Monday, 22 September 2008

A Random Walk Off Wall St

I remember on “Black Monday” in October 1987 (when share prices fell by about 25% in a single day - puts the recent falls to shame) I was in Dusseldorf trying to agree a deal. As I walked around I saw screens in bank windows showing the price falls and feeling very out of touch; we had good meetings but the changed world made the deal irrelevant.

I felt just the same on Wednesday, the day after AIG was saved and Lloyds agreed to buy HBOS. I was in Newcastle catching odd glimpses into what was happening and feeling that what I was doing was irrelevant.

The positive spin from 1987 is that of course things recovered, new opportunities arose: in due course they will here as well.

The title comes from the book A Random Walk Down Wall St. It suggests share prices move like a random walk (aka a drunkards walk). In other words (and very simplistically), it is not possible to beat the market except by chance and that if you must invest you should get a representative mix of shares and just hold on. Fortunately for the financial industry, most private investors don’t believe this and waste their money trying to do better.

A quote from another book, The Go-Go Years , about the collapse of confidence in Wall St in the late 1960s shows little has changed and summarises what’s gone wrong in the past few years:

"..in America - with its deeply imprinted business ethic - no inherent stabilizer, moral or practical, is sufficiently strong .. to support the turning away of new business when competitors are taking it on. As a people, we would rather face chaos making potsfull of short term money than maintain long term order and sanity by profiting less. A former high SEC official, talking to me in 1969.., defended the SEC's relative passivity by describing its rightful function as that of being "an arbiter between powerful industry groups pulling in different directions".

Sounds familiar.

1 comment:

East Anglian Troy said...

My shares seem to do random plunges rather than random walks - sometimes within days of buying them!

Did you see that totally tasteless comment by Polly Toynbee about not enough bankers committing suicide?