VIEWPOINTS : Pendulum Swings Back to Growth : Investors Should Keep the Faith

Reaching 2,000 on the Dow was an event that the majority of investors greeted with a yawn instead of a nosebleed. It pleased them but it certainly didn’t make them think that the market had attained stratospheric levels and now was on the verge of a terrifying collapse.

Why this seeming complacency? A brief review of the abrupt swings in the mentality of investors during the last 30 years will make it clear that the nonchalance--or more accurately, faith--is well-founded.

The 1950s were a period of suburbanization in the United States. The post-World War II baby boom, which peaked late in the decade, made millions of young couples think seriously about raising their children in a suburban home rather than an urban apartment.

Tangibles were in--real estate, in particular--as people invested in affordable housing being built near every major city. Stocks, especially the blue chips, were appealing to the upwardly mobile, and so were the material possessions (Cadillacs with tail fins) they had been unable to buy during the war.

That changed in the 1960s, once the children of these families began to come of age and this largest-ever generation became a force in its own right.

The number of new investors, young and old, who poured into the stock market seeking instant wealth--not from blue chips, naturally--was as huge as it was naive.

Dozens of new issues and penny-stock promoters preyed on their innocence, and long before Ivan F. Boesky’s name was in the news, Bernard Cornfeld and Robert Vesco (who remains a fugitive to this day) fleeced them of hundreds of millions of dollars.

No matter, the pendulum had swung: Financial instruments were strongly in style at the time, not tangible assets. As the children of the Woodstock era were quick to say: “Hang loose, stay free, avoid hassles.” Mobility was everything. Houses were fun to play with on a Monopoly board but were not as portable in real life as paper holdings were.

The 1970s saw the mentality of investors swing back again, so much so that by the end of the decade gold had climbed more than twentyfourfold in value, the price of wheat experienced a tenfold increase in export markets and oil multiplied its price by 20.

The Hunt brothers, embodiments of this period every bit as much as Cornfeld and Vesco were of the prior decade, intensified the prevailing trend by trying to corner the silver market. For a change they ended up costing themselves, instead of the public, billions.

The point, however, is that the flight from financial instruments went nationwide as the decade progressed, and eventually it reached an extreme in the collectibles boom.

Baseball trading cards, old comic books, Tiffany lamps, pewter plates, art and antiques of all sorts, not to mention farmland in Iowa and Texas, doubled and then doubled again in price.

How did it end? In a collapse of commodities and collectibles prices, of course, at the beginning of this decade. Even more suddenly than it had before, the pendulum then swung wildly in the other direction.

The new mentality influenced a capital flow that now had to be measured in the hundreds of billions of dollars and involved both domestic and international investors.

Although real estate has done relatively well during the decade, financial instruments--especially stocks and bonds--have generally outperformed tangible assets by a significant margin.

Will the trend continue? With the Dow up more than 1,200 points in the last five years, there were bound to be naysayers emerging who would claim--too soon--that this shift in investor sentiment has finally run its course, and that in fact we are replaying 1928 and 1929.

Their arguments crucially ignore the low level of speculation--the yawn, not the frenzy--with which 2,000 on the Dow was accompanied.

Brokers cheered; the public was quietly pleased. Nevertheless, since we did have a Great Depression before, no one will be able to still a voice that says we are on the verge of having one again.

The world of fiction (for instance, Paul Erdman’s “The Panic of ‘89”) as well as nonfiction (economist John Kenneth Galbraith’s recent writings and TV appearances) both offer Chicken Littles doing their best to convince us that the end is near.

How near? Ah, there’s the rub. This is always the flaw in these morbid or strident pitches intended to make alleged sinners (this time, in the stock market) adopt whatever “morality” the person is preaching.

Even people who aren’t discussing money or investing use it freely. When I first visited San Francisco in 1960, I was startled to hear a little old lady on the porch of a house I was walking past say: “There is a tremendous earthquake coming, and it’s going to level this whole state.”

I replied anxiously: “When is it due?” Serenely she answered: “I don’t know. But I’ve been warning people about it for 50 years, and one of these days, I’m going to be right.”

Her warning, and Erdman’s or Galbraith’s, can never be proved wrong, since these doomsday preachers could always claim that the date they gave was premature.

It is worth remembering that Erdman’s earlier book on the subject was called “The Crash of ’79.” (Is there a “Crash of ‘99” in the works?) In the meantime, it seems to me that the greater danger is to be out of a market whose mentality still has a considerable distance to go before it becomes exhausted. Good investment alternatives in a low-interest, low-inflation environment, such as the present one, aren’t easy to come by.

Three things are worth keeping in mind: First, the easy money has already been made, so careful stock selection becomes essential at this point.

Second, this market cycle, like those in the 1950s, ‘60s and ‘70s, will also run its course eventually. That will probably happen, as earlier bear markets did, in anticipation of the next recession (the market typically declines six months before the onset of such economic contractions.) Then, some selling will indeed be called for to safeguard one’s gains as well as one’s investment capital.

Finally, pessimism always sounds profound, and optimism superficial. So people who preach the darkness of our collective future can, if nothing else, hope to be thought of as deep, even if they are profoundly wrong--and cost worried investors who run for the sidelines a fortune in the process.