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Quote of the Day

 

“After all, you only find out who is swimming naked when the tide goes out.”

-Warren Buffett in his 2001 letter to shareholders

 

On this day in 2008, a very well known fund manager would be found swimming naked…

December 11th – This Day in Stock Market History


December 11th, 1930 – The Bank of the United States (not a government entity) closes its doors and declares bankruptcy.

bank of US bankruptcy
New York Times coverage of the Bank of U.S. Bankruptcy

 

The stock market was up 50% from the lows in 1929, and many thought the worst of the great depression was over. But the Bank of the U.S.’s failure proved that it was only in the early innings. The Bank of the United States would be the largest bank failure in the nation’s history at the time, with $300 million in deposits ($1.875 billion adjusted for inflation). The bank’s failure re-ignited the panic and increased distrust in banks that would ultimately lead to President Franklin Roosevelt closing all banks in the country on March 6th, 1933.

Source: Panic, Prosperity, and Progress: Five Centuries of History and the Markets

 

December 11th, 1957 – Capital Cities IPOs at $5.75 a share.

The company started its public life with a market cap of $299,000 (52,000 shares at $5.75). Merged with ABC on March 19th, 1985, and was finally sold to Disney July 31st, 1995 for $19 billion.

Over his rein, CEO Tom Murphy would develop into one of the best businessmen in his generation. Capital Cities investors had a annual compounded return of more than 32%, one of the best long term track records in history. Warren Buffett has referred to Murphy and his partner Dan Burke as the best management team “the world has ever and maybe ever will see”.

Chart of Capital Cities growth from William Thorndike's book, The Outsiders
Chart of Capital Cities growth from William Thorndike’s book, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

 

1 share purchased on this day in 1957 would be worth $219,000 when the company was sold to Disney.

For those who want to learn more about Tom Murphy (who sits on Berkshire Hathaway’s Board of Directors), The Outsiders book is a great place to start.

 

December 11th, 1985 – The Dow Jones Industrial Average closes above the 1500 mark for the first time.

Source: The Market’s Measure

The market struggled to go much of anywhere from the mid 60’s through the early 80’s. Starting in late 1985 the stock markets began a leg up that would become known as the greatest bull market in history.

Dow Jones Industrial Average 1985

 

 

December 11th, 2008 – Bernie Madoff is arrested.

Madoff’s ponzi scheme involved taking client’s money, depositing the money into a bank account (never the stock market) and generating fake trades and account statements that listed fake returns. When clients asked for returns, they were given money from the bank account. For years, new clients were depositing more money into Madoff’s fraud than clients were withdrawing, so the ponzi scheme continued.

 

But the 2008 financial crisis was the final straw for Madoff. As customers rushed to the exit as the markets fell, Madoff quickly ran out of money. 2 weeks before he was arrested he had 4,800 client accounts.

 

Wall Street Journal cover of Madoff's arrest December 11th
Wall Street Journal cover of Madoff’s arrest December 11th

 

 

Here is how CNBC covered the news:

Madoff was sentenced to 150 years in prison. After sentencing he apologized to the victims:

“I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. This is something I will live in for the rest of my life. I’m sorry.”




Best December 11th in Dow Jones Industrial Average History

1928 – Up 2.04%, 5.39 points.

Worst December 11th in Dow Jones Industrial Average History

1931 – Down 3.43%, 2.83 points.

 

 

Read of the Day

 

Of course the original “ponzi” was Charles Ponzi himself. Much like Madoff, Ponzi promised above average returns and paid off client redemption with new client money. Ponzi’s scheme kept up until 1920 when he surrendered to authorities. Ponzi’s life and story is told in the book “Ponzi’s Scheme