MARKET PANIC Wild Gyrations, Risks and Opportunities in Stock Markets Stephen Vines MARKET PANIC Also by the author Hong Kong: China’s New Colony The Years of Living Dangerously First published in Great Britain in 2003 by PROFILE BOOKS LTD 58A Hatton Garden London EC1N 8LX www.profilebooks.co.uk Copyright © Stephen Vines, 2003 10 Designed and typeset in Souvenir by MacGuru info@macguru.org.uk Printed and bound in Great Britain by Clays, Bungay, Suffolk The moral right of the author has been asserted All rights reserved Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book A CIP catalogue record for this book is available from the British Library ISBN 86197 403 Contents Acknowledgements List of figures Preface ix xi xiii Chapter Preparing for panics and profiting from them Bear markets yield the biggest gains Bring on the crises Buying panics Why are investors bargain-averse? A simple strategy for success Booms and bubbles Identifying crashes and panics Telling signs Learning from history Professionalism, Oscar Wilde and the conducting of orchestras 6 10 13 15 16 19 Chapter Types of panics Phoney panics Self-induced or end-of-cycle panics Contagious panics Real panics Panics follow the market’s own bizarre logic 21 22 28 35 41 46 Chapter The panic cycle Panics get bigger, more unpredictable Volatility 49 51 52 Looking for causes of boom-and-bust cycles Stages of the cycle Government attempts to cope with panics This time, will it be different? New world – new crashes Dubious practices and crooks move in More a case of neglect than fraud 53 59 62 66 69 72 77 Chapter A new age of panics Stock markets bigger than national economies Mr Ponzi is alive and well New markets ϭ new capital? New markets, new volatility Where does all the money go? So, what role are stock markets actually performing? Contributing to instability – derivatives trading Contributing to instability – hedge funds Contributing to instability – portfolio insurance Contributing to instability – momentum investment Contributing to instability – program trading Contributing to instability – new technology Concentration of power The rise of the investment banks The stock option virus Infectious greed 79 80 82 83 85 86 91 94 97 100 102 102 103 104 107 113 114 Chapter The trader and the fund manager The trader: Warren Primhak The fund manager: John Carey 117 117 126 Chapter The psychology of panics Rational explanations for the seemingly irrational It’s people, not markets, who panic 137 138 138 Herd behaviour Hostility to contrary opinions Optimism overcomes fear Fear overcomes greed Risk aversion Coping with new information Momentum Illusions of control How the past becomes a distant country Behaviour in emerging markets is different Perception is all – defying the herd 142 144 146 147 148 150 154 156 157 160 162 Chapter Does diversification provide protection against stock market fluctuations? Decision regret When to switch Returns for diversified portfolios Diversification into property Diversification into gold Diversification into bonds The case for equities and only equities Diversifying within the equity market The great defensive stock myth Switching between markets Diversification through derivatives Doing nothing is best 165 166 166 167 169 173 177 179 181 182 184 186 189 Chapter Is the market always right? Back to basics The origins of equity investment The problem with efficient markets theory What is rational stock market behaviour? The god of shareholder value 193 194 194 197 200 202 The earnings game The M&A game Paying shareholders, robbing companies How the markets batter economies Entrepreneurs shunning stock markets The hired hands versus the controlling shareholders Despite everything – the case for stock markets Understanding the contradictions Like revolutions, markets kill their babies Stock markets nurture the strong Shutting out market noise 203 206 210 212 213 214 218 220 222 223 224 Chapter Opportunity Bear markets produce the greatest opportunities Speculating on recovery Understand the bias – understand the market Timing Setting targets The brave investor Predicting extreme behaviour New markets – old patterns The stakes are higher A conflict of interest 227 227 228 231 232 235 237 238 240 241 242 Notes Select bibliography Index 243 255 259 Acknowledgements M have provided advice and assistance in the production of this book Their generosity and guidance is much appreciated I only hope that in making these acknowledgements I have not left anyone out This project has received active and extremely helpful support from Martin Liu of Profile Books from the earliest planning stage It has been copy-edited with considerable diligence by Trevor Horwood, who has an uncannily keen eye for spotting the inconsistent, the irrelevant and the missing It was not always easy to find the data contained in this book and I am especially grateful to Tim Adam of the Hong Kong University of Science and Technology (HKUST) for digging out a large mass of figures Patrick Dunne furnished helpful advice on how to put this data into chart form The splendid library at the HKUST, as ever, was my primary source of written material and the library’s helpful staff provided considerable assistance in locating everything I asked for A number of people have supplied useful ideas and suggested sources which have helped considerably Among them are Matthew Brooker, Bob Bunker, Jonathan Green, Andreas Kluth, Ilja MaynardGregory, Tony Measor and Bill Mellor John Carey and Warren Primhak, who are the subjects of the interviews in Chapter 5, gave up a lot of time for this purpose and showed great patience throughout my repeated questioning I am ANY PEOPLE ix NOTES 14 Merton Miller, Merton Miller on Derivatives, John Wiley & Sons, New York, 1987, pp 80–81 Chapter Is the market always right? Gary Santoni and Gerald Dwyer, ‘Bubbles or Fundamentals: New Evidence from the Great Bull Markets’, in Eugene White (ed.), Crashes and Panics: Lessons from History, Dow Jones/Irwin, New York, 1990 Robert Shiller, Market Volatility, MIT Press, Cambridge, Mass., 1989, p Robert Shiller, Irrational Exuberance, Princeton University Press, Princeton, NJ, 2000, pp 5–7 Fabio Canova and Gianni De Nicolo, ‘Stock Returns and Real Activity: A Structural Approach’, in International Stock Returns and Business Cycles, CEPR Conference Report No 5, Centre for Economic Policy Research, London, 1994 Stephen LeRoy, ‘Capital Market Efficiency: An Update’, in Robert Kolb (ed.), Financial Institutions and Markets: A Reader, Kolb Publishing, Miami, 1991, Article 15, p 157 Lawrence Summers, ‘Does the Stock Market Rationally Reflect Fundamental Values?’, Journal of Finance, Vol 41, No 3, July 1986, p 599 Peter Spiro, Real Interest Rates and Investment and Borrowing Strategy, Quorum Books, Westport, Conn., 1989, p 173 Harris Collingwood, ‘The Earnings Cult’, New York Times, Sept 2002 Karen Lowry Miller, ‘The Giants Stumble’, Newsweek, July 2002 10 AT Kearney, Merger Endgames, Chicago, 2000, see http://www.atkearney.com 11 Associated Press Report, ‘Finally, Some Kind Words for Corporate Takeovers’, International Herald Tribune (Paris), August 2002 251 MARKET PANIC 12 Edward Chancellor, Perverse Incentives, Prospect, London, 2002 13 Ibid 14 ‘Recent Equity Market Developments and Implications’, OECD Economic Outlook, OECD, Paris, Dec 1998, Chapter 5, pp 168–9 15 George Melloan, ‘CEO’s Face the Music for Irrational