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Laguna Beach, California

• Did you buy this argument on March 11? You should have…
• The Mayer’s Special Situations Dollar Offer returns,
• Two more Rude issues and it’s adios! You comin’?

Joel Bowman, trying not to interrupt for long, from Taiwan, Taipei…

It is often said that those who do not learn from history are doomed to repeat it. But who cares about those who don’t learn? What about those who do? And, more importantly, what about those who actually PROFIT from their keen attention to relevant historical details?

On March 11 of this year – a mere 48 hours off what is still the year-to-date market low – we published in this space an article by Rude favorite and part time financial historian, Chris Mayer. In his column, Mayer boldly made the case for stocks, arguing that the then fresh market collapse had ushered in a “bull market in buying opportunities.”

There was plenty of blood on the streets when Chris and his readers waded back into the market. It takes a lot of courage to do that…but it also requires an astute sense for the lessons of history, the kind of sense Chris brings to his research service, Mayer’s Special Situations.

Today, as part of our “remembering Rude” series, we present the original column, with lesson intact. Please enjoy…

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A Bull Market in Buying Opportunitiesv
By Chris Mayer

Wall Street trader David Feldman lived through the Great Depression. In 1997, at the age of 87, he set down his thoughts in a little memoir entitled, “The Ups and Downs of a Wall Street Trader During the Depth of the Great Depression of the 1930s.” Interesting that he felt the need to apply “of the 1930s” to his title, so as not to confuse it with others that would follow.

In this memoir, I find some parallels to today. As an investor, the key takeaway for me is to proceed in 2009 with a great deal of caution. If I could sum up a game plan for 2009, it would be to stay with cash-rich and debt-light investments.

Let’s begin with the aftermath of 1929, which is not so dissimilar from the aftermath of the 2007-8 selloff. There was nearly universal optimism after the crash of 1929. When the pundits peered into their crystal balls for 1930, they were bullish to a man.

Feldman writes: “My research has uncovered nearly 50 prophesies the country’s leading businessmen, bankers and government officials contemplated as we slid into the worst economic calamity in the history of the United States. With the exception of a single one, every prediction of conditions in the cheerless year of 1930 was optimistic, even considerably upbeat.”

You could make the case that we see the same sort of thing today. Last fall, the legendary Warren Buffett was urging investors to buy stocks. He even published his bullish musings in a New York Times op-ed piece. Meanwhile, many longtime bears on the stock market were turning bullish. “This is the time to buy,” they said. But it was not EXACTLY the time to buy. The Dow has shed another 2,000 to 3,000 points since these various declarations of “the bottom.”

Most high-profile investors from the late 1920s behaved similarly. The lone exception Feldman found in 1930 was an editorial in the Times by a group of German financiers in Berlin. They predicted that “stocks may enjoy a big temporary recovery, but no prolonged bull movement is considered likely for several years to come.” Bull’s-eye!

Stocks slid to new lows by 1932. A short table of some issues selected at random by Feldman shows the damage:

After the crash, people and businesses did cut back, even though their financial leaders saw a rebound. And we’re seeing this now in our day. Consumer spending is falling. Capital spending is dropping. Another writer on the Depression, Frederick Lewis Allen, notes how the crash also wrecked the credit system. It endangered “loans and mortgages and corporate structures which only a few weeks previously had seemed as safe as bedrock.” Debts that once seemed bearable become a worrisome and heavy burden. Again, we’re seeing this unfold today as companies try to wriggle free of suddenly oppressive debts by trying to raise and conserve cash.

Statistics alone, fail to capture the economic devastation of the 1930s. But the statistics are breathtaking. The amount of money paid out in salaries dropped 40% from 1929-1932, according the National Bureau of Economic Research. Dividends fell 56%. The unemployment rate was about 25% in ‘32.

One thing we haven’t seen yet, but probably will, is a lot of consolidation among business. In the 1930s, Allen notes how there was “more zeal for consolidating businesses than for expanding them or initiating them.” With stock prices low, the cash rich in Corporate America have a chance to steal some things. Why invest in new oil wells when you can buy ‘em in the stock market for less than half of what they would cost you to drill new ones? Why build new factories when you can buy a competitor for 20 cents on the dollar?

As it turns out, the early 1930s were a good time to buy stocks, with one very important caveat: Avoiding companies that failed completely. As Feldman points out: “Stock prices [in the 1930s] were so low that so long as a company did not go out of business, practically anything you might buy was certain to go up, if not sooner, then later.” (Emphasis added). We might call this “Feldman’s Law of Depression Investing.” That caveat was not as easy to avoid as it may sound. By the end of 1933, more than 5,000 banks had failed. Thousands of businesses had also failed.

Feldman lost a lot of money in the crash and its aftermath, like almost everyone else. So what did this brutal experience teach him? “One thing that this experience taught me was that, in investing, you should never cry over spilt milk,” he writes. “Only the future is of importance.”

I don’t know if we are headed for another 1930s-style Depression or not. I think we are close to a precipice where that is more a possibility than at any time since the 1930s. Whatever the case, it will be critically important to stay with the cash-rich and debt-light companies. That’s where my focus is. “Cash was king,” Feldman writes of the depth of the Great Depression. “If you happened to have any, you were really in the driver’s seat.”

I want to be sure that I stick with the survivors and companies that can continue to build wealth, even if it doesn’t show up immediately in their stock prices. When we come out of this contraction, it is the stock in these companies that will pay off big.

Though the bear market of 2008-9 may seem like a calamity now, it may prove otherwise over time. As that great 17th-century wanderer, Jack Casanova, wrote in his memoirs: “My ill fortune, no less than my good, proved to me that…good comes from evil as evil comes from good.” Likewise, 2009 may be good fortune in disguise, as it allows us to pick up new ideas on the cheap.

Joel’s Note: If you would like to take a gander at exactly the kind of work Chris does, you can now do so for only $1. That’s right, back by popular demand is the Mayer’s Special Situations one-month, $1 trial offer.

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[Rude Endnote: Today is the second last Rude issue! Only tomorrow to go then we’re off to publish our insights in The Daily Reckoning. Have you signed up yet? If not, you can do so here for free.

That’ll be all…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com