The era of speculation described in the Money Game—and in Supermoney—began in the early 1960s and was pretty much over by 1968, only to be succeeded by yet another wave of speculation—albeit starkly different in its derivation—that drove the stock market ever higher through early 1973. Then the bubble of that era burst. By the autumn of 1974, the market had fallen by 50 percent from its high, taking it back below the level it had reached in 1959, 15 years earlier.

Both books reached large, eager, and well-informed audiences, deservedly earning “bestseller” status. In them, author “Adam Smith” recounted perceptive, bouncing, often-hilarious anecdotes about the dramatis personae of the stage-show that investing had become. While The Money Game was essentially a study in the behavior of individual investors, Supermoney, as its book jacket reminded us, was about the social behavior of institutional investors, focusing on the use of “supercurrency”—income garnered through market appreciation and stock options—which became the coin of the realm during the Go-Go years.

These two books quickly became part of the lore of investing in that wild-and-crazy era. In retrospect, however, they provided Cassandra-like warnings about the next wild-and-crazy era, which would come, as it happens, some three decades later. The “New Economy” bubble of the late 1990s, followed by, yes, another 50 percent collapse in stock prices, had truly remarkable parallels with its earlier counterpart. Surely Santayana was right when he warned that “those who cannot remember the past are condemned to repeat it.”

In the aftermath of that second great crash, as investors again struggle to find their bearings, the timing of this new edition of Supermoney is inspired. It is a thoroughly enchanting history, laced with wit and wisdom that provides useful lessons for those investors who didn’t live through the Go-Go years. It also provides poignant reminiscences for those who did live through them. Using the insightful (but probably apocryphal) words attributed to Yogi Berra, it is “déjà vu all over again.”

I consider myself fortunate to have learned the lessons of the supermoney bubble, albeit the hard way. While I was among those who lived and lost, both personally and professionally, in that era, I summoned the strength to return and fight again. Hardened in the crucible of that experience, I reshaped my ideas about sound investing. So as the New Economy bubble inflated to the bursting point in the years before the recent turn of the century, I was one of a handful of Cassandras, urging investors to avoid concentration in the high-tech stocks of the day, to diversify to the nth degree, and to allocate significant assets to, yes, bonds.

I also consider myself fortunate to have known and worked with Jerry Goodman (the present-day Adam Smith) during this long span, periodically interviewed for the Institutional Investor magazine (of which he was founding editor) and for his popular Public Broadcasting Network television show, Adam Smith’s Money World. We served together on the Advisory Council of the Economics Department of Princeton University during the 1970s, where his strong and well-founded opinions were a highlight of our annual roundtable discussions. While I have no hesitation in acknowledging Jerry’s superior mind and writing skill—a nice combination!—I console myself with our parity on the fields of combat. (Exact parity: Years ago, on a Princeton squash court, we were tied at 2-2 in the match and at 7-7 in the deciding game when the lights went out and the match ended.)

As one of a very few participants who have been part of the march of the financial markets during a period that has now reached 55 years—including both the Go-Go bubble of yore and the New Economy bubble of recent memory—I’m honored and delighted to contribute the foreword to this 2006 reissue of a remarkable book. I’ll first discuss the excesses of the supermoney era; next, the relentless retribution that came in its aftermath; and finally, the coming and going of yet the most recent example of the “extraordinarily popular delusions and the madness of crowds” that has punctuated the financial markets all through history. Of course if tomorrow’s investors actually learn from the hard-won experience of their elders and the lessons of history chronicled in this wonderful volume, there will never be another bubble. But I wouldn’t count on it!

