increased union wages”, “increased minimum wage”, and a “rogue [spending] programme of US$101 billion which the government has just announced” – these are worries in the 1950s that would absolutely fit in today. And importantly, the Dow Jones Industrial Average (I’m using the Dow because it is the index that is referenced in the news clip) is up from around 400 points in 1955 to over 37,000 currently.
I decided to create a transcript of the news clip for my own reference in the future, and thought of sharing it with the possibility that it might be useful for any of you reading this. Enjoy!
Transcript
TV presenter (10:00): There is no shortage of experts on the market. As for us we’re barely able to tell the difference between a bull and a bear. So we sat in on part of a seminar at The Graduate School of Business at Columbia University. After all it’s older than the stock exchange and we thought professors familiar with the language of the street might treat the market with detachment. Dean Courtney Brown and Professor Benjamin Graham were instructing future brokers and customersmen. Here is See It Now’s short course in the market.
Courtney Brown (10:36): First let me give a caution. I hardly need give it to a group of informed students such as you. No one knows precisely why the market behaves as it behaves, either in retrospect, or in prospect. The best we can do as you well know is express informed judgments. But it is important that those judgments be informed. We do know that there has been a substantial rise. That rise has been going on for a number of years, particularly since the middle of 1953. And we do know that the rate of that rise has been very rapid, uncomfortably like that of the 1928-29 period. It has resulted in a lot of comparisons being made in the press. Moreover the present level of stock prices, as measured by the Dow Jones Averages, is about equal to, indeed a little above the peaks of 1929.
A number of explanations have been advanced regarding the stock market’s rise that suggests it may reflect a return to inflationary conditions. This doesn’t seem to me to be very convincing. First because there is no evidence of inflation in the behaviour of commodity prices, either at the wholesale or at the retail level and there hasn’t been over the past a year and a half – extraordinary stability in the behaviour of both indexes. There is so much surplus capacity around in almost every direction that it’s hard to conceive of a strong inflationary trend reasserting itself at this time.
Still another explanation is that the stock market has gone up because there has been a return of that kind of speculative fever that has from time to time in the past gripped the country – the Florida land boom, the 1929 stock boom. They’ve occurred in history as you know, all the way back from the Tulip speculations in Holland. I suspect there’s a certain element of truth in this one. However, it doesn’t seem to me that it gives us too much concern because there has been no feeding of this fever by the injection of credit. I think it is important for us to observe that the amount of brokers’ loans – loans made to brokers for the financing of securities of their customers that have been bought on margin – are less and then US$2 billion at present. In 1929, they were in excess of US$8.5 billion and there is now a larger volume of securities on the stock exchange. Now gentlemen, Professor Graham will pick up the story at that point.
Ben Graham (13:37): One of the comparisons is interesting is one not between 1929, which is so long ago but 1950 which is only a few years ago. It would be very proper to ask why a price is twice as much as they are now when the earnings of companies both in ‘54 and probably in 1955 are less than they were in 1950. Now that is an extraordinary difference and the explanation cannot be found in any mathematics but it has to be found in investor psychology.
Ben Graham (14:10): You can have an extraordinary difference in the price level merely because not only speculators but investors themselves are looking at the situation through rose-coloured glasses rather than dark-blue glasses. It may well be true that the underlying psychology of the American people has not changed so much and that what the American people have been waiting for for many years has been an excuse for going back to the speculative attitudes which used to characterize them from time to time. Now if that is so, then the present situation can carry a very large degree of danger to people who are now becoming interested in common stocks for the first time. It would seem if history counts for anything, that the stock market is much more likely than not to advance to a point where of real danger.
Unknown questioner (15:03): You said that stock prices now are not too high but that you fear they will go higher. Well then are you recommending the decline?
Courtney Brown (15:09) Well here I’ll defend you on that [laughs].
Ben Graham (15:10): [Laughs] Yeah, go right ahead.
Courtney Brown (15:17): Those who have watched the security market’s behaviour over the years have become more and more impressed with the fact that stocks always go too high on the upside and tend to go too low on the downside. The swings in other words are always more dramatic and more – the amplitude of change is greater than might normally be justified by an analytical appraisal of the values that are represented there. I think what Professor Graham had to say was that his analysis of a series of underlying values would indicate that the stock prices are just about in line with where they might properly be.