Exuberance’, Asian Wall Street Journal (Hong Kong), 30 July 2002 16 David Reilly, Philip Segal and Jonathan Weil, ‘Stock-Option Accounting Colors Earnings Pictures’, Asian Wall Street Journal (Hong Kong), 17 July 2002 17 Patrick Hosking, ‘The Business’, New Statesman, 24 June 2002 18 ‘Stock Markets and Economic Growth’, World Bank Policy Research Bulletin, Washington DC, Vol 6, No 2, March–April 1995 19 George Soros, The Alchemy of Finance, John Wiley & Sons, New York, 1994, p 14 20 Ibid., p 49 21 Judi Bevan, The Rise and Fall of Marks & Spencer, Profile Books, London, 2001, p 96 Chapter Opportunity John Kenneth Galbraith, The Great Crash 1929, Houghton Mifflin, Boston, 1988, p 70 Gary Brinson and Roger Ibbotson, ‘US Equity Returns from Colonial Times to the Present’, in Charles Ellis and James Vertin (eds.), Classics II: Another Investor’s Anthology, AIMR Business One/Irwin, Homewood, Ill., 1991 Jack Schwager, Market Wizards: Interviews with Top Traders, New York Institute of Finance, New York, 1989, pp 132–4 Ibid., pp 73–4 252 NOTES George Ross Goobey, ‘Human Foibles’, in Charles Ellis and James Vertin (eds.), Classics: An Investor’s Anthology, Dow Jones/Irwin, Homewood, Ill., 1989 New York Stock Exchange, Share Ownership, NYSE, New York, 2000 253 Select bibliography Arbel, Avner and Albert Kaff, Crash: Ten Days in October … Will it Strike Again?, Longman, USA, 1989 Beckett, Sean and Gordon Sellon, ‘Has Financial Market Volatility Increased?’, in Robert Kolb (ed.), Financial Institutions and Markets: A Reader, Kolb Publishing, Miami, 1991, Article 14 Beidleman, Carl, The Handbook of International Investing, Probus, Chicago, 1987 Bernstein, Peter, Against the Gods: The Remarkable Story of Risk, John Wiley & Sons, New York, 1996 Bitters, Warren, The New Science of Asset Allocation, Glenlake, Chicago, 1997 Brady, Nicholas (chairman), Report of the Presidential Task Force on Market Mechanisms, US Government Printing Office, Washington, DC, 1998 Chancellor, Edward, Devil Take the Hindmost: A History of Financial Speculation, Farrar, Straus and Giroux, New York, 1999 Chote, Robert, ‘International Stock Returns and Business Cycles’, in International Stock Returns and Business Cycles, CEPR Conference Report No 5, Centre for Economic Policy Research, London, 1994 Cohen, Bernice, The Edge of Chaos: Financial Booms, Bubbles, Crashes and Chaos, John Wiley & Sons, Chichester, 1997 255 MARKET PANIC Dimson, Elroy and Paul Marsh, ‘An Analysis of Brokers’ and Analysts’ Unpublished Forecasts of UK Stock Returns’, Journal of Finance, Vol 39, No 5, Dec 1984 Galbraith, John Kenneth, The Great Crash 1929, Houghton Mifflin, Boston, 1988 Galbraith, John Kenneth, A Short History of Financial Euphoria, Whittle Books, New York, 1993 Garber, Peter, ‘Who Put the Mania in the Tulip Mania?’, in Eugene White (ed.), Crashes and Panics: Lessons from History, Dow Jones/Irwin, New York, 1990 Garber, Peter, Famous First Bubbles, MIT Press, Cambridge, Mass., 2000 Hubbard, Glen (ed.), Financial Markets and Financial Crises, University of Chicago Press, Chicago, 1991 Kindleberger, Charles, Manias, Panics and Crashes: A History of Financial Crises (1978), John Wiley & Sons, New York, 2000 edition Kleidon, Allan, ‘Stock Market Crashes’, Research Paper 1262, Jackson Library, Stanford University, Jan 1994 Le Bon, Gustave, ‘General Characteristics of Crowds: A Psychological Law of Their Mental Unity’, in Charles Ellis and James Vertin (eds.), Classics: An Investor’s Anthology, Dow Jones/Irwin, Homewood, Ill., 1989 LeRoy, Stephen, ‘Capital Market Efficiency: An Update’, in Robert Kolb (ed.), Financial Institutions and Markets: A Reader, Kolb Publishing, Miami, 1991, Article 15 Mackay, Charles, Extraordinary