Yet reality, finally, took over. When it did, the stocks that were in the forefront of the bubble collapsed, fallen idols that proved to have feet of clay. Consider this table from Supermoney:

	High	Subsequent Low
National Student Marketing	36	1½
Four Seasons Nursing Homes	91	0
Parvin Dohrmann	142	14
Commonwealth United	25	1
Susquehanna	80	7
Management Assistance	46	2

Stocks like these were among the favorites of mutual fund managers, and those that played the money game the hardest had the greatest near-term success. In its 1966 edition, the Investment Companies manual, published annually by Arthur Wiesenberger & Co. since the early 1940s, even created a special category for such funds. “Maximum Capital Gain” (MCG) funds were separated from the traditional “Long-Term Growth, Income Secondary” (LTG) funds, with remaining equity funds in the staid “Growth and Current Income” (GCI) funds category. During the Go-Go era (1963-1968 inclusive), the disparities in returns were stunning: GCI funds plus 116 percent; LTG funds plus 151 percent; MCG funds plus a remarkable 285 percent.

At the beginning of the Go-Go era, there were 22 MCG funds, at the peak 143. Amazingly, after its initial offering in 1966, Gerald Tsai’s Manhattan Fund—a hot IPO in an industry that had never before had even a warm IPO—was placed in the LTG category. The offering attracted $250 million, nearly 15 percent of the total cash flow into equity funds for the year, and its assets would soar to $560 million within two years. Tsai was the inscrutable manager who had turned in a remarkable record in running Fidelity Capital Fund—+296 percent in 1958-1965 compared to a gain of 166 percent for the average conservative equity fund. Newsweek epitomized Tsai’s lionization: “radiates total cool . . . dazzling rewards . . . no man wields greater influence . . . king of the mutual funds.” Tsai, no mean marketer, described himself as “really very conservative,” and even denied that there was “such a thing as a Go-Go (fund).”

During the bubble of 1963-1968, equally remarkable gains were achieved by other Go-Go funds. With the S&P 500 up some 99 percent, Fidelity Trend Fund rose 245 percent; Winfield Fund leaped 285 percent, and Enterprise Fund a remarkable 643 percent. But after the 1968 peak, these funds earned unexceptional—indeed subpar—returns during 1969-1971. Nonetheless, with their extraordinary performance during the boom years (however achieved), their lifetime records through 1971 continued to appear extraordinary.

It was not only mutual funds that joined in the market madness. While the cupidity of fund managers could at least be understood, it was not obvious why major not-for-profit institutions also succumbed. Even the Ford Foundation added fuel to the fire, warning that, “over the long run, caution has cost our universities more than imprudence or excessive risk-taking.” The poster-child for imprudence was the University of Rochester’s endowment fund. Supermoney describes its approach: “to buy the so-called great companies and not sell them,” a portfolio dominated by holdings in IBM, Xerox, and Eastman Kodak. The unit value of its portfolio (presented as an appendix in Supermoney) soared from $2.26 in 1962 to $4.95 in 1967, and to $5.60 in 1971—an aggregate gain of 150 percent. Could it really be that easy?

Alas, if only I knew then what I know now. Lured by the siren song of the Go-Go years, I too mindlessly jumped on the bandwagon. In 1965, I was directed by Wellington Management Company chairman and founder Walter L. Morgan to “do whatever is necessary” to bring the firm that I had joined in 1951, right out of college, into the new era. I quickly engineered a merger with Boston money manager Thorndike, Doran, Paine, and Lewis, whose Ivest Fund was one of the top-performing Go-Go funds of the era. The merger was completed in 1966. In 1967 I callowly announced to our staff that “We’re #1,” for during the five years ended December 31, 1966, the fund had delivered the highest total return of any mutual fund in the entire industry. So far, so good.

