Tabell’s Market Letter – March 31, 1988

Tabell’s Market Letter – March 31, 1988

Tabell's Market Letter - March 31, 1988
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r TABELL'S MARKET LETTER 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 March 31, 1988 -.,— estertB.),,'s Wall Street. J ournal tt1!rIl .!!llCJ ..gn,,sQrnethlfg ,it L-CLaJ.1ed….!ixed-O.-hx…..which ..it I cited 88 8 plan many financial advisors were recommending for risk-averse individuals. The strategy for such a plan was descrlbed 8S follows. A set percentage of the investment is put in each of several asset categories—foreign and domestic stocks. bonds, and real estateThen at the end of each year, the investor adjusts the holdings, selling (the investments) that have gone up in value and buying more of those that have declined, so that each fund has the same proportion of the total investment as at the start. It is an interesting approach and it has been cited by a number of other sources, one of WhICh calls It an equalizing plan. That source explains that in a declIning market. when stocks have declined 20 percent, the fund is again equalized; i.e., brought back to the 50/50 stock-bond ratio In a rismg market. at each rise of 25 percent the fund is equalized by selling stocks and buying bonds. ThIS explanation is found in a text entitled, Investment Timing By Formula Plans. by H. G. Carpenter. The subtitle is. Today's Approach to Investment Programs. TlToday presumably refers to the publication date of the book—1943. The comcidence is an example of a phenomenon which we have remarked frequently of late. After 34 years in the securlties industry, a great many of the events which characterized the start of our Wall Street career are occurring once again, sometimes in completely modernized form but. occasionally, with very little change. Formula plans. as they were then called. were all the rage in the early 1950's. and today's FIxed Mix was then known as a constant-ratio plan—as distmgulshed from a cousin, the constant dollar plan. By 1954, such plans had been widely adopted by prestigious institutions, and the approaches had become a great deal more sophisticated. Thus, constant-ratio plans gave way to variable-ratio plans—m one of which there were seven brackets. based on the Dow Jones IndustrIal Average. which determmed the percentage of stocks that an institutional mvestor should appropriately own. Such plans had been extensively back tested, and, indeed. had worked wonderfully during the 1930's and the 1940's. producing a modest profit over those two decades, which ended with the Dow at ——–Ilessthan- half….its–192-9…Jtigh …-The seven' bands -were fIrmly grounded n !o.the- h-iBt-ory'ofthe prior———-ll—I 20 years. They rose at an annual rate of 3 percent, totally consistent with the market pattern of those years. There IS. in plans of this sort. almost invariably a flaw. often produced by Ignoring a possible market trend which seems, on the face of it. patently ridlculous. The possibility of a market which would rise consIstently, bringmg the Dow to 1000 in the ensuing dozen years was considered at the time to fall into such a category. The plan took ItS hapless practitioners totally out of the market at DJIA 300 m March, 1954. An investor who stuck with the plan would have been out of the market ever since. Using the plan's formula today, an overvalued level would exist above 820 for the Dow. Another example of a financial formula. gussied up so as to appear m a thoroughly modern guise. is po'tfolio insurance, whose antecedents go back at least a century. This approach. as we all IClrned last October If we did not know it already. involves selling stocks after they have declined by a certain percentage. This is. of course. no different in principle from the long-familiar stop-loss order. The only essential difference is that derivative products are utilized rather than the sale of the stock Itself. such a technique reducmg transaction costs to a pOInt where the method can. on the surface. be demonstrated to appear plaUSIble. Just as 1954 formula-plan advocates were totally unprepared for a 12-year bull market, portfolio insurers were likeWIse unprepared for last fall's crash In which bids for futures fell through the floor. Still another famihar tendency has recently emerged. This bemg the persomfication of Wall Street as villain. responsIble for Just about every socially rep'ehensible trait. This IS a manifestatIon WhICh erupts at nregular mtervals. Back in the last century. William Jennings Bryan was able to run for President on the premise that fmanclers should not be allowed to crucify mankmd upon a cross of gold Tl Not too long afterward. Matthew Josephson characterized the Morgans and Vanderbilts as Robber Barons. In the 1930's. the blame for a sick economy was laid. popularly, at Wall Stre.t's door. Although the medium is new. it is not surpnsmg that there should appear today a popular movie dedIcated to provmg that the fmancw community is domInated by rather unattractive malefactors of great wealth. Thus one by-product of the October crash was the'emergence of Yupple Jokes. Now there is mdeed. in our view, a perfectly plausible JustifIcation of the securities industry as a socially-useful mstitutIon although we will not go into it here. It IS unfair, in our VIew, to chastise financial markets because they are. as they have been for a thousand years, vehIcles through WhICh some of the more unattractive aspects of human behavior—greed and fear—are able to assert themselves, The financilll commumty should be regarded as an institution, and. as such. it has. in our Vlew. achIeved success. In any case, It has been an mteresting place to earn one's daily bread for some three and one-half decades. ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. AWT ebh Dow Jones Industrials (12 00) S P 500 (12,00) Cumulative Index (3/29/88) 1967.84 257.49 3597.46 No statement or expresSIOn of opInion or any other matter herem contained IS, or IS to be deemed to be, directly or Indirectly, an offer or the SOliCItation of an offer to buy or sell any securrly referred 10 or mentioned The matter IS presented merely for the convenience of the subsCriber While we believe the sources of our mformallon to be reliable, we In no way represent or guarantee Ihe accuracy thereof nor of Ihe statements made herein Any action to be taken by the subSCriber should be based on hiS own Investigation and informatIOn Delafield, Harvey, Tabelllnc, as a corporallon and Its officers or employees, may now have, or may later take, posrtlons or trades tn respect 10 any secuntles menllOned In thIS or any future Issue, and such poSition may be different from any v,ews now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabelllnc, which IS registered Wlthlhe SEC asan Investment adVisor, may give advree to Its 1fwestment adVISOry and other customers mdependently of any statements made m thiS or In any other Issue Further Informallon on any securrly mentIOned herem IS available on request

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