Popular Delusions and the Madness of Crowds (1841), Harmony Books, New York, 1980 edition Miller, Merton, Merton Miller on Derivatives, John Wiley & Sons, New York, 1987 Miskin, Frederic, ‘Asymmetric Information and Financial Crises: A Historical Perspective’, in Glen Hubbard (ed.), Financial Markets 256 SELECT BIBLIOGRAPHY and Financial Crises, University of Chicago Press, Chicago, 1991 Miskin, Frederic, ‘International Capital Movements, Financial Volatility and Financial Instability’, National Bureau of Economic Research Working Paper 6390, Cambridge, Mass., 1998 Moriarty, Eugene, Douglas Gordon, Gregory Kuserk and George Wang, Statistical Analysis of Price and Basis Behavior: October 12–26, 1987, S&P 500 Futures and Cash in the Stock Market: Bubbles, Volatility and Chaos, Kluwer Academic, Boston, 1988 Morris, Charles, Money Greed and Risk – Why Financial Crises and Crashes Happen, Times Books, New York, 1999 Pierce, Phyllis (ed.), The Dow Jones Averages, Business One/Irwin, Homewood, Ill., 1991 Santoni, Gary and Gerald Dwyer, ‘Bubbles or Fundamentals: New Evidence from the Great Bull Markets’, in Eugene White (ed.), Crashes and Panics: Lessons from History, Dow Jones/Irwin, New York, 1990 Schwert, William, ‘Stock Market Crash of October 1987’, in Peter Newman, Murray Milgate and John Eatwell (eds.), The New Palgrave Dictionary of Money and Finance, Macmillan, London, 1992, pp 577–82 Sherman, Eugene, Gold Investment: Theory and Application, Prentice-Hall, New York, 1986 Shiller, Robert, Market Volatility, MIT Press, Cambridge, Mass., 1989 Shiller, Robert, Irrational Exuberance, Princeton University Press, Princeton, NJ, 2000 Siegel, Jeremy, Stocks for the Long Run: A Guide to Selecting Markets for Long-Term Growth, Irwin, Homewood, Ill., and New York, 1994 Sill, Keith, ‘Predicting Stock Market Volatility’, in Peter Rose (ed.), Readings on Financial Institutions and Markets, Irwin, Homewood, Ill., 1994–5, Article 20 Sobel, Robert, The Pursuit of Wealth: The Incredible Story of 257 MARKET PANIC Money Throughout the Ages, McGraw-Hill, New York, 2000 Soros, George, The Alchemy of Finance, John Wiley & Sons, New York, 1994 Spiro, Peter, Real Interest Rates and Investment and Borrowing Strategy, Quorum Books, Westport, Conn., 1989 Summers, Lawrence, ‘Does the Stock Market Rationally Reflect Fundamental Values?’, Journal of Finance, Vol 41, No 3, July 1986 Tvede, Lars, The Psychology of Finance, Norwegian University Press, Oslo, 1990 Vines, Stephen, The Years of Living Dangerously: Asia from Financial Crisis to the New Millennium, Texere, London, 2000 White, Eugene (ed.), Crashes and Panics: Lessons from History, Dow Jones/Irwin, New York, 1990 258 Index A Adelphia Communications, 74 Albania, Ponzi scheme, 82, 161 Anxiety symptoms, 147–8 AOL-Time Warner, 93, 208 Arthur Andersen, 74, 75 Asian tigers, 71, 185 AT Kearney, 208 AT&T, 128 Atlantic, 145 Austria, stock market, 86 B Babson, Roger Ward, 145 Bagehot, Walter, 16 Balance sheets, xvii Bank of America, Bank of England, 31, 98 Barclays Capital Equity-Gilt Study, 177, 178 Barings, 73, 187 Barings Securities Far East, 118 Barsky, Neil, 112–13 Baruch, Bernard, 139 Bear markets, xv, 3, 227–8 Beir, Greg, 187 Benchmarking, 129 Berkshire Hathaway, Bernstein, Peter, 140, 165, 166 Bevan, Judi, 224 Bikhchandani, Sushil, 156 Bitters, Warren, 169 Blodget, Henry, 33, 111, 113 Bloomberg, 134 Blunt, John, 30, 31 Boeing, 133 Boesky, Ivan, 76 Bonds, 177–9 vs stocks, 177–9 Boom and bust cycle, 15–16 Booms Asian markets 1990s, 71–2 causes of, 11–12, 53–9 collapse of, 12–13 dot com, 28–9, 50–51, 59, 62, 67–8, 87, 93, 128, 132, 158, 182, 200, 216, 222 Japan, 69–70 Mexico 1990s, 70 1990s, 10 Booz Allen Hamilton, 215 Bretton Woods agreement, 