“Bailout Plan Rejected, Markets Plunge, Forcing New
Scramble to Solve Crisis” — Headline, Wall
Street Journal, September 30, 2008
With the year coming to a close, I had commenced my seasonal
ritual of cleaning out my office of the many articles, reports,
unread magazines and numerous items, the relevance of which had
totally escaped my memory.
It is a daunting task given my inherited pack-rat gene, the gift
of my beloved father who has just about every will he ever
drafted for a client, dating back to the Eisenhower
administration, in his basement. I swear, he still has an
original edition of Scott’s Antarctic journal down there, a
childhood gift, the very same edition the doomed explorer’s widow
edited to keep from the British public evidence of her husband’s
less than stellar performance. What a prize that would be — if
we could find it.
As I started culling the piles of debris scattered across my
desk, bookcase, and computer table, I came across a trio of front
pages from the Wall Street Journal, Washington
Post and New York Times. All three displayed banner
headlines for September 30, 2008, on the failure of the House of
Representatives to pass the first $700 billion bailout (a
“financial-rescue package” as described by the Journal).
“Defiant House Rejects Huge Bailout; Stocks Plunge; Next Step Is
Uncertain,” wailed the Times.
“House Rejects Financial Rescue; Sending Stocks Plummeting,”
roared the Post.
The Journal echoed these lamentations with “Bailout Plan
Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis.”
Noting the identical observation of all three papers, that the
stock market had plunged and plummeted in the wake of the bailout
package’s defeat, I examined the stories and graphs more closely.
As of that date, the Dow Jones Industrial Average sustained its
biggest point drop in history and its biggest closing decline
since the reopening of the markets after 9/11. The Dow finished
the day 7 percent down with a 777.68 drop to 10365.45.
The Standard & Poor’s 500-stock index fell by almost 9
percent to 1106.42, the third biggest decline since World War II.
Thinking back to the panic and urgency of those days, I was not
alone in feeling that sense of doom conveyed by these headlines.
No wonder, Congress, with the help of some carefully targeted
earmarked pork, managed to muster the votes to pass the bill on
the second try. Yet, with the benefit of hindsight, we had not
yet seen the worst of the stock market losses, not by a long
shot.
By the close of 2008, the Dow had cratered to 8776.39, a decline
of -33.8 percent. The S&P 500 came crashing down to 903.25, a
loss of -40.5 percent for the year. The NASDAQ crashed landed to
1577.03, a staggering drop of -40.5 percent. Internationally,
some exchanges sank even lower.
The sad truth is that the really stupendous stock market losses
came after the bailout package passed Congress and not
before. It all reminds me of an old joke. “They told me if I
voted for Barry Goldwater, we would wind up with half a million
men in Vietnam. I did, and we do.” If you didn’t support the
Bush-Paulson bailout, no questions asked, the stock market would
lose over a third of its value. Get it?
Of course, one cannot infer a causal relationship from a temporal
succession of events. To believe that the cock’s crowing causes
the sun to rise is to fall prey to the logical fallacy, post
hoc ergo propter hoc (“after this therefore because of
this”). But one has to wonder if we might have been able to
engage in a more extended, in-depth debate over the ends and
means, the pros and cons, the right and wrong as well as the
good, the bad and the ugly of this massive intrusion of the
federal government into the nation’s financial sector and the
taxpayers’ wallets.
Just before commencing the paper purge of my office, I had been
reading a story in this month’s Money magazine on
fundamentally sound companies that have experienced unprecedented
loss of value in their stock. For instance, Intel (now at “the
top of the semiconductor food chain”), which suffered a bear
market loss of 52 percent, has an unbelievable price-earnings
ratio of 9.6 and a stock price of $12.49.
American Express, which generates more of its income from fees
rather than interest on its credit cards, saw a 70 percent market
loss and trades at only 7 times earnings. So on and so forth.
Then my son-in-law starts telling me the same thing about Apple,
its freedom from debt and customer loyalty (all my kids swear by
MacBook and iPod), etc. Soon I am starting to get that strange
feeling — the shaking, the sweating, the breathing, the tension
— which numerous deer hunters have described as they sit in a
tree stand, freezing their whatever off, waiting for that
once-in-a-lifetime shot at that massive, antlered buck, you know,
Bambi’s elusive ol’ man.
This is a new feeling for me. For almost my entire adult life, I
have avoided picking individual stocks as a game for suckers or
truly brilliant investors such as Warren Buffett or Peter Lynch,
who made Fidelity Magellan Fund into such an icon for many years.
I drank all the Kool-Aid served up by the likes of John Bogle,
founder of the Vanguard Funds, and Burton G. Malkiel, the author
of A Random Walk Down Wall Street, now in its umpteenth
edition. I walked the path of efficient markets, no-load index
funds and the management of risk through slavish mimicry of the
entire market, not just the domestic market but global markets,
nay, inter-galactic markets. I was, ontologically, mindlessly, a
Boglehead. The market is smarter than any one of us.
It is astounding what a 30-40 percent drop in market value will
do to a man. Intel, American Express, Apple! Buy low, sell high.
Open an account. Call a broker. Have nice chat with that pretty
blond on Charlie Schwab’s website. Where will it all end?
It will all come to tears.
(Mr. Mehan is still paying college tuition for the
youngest of his seven children in Northern
Virginia.)
