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Quote of the Day

 

“Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed.”

-Ben Graham

 

June 1st – This Day in Stock Market History

 

June 1st, 1720 – One of the greatest speculative bubbles in history nears its peak, as the South Sea Company shares jump to from £595 to £720 on this day.

 

The company would sell £50 million worth of shares in June 15th, 1720 for £1,000 per share.

Around this time, shares of the South Sea Company would reach all time high price of £1,050.

Just a few months later, the shares would fall to below £200.

Source: Yale School of Business South Sea Project data

 

June 1st, 1932 – Ben Graham publishes the first of his three part series of articles titled “Is American Business Worth More Dead than Alive?” in Forbes Magazine.

Part 1 was published this day in 1932, titled: “Inflated Treasuries and Deflated Stockholders” – In what may be one of the best timed article ever written as the great depression reaches its bottom on July 8th 1932.

 

Graham’s article begins:

“Suppose you were the owner of a large manufacturing business. Like many others, you lost money in 1931; the immediate prospects are not encouraging; you feel pessimistic and willing to sell out–cheap. A prospective purchaser asks you for your statement. You show him a very healthy balance sheet, indeed. It shapes up something like this:

The purchaser looks it over casually, and then makes you a bid of $5,000,000 for your business–the cash, Liberty Bonds and everything else included. Would you sell? The question seems like a joke, we admit. No one in his right mind would exchange 8 1-2 millions in cash for five million dollars, to say nothing of the 28 millions more n other assets. But preposterous as such a transaction sounds, the many owners of White Motors stock who sold out between $7 and $8 per share did that very thing–or as close to it as they could come.

The figures given above represent White Motors condition on December 31st last. At $7 3/8 per share, the low price, the company’s 650,000 shares were selling for $4,800,000–about 60 per cent of the cash and equivalent alone, and only one-fifth of the net quick assets. There were no capital obligations ahead of the common stock, and the only liabilities were those shown above for current accounts payable.

The spectacle of a large and old established company selling in the market for such a small fraction of its quick assets is undoubtedly a startling one. But the picture becomes more impressive when we observe that there are literally dozens of other companies which also have a quoted value less than their cash in bank. And more significant still is the fact that an amazingly large percentage of all industrial companies are selling for less than their quick assets alone–leaving out their plant and other fixed assets entirely.

This means that a great number of American businesses are quoted in liquidating value; that in the best recent judgment of Wall Street, these businesses are worth more dead than alive.”

 

The entire article can be read on Forbes’ archives found here.

 

 

 June 1st, 2009 – General Motors declares bankruptcy and is bailed out by the U.S. Government.

Once one of America’s strongest companies, the great recession had taken its toll on GM, in addition to its large pension liabilities and increased costs. GM’s hardships were well known; GM had announced a loss of $38.7 billion the year prior, sales had fallen 45%, and GM had warned the government and investors that it would soon run out of cash.

 

Shares closed the day at 75 cents, and were removed from the Dow Jones Industrial Average June 8th, a spot in the index it had held since 1925. GM had over $172 billion in liabilities, making it the 2nd largest U.S. Industrial bankruptcy at the time.

 

 

General Motors had been one of the country’s best known brands and most widely owned stocks. The company had paid a dividend for 55 consecutive years, and was a common holding in many pension and retirement accounts.

By mid 2009, shares would be worthless:

Best June 1st in Dow Jones Industrial Average History

1938 – Up 2.66%, 2.87 points

 

Worst June 1st in Dow Jones Industrial Average History

1931 – Down 4.43%, 5.69 points

Read of the Day

• Interested in how Ben Graham was able to come to his well timed conclusion in 1932? His book “Security Analysis” was used as the textbook for his class at Columbia. It is a massive book, thoroughly detailing his investment analysis technique. As a bonus, the newest edition has forward and commentary by Warren Buffett and Jason Zweig – Check it out on Amazon here