The story of that merger was chronicled in the lead article in the January 1968 issue of the Institutional Investor, whose editor was none other than George J. W. Goodman. “The Whiz Kids Take Over at Wellington” described how the new partners had moved Wellington off the traditional “balanced” investment course to a new “contemporary” course. In Wellington Fund’s 1967 annual report, it was described as “dynamic conservatism” by the fund’s new portfolio manager, Walter M. Cabot:

Times change. We decided we too should change to bring the portfolio more into line with modern concepts and opportunities. We have chosen “dynamic conservatism” as our philosophy, with emphasis on companies that demonstrate the ability to meet, shape and profit from change. [We have] increased our common stock position from 64 percent of resources to 72 percent, with a definite emphasis on growth stocks and a reduction in traditional basic industries. A conservative investment fund is one that aggressively seeks rewards, and therefore has a substantial exposure to capital growth, potential profits and rising dividends . . . [one that] demands imagination, creativity, and flexibility. We will be invested in many of the great growth companies of our society. Dynamic and conservative investing is not, then, a contradiction in terms. A strong offense is the best defense.

When one of the most conservative funds in the entire mutual fund industry begins to “aggressively seek rewards,” it should have been obvious that the Go-Go era was over. And it was over. Sadly, in the market carnage that would soon follow, the fund’s strong offense, however unsurprisingly, turned out to be the worst defense.

Part Two: Retribution Comes

When there is a gap between perception and reality, it is only a matter of time until the gap is reconciled. But since reality is so stubborn and tolerates no gamesmanship, it is impossible for reality to rise to meet perception. So it follows that perception must decline to meet reality. Après moi le déluge.

The ending of the Go-Go era in 1968 was followed by a 5 percent market decline in the stock market during 1969 and 1970. Even larger losses (averaging 30 percent) were incurred by the new breed of aggressive investors. But that decline was quickly offset by a 14 percent market recovery in 1971 (just as Jerry Goodman was writing Supermoney). In 1972, with another 19 percent gain, the market’s snapback continued. For the two years combined, both the market and the MCG funds produced a total return of about 35 percent.

Those final two years of the bubble reflected a subtle shift from the Go-Go era to the Favorite Fifty era. But that metamorphosis didn’t help the other, more conservative, equity funds. Why? Because as the bubble mutated from generally smaller concept stocks to large, established companies—“the great companies” epitomized in the Rochester portfolio, sometimes called the “Favorite Fifty,” sometimes the “Vestal Virgins”—the stock prices of these companies too lost touch with the underlying economic reality, trading at price-earnings multiples that, as it was said, “discounted not only the future, but the hereafter.”

But as 1973 began, the game ended. During the next two calendar years, the aggressive funds tumbled by almost 50 percent on average, with Fidelity Trend off 47 percent and Enterprise Fund off 44 percent. (Winfield Fund, off 50 percent 1969-1970, was no longer around for the final carnage.) Tsai’s Manhattan Fund, remarkably, did even worse, tumbling by 55 percent. By the end of December 31, 1974, Manhattan Fund had provided the worst—the worst—eight-year record in the entire mutual fund industry—a cumulative loss of 70 percent of its shareholders’ capital. In the meanwhile, Tsai, the failed investor but still the brilliant entrepreneur, had sold his company to CNA Insurance in 1968. By 1974, Manhattan Fund’s assets had dwindled by a mere 90 percent to $54 million, a shell of its former self, a name that virtually vanished in the dustbin of market history.

And at Rochester University, the value of the endowment fund—for all the noble intentions of its managers—also plummeted. The coming of the Go-Go bubble followed by the Favorite Fifty bubble had carried its unit value from $3.17 in 1964 to $7.20 in 1972, but their going had carried it right back to $3.13 in 1974—even below where it began a decade earlier. Après moi le deluge, indeed! (Reflecting the embarrassment of the Rochester managers, the cover of the endowment fund’s annual report for 1974 was red, “the deepest shade we could find.”)

My face was red, too. I can hardly find words to describe first my regret and then my anger at myself for having made so many bad choices: associating myself—and the firm with whose leadership I had been entrusted—with a group of Go-Go managers; the stupid belief that outsized rewards could be achieved without assuming outsized risks; the naive conviction that I was smart enough to defy the clear lessons of history and select money managers who could consistently provide superior returns; putting on an ill-fitting marketing hat to expand Wellington’s “product line” (a phrase I have come to detest when applied to the field of money management, accurate today only because the fund field is now one of money marketing, and, ugh!, product development). I too had become one of the mad crowd that harbored the extraordinary popular delusions of the day.