38 Bristol-Myers, British stock market bear market of 1972–3, 42 biggest fall, 86 crash of 1964, 52 follows US, 185 house brokers, 110 origins, 195 Broadcasting, financial, 150–51 Bubbles, definition of, 11 259 MARKET PANIC Buffet, Warren, 7, 80, 113 Bull markets, xv, Business Week, 105, 151 Buying panics, C Cable and Wireless, 93 Canada, crash of 1962, 52 Canova, Fabio, 198 Carey, John, 126–35, 182 Caswall, George, 30, 31 CEOs, turnover of, 215 Chance, Don, 186 Chancellor, Edward, 210 Chartists, 34, 157–8 China gold investment, 174 stock market, 83, 240 Chinese investors, 160–61 Chrysler (DaimlerChrysler), 222 Churchill, Sir Winston, 219 Citicorp, Clausewitz, Karl von, 163–4 Clifton, Eric, 156 Clinton, President Bill, 67, 111–12 CNBC, 111, 133 Cohen, Abby Joseph, 111 Collingwood, Harris, 204–5 Corrigan, Gerald, 96 Cost of new capital, 88 Crashes causes of, 14 government intervention, 63–6 Crash of 1848, 38 Crash of 1857, 38 Crash of 1866, 16 Crash of 1890, 38 Crash of 1907, 51–2 260 Crash of 1929 brokers’ loans, 56 comparison with 1987, 14–15 land speculation, 52 market drop, performance of utility stocks, 184 post-crash gain, recession, 42, 43 recovery period, 10 Crash of 1987 comparison with 1929, 14–15 contagion from Japan, 35–6 dominant players, 154 economic expansion, 44–5 fund managers’ response, 130–32 government action, 62 market drop, market turnover, post-crash gain, Presidential Task Force on Market Mechanisms, 66, 100–101, 154 roll of derivatives trading, 97 roll of portfolio insurance, 100–102 Crises Argentinean (2001), 179 Asian (1990s), 39–40, 119 IMF intervention, 64 banking, 51 major American, Mexican (1994–5), 39–40 non-economic, 26–8 Crisis 1974, 230 Crisis 2001 economic downturn, 43–4 fund managers’ response, 133–4 market decline, 17 market reopening, xiv INDEX post-attack poll, 155–6 subsequent price falls, 115 terrorist attack, 25–6 traders’ response, 124–5 Cutler, David, 26 D Daimler Benz group, 222 Dalio, Ray, 73 Data General, 128 Dean Witter, 18 De Bondt, Werner, 146 Decision regret, 166 Defensive stocks, 9–10, 17, 182–4 Dell Computer Corporation, 32 De Nicolo, Gianni, 198 Derivatives, 94–7 as hedging, 96–7, 187, 237 as risk insurance, 188–9 as speculation, 187–8 for diversification, 186–9 new issues, 60–61 Deutsche Securities Asia, 20, 118 Digital, 127 Diversified portfolios, 167–9 for risk aversion, 237 Dollar cost averaging, 234 Dorsett, Dovalee, 158 Dow, Charles, 154 Dow Jones, 154 Dow Jones Industrial Index (DJIA) biggest one-day gains, versus rest of world 1990–2002, 36–8 Dresdner Klienwort Wasserstein, 114 Dutch stock market, 195 Dutch tulip mania, 29–30, 95, 138, 141 Dwyer, Gerald, 14, 197 E Earnings, 203–6 consensus forecasts, 203–4 growth (US), 204 quality, 204 scams, 205–6 EBITDA, 33 Edwards, Franklin, 97 Efficient markets theory, 46–7, 197–200, 221, 227 Eisenhower, President Dwight, heart attack, 13, 23–4 Emerging stock markets, xix, 83–6, 240–41 psychology of, 160–62 Energy stocks, 129 Enron Corporation, 74–5, 114, 211 Equity issues (IPOs), 60, 92, 113 Erleigh, Viscount, 30 Extreme behaviour, 238–9 F Falkland Islands, 24 Family run corporations, 214–18 Fear, 147–8 Finland, stock market, 86 Fisher, Irving, 2, 49 Fixed capital investment, 84–5, 90–91, 211 and stock prices, 89 Ford Motor Company, 5, 214, 222 France, fall of (1940), 46, 55 French Revolution, 222 261 MARKET PANIC French stock market, crash of 1958, 52 Friedman, Milton, 54, 59, 63 Fundamental analysis, 126, 202–3 G Galbraith, John Kenneth, 1, 12, 72, 145, 158, 159, 164, 228 Garber, Peter, 29,138 General Electric, 206 General Motors, 5, 32, 128, 222 German stock market follows US, 185 Globalisation, 38–9, 241 Gold, 167, 173–6 vs stocks, 175–6 Goldsmith, Sir