How to lose $8 million in the market
Investing Journey has a portfolio update (at the end of the article)
Just a week or so before the Dow Jones Industrial Average crashed in late 1929, Yale University economist Irving Fisher (1867-1947) famously proclaimed: “Stock prices have reached what looks like a permanently high plateau.” As you can imagine, this forecast delivered a heavy blow to his professional reputation.
Until this contretemps, Fisher was one of the first celebrity economists. He not only was frequently published in academic journals to wide acclaim from his peers but also prolific in his clear and accessible expositions in mainstream media on a variety of economic topics and causes he held dear - such as conservation of the environment and the League of Nations as an instrument for world peace.
He started to accumulate wealth after inventing and patenting in 1913 a card-index filing system that eliminated the laborious process of searching card catalogues. The company formed to commercialize the invention became profitable and merged in 1925 with its rival to form the Remington Rand company. Fisher was on the board of directors and held a large stock position.
As the stock market boom of the 1920s progressed, he borrowed from the banks to buy more of the company’s shares. Inspired by the success of his card-index filing system, he also borrowed to buy shares in early-stage companies to get in on the ground floor of some exciting new concepts.
He had given his son, Irving Jr., and daughter, Carol, some of his Remington Rand shares toward the end of the 1920s as part of his estate planning. His son asked about the advisability of selling part of his shares to diversify. Fisher suggested he instead borrow against half and buy more – because in 6 to 12 months, Fisher felt, his son should be able to sell and diversify a larger sum. Irving Jr. disregarded the advice.
Just before the stock market crashed in October of 1929, Fisher’s portfolio was concentrated in a few stocks and worth US$8 million (after netting out the debt), as Irving Jr. disclosed in his book: My father, Irving Fisher. After the crash, the market went on a multi-year decline, occasionally interrupted by transitory rallies. Fisher, an inveterate optimist, hung on, convinced the market would regain its bullish uptrend.
But as the value of his stocks continued to fall, the banks called for more collateral to cover the loans. His wife, who came from a wealthy family, put up her blue-chip stocks for that purpose. Later, his wife’s sister was approached, and she too put up a sizable portion of her portfolio.
Remington Rand stock was priced at $58 just before the market crash. The deflationary spiral took it all the way down to $1 at the nadir in 1933. As for his bets on promising young companies, they were swept away.
Fisher’s millions were wiped out. Also gone was most of his wife’s wealth, as was three-quarters of a million dollars from her sister’s portfolio. Yale University had to come to the aid of Fisher and his wife, buying their house and renting it back to them.
Why did such an intelligent and accomplished person take such great risks? It was not greed for more possessions or greater status. It was the desire to have enough wealth to set up a foundation that would continue to work on his many causes after his death.
Portfolio update: sold VIX call options
The VIX call options bought about a month ago (see Oct. 21 post) were SOLD on Friday, Nov. 26, during the market plunge triggered by news of a new COVID variant, originating from South Africa. Since the VIX Index moves inversely to the stock market and is a hedge against market downturns, the calls delivered a good gain of over 50% for offsetting the losses elsewhere in the portfolio.
At the time of the sale, the VIX Index had soared to 27, almost double the strike price on the calls. The 27 level was the same level the VIX reached at the peak of the Evergrande debt crisis in September, which was a more serious event in my opinion. So, it seemed the market was overreacting on Friday, especially considering there still wasn’t a lot of details known about the new variant.
It also seemed like it could be another case of the psychological behaviour known as recency bias. We saw this after the U.S. housing collapse in 2008 when dozens of analysts in Canada kept predicting for years afterward that the Canadian housing market was going to also collapse. We may have seen it again on Friday, with the market’s swift and overwhelming response to the new variant, a reaction likely fueled by still fresh memories of the March 2020 crash when Covid first burst onto the scene. I could be wrong but trying to time exits perfectly often doesn’t work well.