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Quote of the Day

“As time goes on, I get more and more convinced that the right method of investment is to put large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”

-John Maynard Keynes, in a letter written August 15th, 1934.

August 15th – This Day in Stock Market History

August 15th, 1945 – U.S. stock markets close to celebrate the end of World War 2.

Japan formally surrounded the day before, August 14th, 1945. Stock markets would reopen August 17th, 1945 without much excitement, as rumors of Japan’s surrendering had been floating around the trading floor for over a week.

In fact, it seems the news was already priced in. The Dow Jones Industrial Average would close down 0.25% on August 17th, 1945.

Times Square, NY celebration of the surrender of Japan to end World War 2
Times Square, NY celebration of the surrender of Japan to end World War 2

August 15th, 1971- President Nixon signs Executive Order 11615, ordering a 90 day freeze on wages and prices in an attempt to reduce inflation.

In a speech given on this day in 1971, Nixon would say:

“I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days. In addition, I call upon corporations to extend the wage-price freeze to all dividends.”

The same speech would also announce an end to a gold-based dollar. Beginning on this day in 1971, U.S. dollars would no longer be exchangeable for gold. Nixon would say:

“In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy–and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.”

In addition, Nixon would announce a 10% tariff on all good imported into the U.S, and a 10% reduction in foreign aid.

The freeze would have no lasting effect on American inflation. The nation would fight high inflation for the next decade:

Chart from Multpl
Chart from Multpl

Best August 15th in Dow Jones Industrial Average History

1932 - Up 5.25%, 3.32 points.

Worst August 15th in Dow Jones Industrial Average History

1997 - Down 3.11%, 247.37 points.

Read of the Day

The quote for the Quote of the Day sounds very much like something Warren Buffett or his mentor Ben Graham would write, but it in fact comes from someone before Buffett's time. John Maynard Keynes was a very successful investor (after nearly going under twice!), the evolution of Keynes's investment philosophy is fascinating and is detailed in our post here:

The Evolution of a Super-Investor - John Maynard Keynes

There is also a great book published on the investing life of Keynes, "Keynes's Way to Wealth" that is definitely worth a read.

Warren Buffett also quotes this letter in his 1991 letter to shareholders and expands on the topic a bit more (which is certainly an interesting viewpoint in a time where index investing is becoming so popular!):

"We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. This focus doesn't guarantee results: We both have to buy at a sensible price and get business performance from our companies that validates our assessment. But this investment approach - searching for the superstars - offers us our only chance for real success. Charlie and I are simply not smart enough, considering the large sums we work with, to get great results by adroitly buying and selling portions of far-from-great businesses. Nor do we think many others can achieve long-term investment success by flitting from flower to flower. Indeed, we believe that according the name "investors" to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic. If my universe of business possibilities was limited, say, to private companies in Omaha, I would, first, try to assess the long- term economic characteristics of each business; second, assess the quality of the people in charge of running it; and, third, try to buy into a few of the best operations at a sensible price. I certainly would not wish to own an equal part of every business in town. Why, then, should Berkshire take a different tack when dealing with the larger universe of public companies? And since finding great businesses and outstanding managers is so difficult, why should we discard proven products? (I was tempted to say "the real thing.") Our motto is: "If at first you do succeed, quit trying."

John Maynard Keynes, whose brilliance as a practicing investor matched his brilliance in thought, wrote a letter to a business associate, F. C. Scott, on August 15, 1934 that says it all: "As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. . . . One's knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence."

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