However, from experience that would be the least likely thing to happen that stocks would just stabilise right here. Now if it’s the least likely thing to happen, and you have to select a probability between going up further or down further because of the strong momentum that they have had, I think I would be inclined to agree with him [referring to Graham] that the more probable direction would be towards a somewhat higher level.
Unknown questioner (16:24) When stockholders believed the market was too high, they switched from stocks to cash. Now, many people feel that due to capital gains tax they are not free to act. They are, what you might say, locked in. What effect does this have on the stock market in general?
Courtney Brown (16:41): No question about the fact that it does discourage some sales that might otherwise be made because one selling stocks trying to replace them would have to replace them at substantially lower prices and to come out even after paying the capital gains tax. However, that’s not the only reason people are reluctant to sell stocks and buy bonds. Stocks are still yielding about 4.5% on the basis of current dividend payments whereas bonds of prime quality are closer to 3%. Here again we find a contrast with the situation in 1929, when stocks were yielding about 3.5% and prime bonds closer to 5%.
Unknown questioner (17:24): In addition to raising margin requirements, should the federal government take other measures to check a speculative boom in the stock market, and which method is the better?
Ben Graham (17:34): My own opinion would be that the Federal Reserve should first exhaust the possibilities of raising the margin requirements to 100% and then consider very seriously before they imposed other sanctions if needed
Unknown questioner (17:47): What is the significance of the broadening public participation in stock purchasing and ownership?
Courtney Brown (17:58): There are probably two elements there that are important. One, the broadening participation of the public in stock purchases is one measure of the degree of speculative fever that we were talking about before. However, subject to that being controlled – and I believe that it can be controlled as Professor Graham has indicated. But over and above that, there is a broad social significance to that, it seems to me. What in essential terms means is that the ownership of American industry is being more widely dispersed among more and more people. This has very favourable repercussions in terms of our political and social life.
Unknown questioner (18:45): This question concerns the so-called Wall Street professional. Our Wall Street professionals, usually more accurate in their near or long-term market trends – forecasts of stock market trends. If not, why not?
Ben Graham (19:03): I said you say that they are more often wrong than right on their forecasts?
Unknown questioner (19:08): What I mean is are they more accurate in the shorter term than the long-term forecasts?
Ben Graham (19:11): Well we’ve been following that interesting question for a generation or more and I must say frankly that our studies indicate that you have your choice between tossing coins and taking the consensus of expert opinion. And the results are just about the same in each case. Your question as to why they are not more dependable – it’s a very good one and interesting one. My own explanation for that is this: That everybody in Wall Street is so smart, that their brilliance offsets each other, and that whatever they know is already reflected in the level of stock prices pretty much. And consequently what happens in the future represents what they don’t know.
Unknown questioner (19:56): Would you kindly comment on an item appearing in the newspapers to the effect that while 45% of buying today is on margin, the money borrowed is equal to only 1% of the value of listed stock.
Courtney Brown (20:12): The amount of trading on the stock exchange is a very small part of the total value of all the securities that are listed there on. And when you say that the total amount of borrowing on margins financed by brokerage loans is only 1% of the value, it is a reconcilable figure. You can’t reconcile it unless you have the detailed data with you, but it isn’t incompatible in any way.
Ben Graham (20:34): I might add a point on that Dean Brown and that is the slow increase in brokers loans as compared with 45% marginal trade, would indicate that a good deal of the marginal trading is between people who are taking in each other’s washing – that is the marginal buyers are buying from sellers who are previously on margin. And that’s why the rate of growth of brokers’ loans is so much smaller now than it had been in the 1920s, when I think a good deal of the selling had come from long-term owners and really smart people who were selling out to the suckers.
Unknown questioner (21:09): I want to raise a point of argument here on this question of inflation. Seems to me that you’re correct in stating that there’s been no inflation in ‘54 but there also appears to be several long-term inflationary points in the economy today. These I think are the deficits spending that’s supposed to be continued by the government, the easy money policy which is expected to continue, the question of increased union wages, the talk about increased minimum wage, and the talk about a guaranteed wage. All these and on top of this, the rogue program of US$101 billion which the government has just announced. These seem to me to be long-term inflationary things in the US economy and I wish you’d talk about these.
Courtney Brown (21:57): That’s a question that has a good many angles on it. Perhaps we both better try it. Prof Graham, why don’t you take the first crash?