Ultimately, alas, the merger that I had sought and accomplished not only failed to solve Wellington’s problems, it exacerbated them. Despite the early glitter of success for the firm during the Go-Go years, the substance proved illusory. As a business matter, the merger worked beautifully for the first five years, but both I and the aggressive investment managers whom I had too opportunistically sought as my new partners let our fund shareholders down badly. In the Great Bear Market of 1973-1974, stock prices declined by a devastating 50 percent from high to low. Even for the full two-year period, the S&P 500 index provided a total return (including dividends) of minus 37 percent.

Most of our equity funds did even worse. During the same period, for example, Ivest lost a shocking 55 percent of its value. In my annual Chairman’s letter to shareholders for 1974, I bluntly reported that, “the fund’s net asset value declined by 44 percent for the August 31 fiscal year. . . . Comparing this with a decline of 31 percent for the S&P 500 . . . we regard the Fund’s performance as unsatisfactory.” (One of the fund’s directors was appalled by my recognition of this seemingly self-evident fact. He soon resigned from the board.) We had also started other aggressive funds during this ebullient era. When the day of reckoning came, they too plummeted far more than the S&P 500: Explorer minus 52 percent; Morgan Growth Fund minus 47 percent; and Trustees’(!) Equity Fund minus 47 percent. The latter fund folded in 1978; and a speculative fund—Technivest—that we designed to “take advantage of technical market analysis” (I’m not kidding!) folded even earlier.

Even our crown jewel Wellington Fund, with that earlier increase in its equity ratio and a portfolio laden with “the great growth companies of our society,” suffered a 26 percent loss in 1973 - 1974. Its record since the 1966 merger was near the bottom of the balanced fund barrel. With the average balanced fund up 23 percent for the decade, Wellington’s cumulative total return for the entire period (including dividends) was close to zero—a mere 2 percent. (In 1975, portfolio manager Cabot left the firm to become manager of the Harvard Endowment Fund.)

In a business environment that was falling apart almost week by week, this terrible performance put enormous strains on the once-cooperative partnership, strains that were soon exacerbated by personal differences, conflicting ambitions and egos, and the desire to hold the reins of power. Not surprisingly, my new partners and I had a falling out. But they had more votes on the Board, and it was they who fired me from what I had considered “my” company.

I had failed our shareholders and I had failed in my career—not in getting fired, but in jumping on the speculative bandwagon of aggressive investing in the first place. Life was fair, however: I had made a big error and I paid a high price.⁹¹ I was heartbroken, my career in shambles. But I wasn’t defeated. I had always been told that when a door closed (this one had slammed!) a window would open. I decided that I would open that window myself, resume my career, and change the very structure under which mutual funds operated, which was importantly responsible for the industry’s abject failure during the Go-Go era. I would make the mutual fund industry a better place to invest.

But how could that goal be accomplished? With the essence of simplicity. Why should mutual funds retain an outside company to manage their affairs—then, and now, the modus operandi of our industry—when, once they reach a critical asset mass, funds are perfectly capable of managing themselves and saving a small fortune in fees? Why not create a structure in which mutual funds would, uniquely, be truly mutual? They would be run, not in the interest of an external adviser—a business whose goal is to earn the highest possible profit for its own separate set of owners—but in the interest of their own shareholder/ owners, at the lowest possible cost. The firm would not be run on the basis of product marketing. The funds would focus, not on hot sectors of the market, but on the total market itself. The core investment philosophy would eschew the fallacy of short-term speculation and trumpet the wisdom of long-term investing. And so, on September 24, 1974, out of all of the hyperbole and madness of the Go-Go era and the Favorite Fifty era, and the travail of the great crash that followed, came the creation of the Vanguard Group of Investment Companies.

