This chapter is really Graham’s attempt to highlight how all those who participate in what we call “Wall Street” can miss seeing things that are “extremes” when it comes to creating negative outcomes for investors. Graham highlights 4 companies, one that as an example of the system neglecting the “most elementary” warnings of financial weakness, the second an example of careless lending enabling reckless expansion, the third highlighting some accounting chicanery in M&A and the last an example of extremely inflated price of a stock offering which the public still bought.
While the specifics of the examples above are beyond the scope of my import in this series, when discussing the fourth and final example, Graham offers one of my favorite quotes from the book, stating: “The speculative public is incorrigible. In financial terms it cannot count beyond 3. It will buy anything, at any price, if there seems to be some “action” in progress. It will fall for any company identified with “[fill in your fad of the day]” when the particular fashion is raging.”
If you think we’ve evolved since the 1970s then I’ve got a blog to sell you. Human nature remains undefeated. Humans will buy a jpeg of a monkey, a coin sold based on a viral video, will bet on eight leg parlays, you name something with some “action” and we’ll be there, price and risk be damned.
Commenting on Commentary on Chapter 17
Zweig updates Graham’s four “extremes” with more recent (year 2000’s) corporate examples. Some of the examples may provide us with stories that sound familiar today. For example, Zweig discusses Lucent Technologies, a stock that went from $51/share to $1.26/share in 2 years time. The point of this example was that all the warning signs were there; they were just ignored.
One warning sign Zweig highlights is “customer financings” in which Lucent had lent or guaranteed their purchasers financing of purchases of their products. Isn’t this a story we hear with the AI buildout today? Suppliers funding their own buyers, recycling cash flows, so called “circular financing”. The story today might be one based more on equity investments and less on debt funding, but the risks are likely very similar.
Another of Zweig’s four examples of extremes is the IPO of eToys in 1999, an IPO that history regards as an example of the tech bubble top. The story is one of investors buying a narrative where no price was too high. A narrative that ultimately collapsed when the reality of the company losing nearly $400 million in less than two years time.
Perhaps the lesson is simple, human nature remains undefeated.
“The wisdom god, Woden, went out to the king of the trolls, got him in an armlock, and demanded to know of him how order might triumph over chaos. “Give me your left eye,” said the troll, “and I’ll tell you.” Without hesitation, Woden gave up his left eye. “Now tell me.” The troll said, “The secret is, ‘Watch with both eyes.”
-John Gardner
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