value and opportunity

“The Go Go years” was how the late 1960ties were called at Wall Street. Although covering a time almost 50 years ago and written in the early 1970ties, this book is still a very good read as a lot of things that happened and a lot of things invented in the 1960ties still influence capital markets.

Among the innovations of the 1960ties were Mutual funds, conglomerates, earnings per share games via acquisitions, financial “innovation” like convertibles, letter stocks etc. etc. Especially the interaction between the new and red-hot Mutual funds and the acquisition hungry conglomerates pushed up stock market levels significantly over the 60ties.

The book gives a very good account especially how stocks were actually traded back then. Paper certificates had to e moved from seller to buyer and due to the increasing trading levels, a lot of transactions wer not correctly settled. Also woman were rarely seen in “real” finance jobs and were denied entry to most of the restaurants around Wall street.

The book contains also some amusing side stories about the beginning the Hippy movement, for instance that many of the back office guys were pretty much on drugs all the time which further added to the back office problems.

There is also good coverage on some of the most “notorious” conglomerates and early “Raiders” like Saul Steinberg, who, finally unsuccessfully tried to take over one of the biggest banks back then, Chemical Bank.

Although this isn’t mentioned in the book we all know that Warren Buffett closed his partnership in 1969 because he didn’t find anything interesting to invest in, but he was definitely not a houshold name back then. Funnily enough, Buffet’s Berkshire itself became the most succesful conglomerate ever over the next 50 years, although with a clearly more conserative structure then the “Go go” guys.

The whole story culminates in the “almost fail”of two of the biggest brokerage houses at that time, Goodbody and Du Pont in the early 1970ties. Du Pont was actually rescued by Ross Perot, founder of EDS and future billionaire presidential candidate.

This part of story almost reads like a 1:1 copy to Bear Stearns and Lehman Brothers 40 years later. Too much leverage, aggressive deals etc. Interestingly, the partnership structures did not prevent those problems as “partners” could take out their capital with a 30 day notice. of course those institutions “had to be saved”, a 1970ties version of to big to fail. Goodbody by the way was “saved” by Merril Lynch, which as we all know now had to be saved 40 years later by Bank of America. Other than now, no tax payer money was involved though.

There is a pretty good Wikipedia entry about the author John Brooks, a “New Yorker” staff writer who has written a couple of other interesting sounding books.

Overall I found this a very very good book and a “must read” for anyone interested in the history of Wall Street and the stock markets in general.

Some lessons to be learned are from my point of view:

1. On Wall Street and in finance generally, “innovation” very often means gains for the guys who run them and big risks and big pain in the long-term for investors

2. Brokerage houses and banks are naturally unstable institutions. Even the best regulation will not make them stable businesses

3. Investors forget quickly, only 10-15 years after that episode, the junk bond mania broke out. After 10-15 years it seems one can run the same schemes again. The current startup, social media etc “craze” is taking place 15 years after the first dot.com boom

4. Whenever the “plumbing” of the market is not working, it gets dangerous. Something similar was happening in 2007/2008 with unsettled CDS contracts

5. Business stratgies relying on ongoing and ever biiger acquisitions are risky and most often do not end well (Valleant anyone ?)

The author closes the book with the expectation that Wall Street will never be the same. To a certain extent he was right as future events were not “The same” but the basic patterns were very similar. Boom bust, speculation, greed, fraud belong to Wall Street, only their appearance changes slightly.

P.S.: The “go go” years were called so because quite often, people would stand before stock tickers in brokerage offices and shouting “Stock x – go go go stock x”….