Part Three: Another Bubble

One of the most engaging anecdotes in Supermoney is the tale of an annual investment conference in New York City that attracted some 1,500 trust officers and mutual fund managers (presumably the 1970 Conference held by the Institutional Investor magazine). Jerry Goodman was the moderator, and as he writes, he “thought it would be a nice psychological purge after the [then] worst year of the Big Bear, if some of the previous winners could get up and confess their big sins.” However good for the soul that might have been, few confessions were forthcoming. But the crowd was reminded of its sins by crusty New Englander David Babson, who described the stock market of the day as “a national crap game.” His philosophy as an investment manager revolved around hard work and common sense, “virtues that would triumph in the long run.”

He lashed into the assembled crowd, describing how professional investors had “gotten sucked into speculation,” reading off a list, name by name, of once-vaunted stocks that had plummeted in price (from 80 to 7, 68 to 4, 46 to 2, 68 to 3, and so on), and suggesting that some of the assembled managers should leave the business. Despite Goodman’s warning (“David, you have passed the pain threshold of the audience”), Babson singled out “the new breed of investment managers who bought and churned the worst collection of new issues and other junk in history, and the underwriters who made a fortune in bringing them out . . . and elements of the financial press which promoted into new investment geniuses a group of neophytes who had . . . no sense of responsibility for managing other people’s money.” Babson concluded that “no greater period of skullduggery in American financial history exists than 1967 to 1969. It has burned this generation like 1929 did another one, and it will be a long, long time before it happens again.”

As one might imagine, Mr. Babson’s remarks were not well-received by the audience of money managers. But while he failed to foresee a second leg of the bubble (the Favorite Fifty era) that would quickly follow, he was right. Just as some 35 years had elapsed from 1929 until the start of the Go-Go era in 1965, so some 33 years would elapse before the next bubble emerged. Once again, a new generation would forget the lessons learned by its predecessors.

Some of the causes of the new bubble were the same. (They may be eternal.) David Babson had listed them: “Accountants who played footsie with stock-promoting managements by classifying earnings that weren’t earnings at all. ‘Modern’ corporate treasurers who looked upon their company pension funds as new-found profit centers . . . mutual fund managers who tried to become millionaires overnight by using every gimmick imaginable to manufacture their own paper performance . . . security analysts who forgot about their professional ethics to become storytellers and let their institutions be taken in by a whole parade of confidence men.” Charles Ellis’s 1968 insight that “portfolio managers buy stocks, they do not ‘invest’ in corporations” also came back to haunt us. (With a twist, of course: Managers didn’t merely buy stocks; they traded them with unprecedented ferocity.)

If you conclude that the more things change, the more they remain the same, you get my point. But each bubble has its own characteristics, too, and the bubble of the late 1990s added a host of new elements to the eternal equation. Part of the bullish thesis underlying that bubble (as it was described by Wired magazine) was based on a heavy dose of rose-colored vision: “the triumph of the United States, the end of major wars, waves of new technology, soaring productivity, a truly global market, and corporate restructuring—a virtuous circle . . . driven by an open society in an integrated world.” And there was more: the excitement accompanying the turn of the millennium that would begin in 2001 (even though most people celebrated it on January 1, 2000); the “Information Age” and the technology revolution; the (once-capitalized) “New Economy.” Together, these powerful changes seemed to hold the prospects of extraordinary opportunity. And so, once again, investors lost their perspective.

Why should that surprise us? After all, way back in the second century B.C. the Roman orator Cato warned us:

There must certainly be a vast Fund of Stupidity in Human Nature, else Men would not be caught as they are, a thousand times over, by the same Snare, and while they yet remember their past Misfortunes, go on to court and encourage the Causes to which they were owing, and which will again produce them.