James, 207 Goobey, George Ross, 234 Graham, Benjamin, 147, 225, 239 Grantham, Jeremy, 47, 114 Granville, Joseph, 151 Grasso, Dick, xiii Great Depression, xiii Greenbury, Sir Richard, 224 Greenmail, 207 Greenspan, Alan, 58, 96, 112, 115 Grenada, invasion of, 23 Gross National Product vs stock market capitalisation, 80–82 Hong Kong hedge funds, 98 market intervention, 64 stock market closure, 63 Hong Kong Telecommunications, 93 Hosking, Patrick, 219 Hostility to contrarians, 144–6 I IBM, 152 Illusion of control, 156–7 India gold investment, 174 stock market, 83, ING Groep, 123 Insider information, 152–4 Insider trading, 152–3 Institutional investors, 104–7 Intel Corporation, 32 Interest rates, 52, 55–6 International Accounting Standards Board, 114 International Monetary Fund (IMF), 64 Investment banks, 107–13 Italy crash of 1963, 52 stock market, 86 H J Harris Interactive, 155 Hang Seng Index (Hong Kong), 37 Hatry, Clarence, 73 Heath, Christopher, 119 Hedge funds, 97–100 Herd instinct, 106, 139, 142–4, 156 Jamaica, stock market, 86 Japan boom (1990s), 69–70 crash (1990s), 51, 62, 202 detachment from other markets, 184–6 dividend policy, 177 262 INDEX example to West, 214 Kobe earthquake, 123 overtaken by Taiwan, 240 1987 crisis, 121–2 Jones, Paul Tudor, 231, 232 Lotus Development Corporation, 152 Lusitania, 22 Lynch, Peter, 165 K Mackay, Charles, 140–41, 142–3 Magellan Fund, 165 Mahathir Mohamad, Dr., 39 Malkiel, Burton, 105–6 Mannesmann, 93 Margin trading, 95–6 Market bias, 231–2 Market rumours, 201 Markowitz, Harry, 165 Marks and Spencer, 224 Marshall, Alfred, 187 McCain, John, 114 MCI, 206 Mergers and acquisitions, 88, 93, 206–10 activity in Asia, 216 herding, 209–10 numbers of, 207 results of, 207–8, 209 Merrill, Charles, 109–10, 159 Merrill Lynch, 5, 75–6, 108–10, 113 Metallgesellschaft, 188 Microsoft Corporation, 32, 223 Mieno, Yasushi, 70 Milken, Michael, 76 Miller, Merton, 96, 188 Minsky, Hyman, 59 Momentum investment, 102, 154–6 Money supply, 54–5, 59, 63, 66 Mutual fund performance, 105–6 Kahneman, Daniel, 148 Kaufman, Henry, 96 Kennedy, President John F., assassination, 23–4 Keynes, John Maynard, 53, 145, 174, 189, 199, 223, 238 Kindleberger, Charles, 16, 59, 60, 61, 72 Korean War, 24 Kovner, Bruce, 232 Kumar, Manmohan, 147 L Law of One Price, 91 Lawrence, Joseph, 228 Le Bon, Gustave, 143 Leeson, Nick, 73, 119, 123, 188 Leland, Hayne, 101 Lender of last resort, 62, 64 LeRoy, Stephen, 199 Lev, Baruch, 204 Leveraged buy-outs (LBOs), 99 Levin, Carl, 114 Li Ka Shing, 218 Li, Ronald, 73 Liem Sioe Liong (Sudono Salim), 218 Liquidity, 17–18, 124 Litman, Arthur, 76 Long Term Capital Management, 65, 66, 99 M 263 MARKET PANIC N Nacchio, Joseph, 209 Naisbitt, John, 71, 72 Nasdaq, 67–8, 94, 103, 128 National Center for Employee Ownership, 113 Neal, Larry, 30 Ned Davis Research, New Deal policies, 24–5 New East India Company, 31 New information, 150–54 share prices, 27–8 Newsweek, 207 New York Daily News, 74 New York Post, 137 New York Stock Exchange, origins of, 195 New York Times, 145, 204 Nikkei 225 Index (Japan), Nokia, 81 Non-stock market capital raising, 213–14 O Online trading, 103, 104 OPEC, 38 Operation Desert Storm, 23 Optimism, 146–7 Over trading, 60 Overend, Gurney, 16 P Pacific Century CyberWorks, 93 Panics causes of, 14 contagious, 35–41 cycle stages, 59–62 definition of, 13–14 264 end of cycle, 28–34 phoney, 22–8 real, 41–6 self-induced, 28–34 Pearl Harbor, 24 Persaud, Avinash, 147 Pettway, Richard, 91 Philippines, stock market, 85–6 Pickens, T Boone, 207 Pioneer Group, 127 Playboy, 60 Political impact, 45–6 Ponzi, Charles, 82–3 Ponzi schemes, 82–3 Portfolio insurance, 46, 100–102, 238 end of, 101 Poterba, James, 26 Pound, John, 153 Price-earnings ratios (PERs), 200 Pricing ,120 Prime Computer, 128 Primhak, Warren, 117–26, 235 Procter and Gamble, 187–8 Productivity, US, 210 Program trading, 102–3 Property investment, 169–73 vs stocks, 169–71 Proprietary trading, 112 Prospect theory, 148–9 Q Quest Communications, 209 R Radio Corporation of America (RCA), 32, 130 INDEX Railway shares mania, 32, 50–51, 59, 129–30, 216, 222 Recessions, 42 Reichenstein, William, 158 Research and development, 87 Returns on equity, US, 210–11 Risk aversion, 148–50, 238 Risk tolerance, 234–5 Rothschild, Nathan, 232, 235 Rubinstein, Mark, 101 Russian investors, 161, 240 S Sadler, Simon, 20 Santoni, Garry, 14, 197 Savings and loans associations, 65 Scams and swindles, 61, 72–7, 205–6 Schenk, Hans, 207–8 Schwager, Jack, 231 Securities and Exchange Commission, 152 investigations, 74 September 11 2001, terrorist attack, 25–6 Settlements, 118 Shares (equities) as percentage of assets, 196 bond yields, 56–8 buy-backs, 4–5 dividend relationship to stock prices, 197–200 vs capital gains, 201 yields, 56–7, 197–200 irrationality, 141–2 ownership, 19, 104, 107, 241 perceptions, 139–40 of risk, 162–3 prices, contrary information, 45 prices, new information, 27–8 returns, 180–81 vs other asset classes, 180–81 revulsion against, 61–2 trading limits, 62 turnover, 52, 103–4 uncertainty, 140 ‘Shareholder value’, 202 Sherif, Muzafer, 144 Sherman, Eugene, 175 Shiller, Robert, 85, 147, 152, 153, 155, 178, 197–8 Shulman, David, 67 Siegel, Jeremy, 45, 53, 180–81 Sirmans, C.F and Stacey, 169, 172 Smith, Adam, 60, 139 Soros, George, 35, 98, 139, 188, 221 South Sea Bubble, 30–32, 138 Southwest Airlines, 133 Spencer Thornton, 118 Spiro, Peter, 55, 172, 201 Spitzer, Eliot, 108–10 Sputnik, launch of, 22 Standard & Poors 500 Stock Index (1941–1999), 230 State Street Bank, 118 Stewart, Martha, 75 Stockbrokers’ analysts, 110–11 Stock markets capital raising, 93 fuel economic decline, 212–13 history repeats, 158–60 judgement of performance, 233–4 265 MARKET PANIC purpose of, 194 recovery periods, 228–31 Stock market closures European exchanges, 64 Hong Kong 1987, 63 New York 1873, 63 New York 1949, 63 New York 2001, 63–4 Stock options, 92–3, 113–14, 217, 219 Summers, Lawrence, 26, 200 Sunbeam, 205 Switching, 166–7, 189–90 globally, 184–6 T Taiwan, stock market, 86, 240 Tapley, Craig, 91 Targets, share trading, 8–9, 235–7 Templeton, Sir John, Thaler, Richard, 146 Thomson Financial/First Call, 203 Timing, 120, 232–5 Tobin, James, 45 Treasury bonds, 155 Trimbath, Susanne, 208–9 Trujillo, Solomon, 209 Tvede, Lars, 144–5, 151, 152, 163 Tversky, Amos, 147, 148 Twain, Mark, 14 Tyco International, 74, 206 266 U Uni Credito Italiano, 127 United Copper Company, 52 United Steel, 73 US Federal Reserve, 58 US Steel, 128 US Treasury bonds, 57–8 US West, 209 Utility stocks, 167, 182–4 V Value investors, Verniaud, Pierre, 222 Vodafone AirTouch, 93 Vogel, Ezra, 70, 71 W Wall Street Journal, 73, 134, 154 Wang Laboratories, 127 Weighting, 129 Welch, Jack, 206 WhisperNumber.com, 203 Wilde, Oscar, 19 Wood, Arnold, 156 Word of mouth communication, 153 WorldCOM, 74, 206 X Xerox Corporation, 74 Y Yahoo Inc., 33, 141–2, 200 .. .MARKET PANIC Wild Gyrations, Risks and Opportunities in Stock Markets Stephen Vines MARKET PANIC Also by the author Hong Kong: China’s New Colony The Years of Living Dangerously... the bubble bursts In bull markets the wise investor will be turning over their portfolios, taking profits and reinvesting them either in equities or in other assets In bear markets, ironically,... Bear markets produce the greatest opportunities Speculating on recovery Understand the bias – understand the market Timing Setting targets The brave investor Predicting extreme behaviour New markets