Investors Should Indulge In `Financial Euphoria'

Care clings to wealth: the thirst for more Grows as our fortunes grow. - Horace

I called John Kenneth Galbraith the other day to tell him I had just read a good book: His.

Lucky for me, he answered his own Boston-area telephone, despite his nearly 86 years on this planet. You remember Galbraith: fabled economist, adviser to President John F. Kennedy, former U.S. ambassador, Harvard University icon, author of, among others, the outstanding work, "The Great Crash 1929."

This call was about the paperback issue, available Tuesday, of "A Short History of Financial Euphoria" ($8.95, Whittle Books, 113 pages).

"Financial Euphoria" is a keeper, the sort of book you'll recommend to other investors. It is brief, readable, with a statesman-like style, yet not above the heads of small investors.

It contains much of what went before it in far greater detail in "Extraordinary Popular Delusions and the Madness of Crowds," a premier work only a dumb investor would avoid. "Extraordinary," written by Charles Mackay, first appeared in 1841.

"I was very much influenced by that book," Galbraith said. "It was an extraordinary piece of work for its time. I was urged to read it by Bernard Baruch."

Baruch was a Wall Street legend, one of its most famous investors of the first half-century.

Galbraith, in the book, summarized the financial bubbles first collected by Mackay, then adds modern-day examples. He invokes the 1929 crash; the excesses of Bernie Cornfeld, Robert Vesco and Michael Milken; and the real estate failures of Robert Campeau.

"I've long felt that one of the great neglected facts of life is the way in which insanity can invade high finance and vice versa," Galbraith said. "There is some tendency for it to get worse as you get closest to the top - then administration of money excludes questions. Often in the financial world your intelligence is measured by the extraordinary extent to how much money you have."

The subject has interested Galbraith since his "The Great Crash 1929" was published in 1954. That book just won't seem to die.

"Just about the time it goes out of print, something else happens in the financial market to make it relevant again," Galbraith said.

In the book and on the telephone, Galbraith concedes no amount of warning seems to be enough to crack out of the boom/bust cycle.

First, from the book: "In the first foreword to this volume, I told of my hope that business executives, the inhabitants of the financial world and the citizens of speculative mood, tendency or temptation might be reminded of the way that not only fools but quite a lot of other people are recurrently separated from their money in the moment of speculative euphoria.

"I am less certain than when I then wrote of the social and personal value of such a warning. Recurrent speculative insanity and the associated financial deprivation and larger devastation are, I am persuaded, inherent in the system. Perhaps it is better that this be recognized and accepted."

Now from the phone, his voice as deep and resonant as it was a decade ago:

"The desire to get rich without effort is deep in the human character. You can't do anything about that, as also the notion God intends you to be rich."

What Galbraith's and Mackay's books don't address are the best trading schemes for making money in stocks and bonds. They deal with the more important psychological elements.

With "Extraordinary Popular Delusions" and "Financial Euphoria" stands a third book designed to make investors realize that controlling emotions is critical. It is the 1923 classic, "Reminiscences of a Stock Operator." "Reminiscences" is a fictionalized account of the great fabled - but not always successful - trader, Jesse Livermore. The book was written by Edwin Lefevre.

"Reminiscences" recently was reissued in paperback by John Wiley & Sons ($16.95, 299 pages). On the back cover is the following:

"The most entertaining book written on investing is Reminiscences of a Stock Operator by Edwin Lefevre, first published in 1923."

Readers saddled with photographic memories will recall those words appearing in this very precinct March 7, 1993. The words were not taken out of context. "Reminiscences" is a most entertaining book.

But the entertaining remark came right after three sentences on "Extraordinary" that suggested it "may be the most valuable on investing you'll ever read."

So while praise for "Reminiscences" is fully due, readers should know that "Extraordinary Popular Delusions" is a more vital, more important book. (Reading both would cause no injury, except to ignorance.)

Galbraith's quicker look at the same material (and more) makes it equally worthy, especially for those who may be a tad intimidated by "Extraordinary's" 724-page length. Yet only the first 100 pages of "Extraordinary" concern investment bubbles. Hundreds of additional pages go into witchcraft, alchemy and other matters divorced from investing. We hope.

For those interested in comparing the 1920s' climb to current times, no history surpasses Galbraith's in "The Great Crash 1929." The body of literature on the Roaring '20s stock market is light, to say the least. Galbraith's approach in both of his market-oriented books is to emphasize brevity and clarity and avoid meanderings that may lose the reader. Get in, make your point and get out.

That doesn't mean a more flowery approach isn't welcome once in a while. Frederick Lewis Allen's "Only Yesterday," published in 1931, is a 300-page book that digs deep into the lifestyles of the post-World War I generation, aligning all of the props to stage the coming market crash. Galbraith himself quotes from it in "Financial Euphoria."

Somehow, though, the straightforward approach gains more currency. Many investors are disinclined to read anything that might alter their convictions. Galbraith's right cross to the investor's ego may be the best shot yet.

Stocks and bonds

The Dow Jones industrial average of 30 blue-chip stocks last week rose 62.49 points to 3,709.14.

The Murphey Favre Northwest 50 of 50 stocks weighted by their regional economic impact fell 2.29 points to 2,419.45.

Job growth shot up faster than expected, skewering bonds. The U.S. Treasury's 30-year bellwether bond fell $7.50 per $1,000 of face value to close at $831. That was priced to yield 7.69 percent, said Pamela Warren, Seattle-Northwest Securities vice president.

A rapidly growing economy inspires inflation, which bondholders dislike because it decreases the value of their holdings. Warren said investors now are stewing about whether the Federal Reserve Board will hoist interest rates. She said a Fed move is likely by mid-week if wholesale prices and consumer prices due out Tuesday and Wednesday show too-fast growth.

Municipal-bond buyers hung back, awaiting economic news on the international and employment fronts. In the end, tax-exempts shed $5 per $1,000 of face value, reported Judith Cochrane, Seafirst Bank vice president and municipal trader.

"The anticipated Fed tightening has market professionals looking over their shoulders," said Cochrane, referring to the aforementioned Fed.

New-issue supply remains low, probably a good thing considering the buyers' malaise, Cochrane said.

Wall Street Recap appears Sunday in the Business section of The Seattle Times.