The Worst Time to Buy Is When Everyone Believes It

The Worst Time to Buy Is When Everyone Believes It

On this day in economic and business history...

Black Tuesday struck the Dow Jones Industrial Average on Oct. 29, 1929, shaving 11.7% off the index just one day after Black Monday set a record for lost value that would stand until 1987. Black Tuesday set a record of its own -- more than 16 million shares traded hands in the frenzy, and this level of volume would not be surpassed until 1968. In more than a century, the Dow has only ever recorded a handful of double-digit percentage declines, and the second and third worst of all time took place on consecutive days in the fall of 1929.

These two Black trading days, which destroyed nearly a quarter of the Dow's value in less than 48 hours, mark a sharp break between the Roaring '20s and the onset of the Great Depression. Some $30 billion in market value was destroyed in these two days -- an amount equal to more than 30% of U.S. GDP -- and at this point in the Great Crash, the Dow had already lost 40% of its value since peaking at 381 points in early September.

The most surprising thing about Black Tuesday, to those of us with the benefit of hindsight, is that the national mood was overwhelmingly positive. Toward the end of the day, wrote the Los Angeles Times, "There was a wave of optimistic feeling among the brokers. Old traders 'felt it in their bones' that the worst was over." Journalists, financiers, and politicians from across the country stridently championed an imminent return to prosperity. The Associated Press and The New York Times gathered many notable statements in Black Tuesday's aftermath, and to these seasoned professionals, Wall Street's future was so bright that everyone would soon need to wear shades:

The Kansas City Star wrote: "Now that the inevitable deflation has come, business conditions remain essentially sound ... the way is prepared for a further advance in industry."

"The sagging of the stocks has not destroyed a single factory, wiped out a single farm or city lot or real estate development... all those things are still there," claimed New York News.

The New York World wrote: "However sour things may look to individuals at the moment, the country has not suffered a catastrophe."

The Louisville Herald-Post quoted "the elder Morgan... who observed that in the long run it never paid to be a bear on the United States."

"The stock market crash is the result of many forces, most of them transitory, and all of them combined incapable of upsetting the firm base of prosperity," wrote the Baltimore Sun.

"The country is in reality no poorer than it was before the boom set in," claimed the Des Moines Register. "We may look forward confidently to a much saner and much safer financial winter than promised a few weeks ago."

The Davenport Times wrote, "The nation is economically sound. Now, not a month ago, is the time to be bullish on America."

"Values are still there," wrote the Troy Morning Record. "We can still afford to be bulls on the United States."

The Chicago Herald and Examiner wrote, "It is difficult to believe that financial shoppers in this country and abroad will not take advantage of the low prices at which the very best of securities are selling."

The St. Louis Globe-Democrat claimed that "the country is too well fortified by its business and financial conditions to be materially disturbed. ... conditions have never been more favorable than they are at this time."

"Conditions will right themselves without serious injury to the country or to the market," wrote the Louisville Courier-Journal.

The Chicago Daily Tribune also recorded the bullishness of several notable Wall Street insiders. Albert Conway, New York State superintendent of insurance, declared that lowered stock prices had now made them "suitable investments for large insurance companies." Robert S. Brinker, president of United States Shares Financial, agreed, saying, "We have been substantial purchasers in today's market." JPMorgan President Thomas W. Lamont, a key figure in the market panic, told the Tribune that "the feeling among the bankers is that the public is coming somewhat to its senses."

Today, these statements seem like a greatest-hits collection of bad forecasting and irrational optimism, but it's important to remember that most available metrics still showed an economy in full bloom. Investors in 1929 simply didn't have anything like the wealth of economic analysis we enjoy today. This information gap, combined with persistent and irrational optimism, proved ruinous for many investors in the wake of Black Tuesday. When the market finally bottomed out in the summer of 1932, the Dow was 82% lower than it had been on Oct. 29, 1929.

A new publishing permutation
Penguin and Random House became Penguin Random House, the world's largest book publisher, on Oct. 29, 2012. The two publishing houses, owned by Germany's Bertelsmann and London's Pearson , respectively, had come together for "unmatched leverage against ," in the words of The New York Times. It was, in essence, the first major old-media response to the rise of the e-book. The new megapublisher was to control more than a quarter of the global book business and boasted combined annual revenues of about $3.9 billion.

Penguin Random House, which will publish more than 15,000 new titles a year, might have more leverage over Amazon than its component parts once did, but it won't be able to push the online retailer around for long. E-book sales, which continue to grow rapidly, made up 20% of all publishing revenues in 2012, up from 15% the year before. Total publishing revenues, on the other hand, only grew by 7%, with hardcovers and paperbacks essentially flat. Such an evident discrepancy between the growth of the digital and the physical will probably force more large publishing houses into each other's arms -- or into the grave -- before the e-book revolution is over.

Your ability to access this article today stems directly from two letters sent between UCLA and the Stanford Research Institute on Oct. 29, 1969. The first ARPANET communication attempted to transmit the word login, but only managed lo before crashing. When these two letters showed up on the tape at Stanford, it signaled the start of a computerized world that would eventually revolutionize every aspect of modern life.

The technology behind ARPANET was essential in the later development of the Internet, and the World Wide Web that runs atop it. In 2011, the McKinsey consultancy published a study that attempted to quantify the value of the Internet, finding that in 2009:

  • 2 billion people are connected to the Internet.

  • Nearly $8 trillion is spent on global e-commerce each year.

  • Two-thirds of all businesses have a web presence.

  • The 13 countries that comprise more than 70% of global GDP generate roughly 3.4% of their combined GDP -- $1.4 trillion -- from Internet-related activities.

  • The U.S. captures more than 30% of global Internet revenue and more than 40% of net income.

  • Online marketing represents 15% of total marketing spending.

As time passes, these numbers are bound to improve. The spread of online-capable smartphones, which surpassed a billion users in 2012, will help extend the Internet to millions and ultimately billions of people in developing countries that may have never used a computer before. By the end of this decade, you're not likely to find any company in any industry untouched by the Internet -- and that revolution began in 1969 with the letters L and O.

ARPANET's legacy
One of the largest IPO pops in history traces its lineage back to ARPANET: Akamai Technologies , "an Internet networking company developed by MIT scientists," in the words of CNNMoney, went public on Oct. 29, 1999 after pricing its offering at $26 per share. By the end of the trading day, Akamai's shares closed at $145.19, giving early shareholders a first-day pop of 458%. The company, which offered 9 million shares, left $1 billion on the table by pricing its IPO so far below what the market could bear.

Only seven other IPOs have ever opened with larger first-day pops in the history of American stock markets, and only one still exists as an independent publicly traded company, albeit not one of much note. All went public at the height of the dot-com bubble, from late 1998 to early 2000. The one remaining public holdout of those bubbly days has put together a less impressive post-IPO performance than Akamai's -- while Akamai's shares remain 69% below their first-day closing price, its onetime dot-com megapop peer has lost more than 99% of its first-day value. Investors who got to buy shares at the offering price had a happy few weeks, but nearly everyone who invested for the long term got burned badly by the dot-com era's megapops.

Real growth at good prices
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