After my experience in the earlier bubble, I hardly needed Cato’s warning. Late in March of 2000—within days of the stock market’s hyper-inflated peak—I was writing a speech that would soon warn a gathering of institutional investors in Boston that we could well be “caught in one of those periodic snares set by the limitless supply of stupidity in human nature. . . . Professional investors who ignore today’s rife signs of market madness—of a bubble, if you will—are abrogating their fiduciary duty, and dishonoring their responsibility for the stewardship of their clients’ assets.”

“How should that responsibility be honored?” I asked.

By recognizing that, for all of the projections and assumptions we make (and almost take for granted) . . . stock market returns are completely unpredictable in the short-run and—unless we know more about the world 25 years from now than we do about the world today—may prove even less predictable over the long-run. The problem is that future expectations often lose touch with future reality. Sometimes hope rides in the saddle, sometimes greed, sometimes fear. No, there is no “new paradigm.” Hope, greed, and fear make up the market’s eternal paradigm.

In the speech, I also noted that, “by almost any conventional measure of stock valuation, stocks have never been riskier than they are today,” pointing out that major market highs were almost invariably signaled when the dividend yield on stocks fell below 3 percent, when the price-earnings ratio rose much above 20 times earnings, and when the aggregate market value of U.S. equities reached 80 percent of our nation’s gross domestic product (GDP). “Yet today,” I warned, “dividend yields have fallen to just over 1 percent . . . stocks are now selling at something like 32 times last year’s earnings . . . and the equity market value has almost reached 200 percent of GDP. (Just be patient!) Clearly, if past data mean anything, risk is the forgotten man of this Great Bull Market.”

The disquieting similarities between the Go-Go era and the recent technology-driven market also caught my attention. In the course of my remarks, I presented the exhibit in Table 11.1 to show the striking parallels between the huge upside returns of the aggressive funds of each era and the enormous capital inflows that they enjoyed when investors—as always, late to the game—chased those returns. (I’ve taken the liberty of filling in the subsequent performance for the tech funds and the S&P 500.)

TABLE 11.1 DÉJÀ VU? COMPARISON OF GO-GO ERA TO TECH-BOOM ERA

My conclusion:

So, let me be clear: You can place me firmly in the camp of those who are deeply concerned that the stock market is all too likely to be riding for a painful fall—indeed a fall that may well have begun as I began to write this speech ten days ago. From Milton Friedman to Robert Shiller (author of the newly published Irrational Exuberance), to John Cassidy of the New Yorker, and Steven Leuthold, Jeremy Grantham, Jeremy Siegel, Julian Robertson (who just threw in the towel), Gary Brinson (whose convictions may have cost him his job), and Alan Greenspan (whose convictions haven’t). Viewed a decade hence, today’s stock market may just be one more chapter in Extraordinary Popular Delusions and the Madness of Crowds.

As it turned out, the painful fall had begun, on March 10, 2000, just as I began to write that speech. (There’s luck in that; while we often know what will happen in the stock market, we never know when.) But what about those three question marks about future returns that I posted in the lower right corner of the exhibit? Again, the similarities to the earlier bubble were to prove stunning. While the S&P 500 was off 38 percent in 2000-2002, the total return of the average large technology fund was a staggering minus 71 percent. “History may not repeat itself,” in Mark Twain’s wise formulation, “but it rhymes.”

So, dear reader, learn from the past, from a wild-and-crazy era, the kind of an era that, as Cato warned us, repeats itself over and over again. Profit, too, if you will, from my own personal and professional failures, and learn from them the easy way rather than the hard way that was my lot. (Not that, after a long and character-building struggle, it didn’t have a wonderful outcome!) Above all, heed the idealistic goal set out by John Maynard Keynes 70 years ago, quoted at length in Supermoney:

[While] the actual private object of most skilled investors today . . . is a battle of wits to anticipate the basis of conventional valuation a few months hence . . . the social object of investment should be to defeat the dark forces of time and ignorance which envelop our future.

Part One: The Supermoney Era

Part Two: Retribution Comes

Part Three: Another Bubble