Ben Graham (22:00): I think there are two answers to that in my mind. The first is that acknowledging that there are inflationary elements in governmental policy as it’s now being carried out, it may be argued that those are just necessary to keep things on an even keel because without them, we might have some inbuilt deflationary factors in the way business operates through increased productivity capacity and so forth.
Courtney Brown (22:27): I’ve been impressed with the possibility of labour costs as an inflationary factor. But a rise in wages does not necessarily mean a rise in labour costs. It depends upon the relationship of the rate of change in wages and the rate of change in output per man-hour, or productivity. Now if wages are related to productivity, as you know they were in the General Motors contract, there is no necessary inflationary consequence to be anticipated. However, apart from that, it’s entirely possible that if wages go ahead faster than changes in productivity there could be a seriously inflationary factor.
Unknown questioner (23:13): On the basis of your recent answer with regard to the psychological impact of the present condition of the market on the small investor, do you discount the entire theory of dollar averaging?
Ben Graham (23:30): I think there’s no doubt for this, accepting your premise the man will put the same amount of money in the market year after year for the next 20 years, let’s say, there is a great chance of coming out ahead regardless of when he begins and particularly regardless we should begin now. You have to allow for the human nature factor that no man can really say definitely just how he’s going to behave over the next 10 to 20 years. And there is danger that people start with the idea of being systematic investors over the next 10 to 20 years, may change their attitude as the market fluctuates – in the first instance, put more money into the market because they become speculators, and secondly, get disgusted and scared and don’t buy at all later on when prices get low. It’s a psychological danger – the fault is not in the stars or in the system but in ourselves I think.
TV presenter (24:27): That was a glimpse of a seminar examining the stock market at Columbia University. We move now to Washington, where Democratic Senator William J Fulbright has announced that his Banking and Currency committee will conduct an investigation of the market.
Unknown questioner (24:40): Senator Fulbright, why is your committee going to investigate the stock market?
William Fulbright (24:43): Well Mr Mayor, there are two principal reasons. One is that my committee has jurisdiction over the subject matter through its control and responsibility for the SEC. The second reason is that the unusual increase during the last 12 to 18 months in the level of prices would seem to warrant a study at this time.
Unknown questioner (25:04): Are you worried about another 1929?
William Fulbright (25:06): But of course there’s certainly a possibility of it. This situation is reminiscent of 1929. We know the Great Depression in the early ‘30s was heralded by the tremendous increase, the great rise in the stock market and then the great drop. That’s unsettling to the whole economy and it frightens people. It causes great harm to people on fixed incomes and so on. And another thing about it is that the greatest criticism of our system and our economy by our enemies – especially the Communists – is the instability of our economy and the why of our fluctuations and we should endeavour to minimise those fluctuations. Now I don’t know all the reasons involved in this. That’s why we’re going to have the study. But the objective is is to inform the Congress and inform the people as far as we can about the conditions that now exist and we would then hope to be able to develop some remedy for it, some way to control these wild fluctuations.
I confess with what limited knowledge I have, it does disturb me because it has gone up for such a long time and to such a great extent – I think far beyond what the conditions in the country itself warrant. I happen to know of my own knowledge that in the agricultural areas in the southwest, we are having a very severe depressed period. There is no boom in the agricultural areas, the rural areas of the West, and the Southwest. So that most of this boom is concentrated in the market and I think it is unhealthy but I’m unwilling to take a dogmatic stand now. That’s why as I say, we’ll have the study.
Unknown questioner (26:52): Well Senator Fulbright, I think you have referred to this as a friendly investigation. What exactly is a friendly investigation?
William Fulbright (27:00): Well what I meant to convey is that I have no knowledge nor even suspicion of wrongdoing, manipulation, or anything of that kind in this increase. And I approach it in a friendly spirit in the spirit of trying to find out for the information of the country and of our committee and the Congress, what has been taking place. I’m not approaching it with the idea that we’re going to reveal a lot of wrongdoing.
TV presenter (27:27): The stock exchange hasn’t been investigated for 20 years, but it remains the subject of curiosity and concern as to whether what is good for the exchange is good for the country and the people who live here. There have been no official charges that it has been rigged or manipulated but rather the question of whether or not the market is healthy. There is wide disagreement amongst the experts as to why the market behaves as it does. But there is considerable agreement that it behaves the way it does because people behave the way they do.
Good night and good luck.
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