Wall Street Bubbles from the Sixties to the Nineties

After covering tulip mania and the South Sea Bubble, you might think Wall Street eventually learned its lesson. It didn’t. Chapter 3 of A Random Walk Down Wall Street is Malkiel’s tour through modern speculation, from the 1960s to the 1990s. And the twist? This time the “smart money” is doing the speculating.

By the 1990s, institutions accounted for over 90 percent of trading volume on the New York Stock Exchange. These are pension funds, mutual funds, insurance companies. The professionals. You’d think they’d be immune to hype. They weren’t.

The Soaring Sixties: tronics and new issues

Malkiel started on Wall Street in 1959, and “growth” was the magic word. Companies like IBM and Texas Instruments traded at price-earnings multiples above 80. A year later, those multiples dropped to the 20s and 30s. But nobody wanted to hear that in 1959.

Then came the new-issue craze. Promoters flooded the market with IPOs between 1959 and 1962. They called it the “tronics boom” because every stock name had some version of “electronics” in it, even if the company had nothing to do with electronics. A door-to-door record company called American Music Guild changed its name to Space-Tone before going public. The stock went from $2 to $14 in weeks.

Jack Dreyfus joked about it perfectly. Take a boring shoelace company trading at 6x earnings. Rename it “Electronics and Silicon Furth-Burners.” Nobody knows what furth-burners means, and that’s the point. Now you’re at 42x earnings.

Some IPO prospectuses literally said in bold letters: “This company has no assets or earnings.” Investors didn’t care. The tronics boom collapsed in 1962. Most of those companies are gone today.

Synergy generates energy: the conglomerate trick

By the mid-1960s, a new scheme showed up. If you couldn’t find real growth, you could manufacture it through mergers. The conglomerate was born.

Here’s how the trick worked. Say an electronics company trades at 20 times earnings and a candy company trades at 10 times. The electronics company swaps stock to buy the candy company. After the merger, the combined earnings per share go up, not because anything improved, but because the high-multiple stock absorbed the low-multiple stock. Wall Street sees “growth” and keeps the price-earnings ratio high. Then the conglomerate does it again. And again.

It’s a chain letter. The growth is an illusion. None of the underlying businesses are actually growing. But as long as the company keeps acquiring, the per-share earnings keep ticking up.

Conglomerate managers invented a whole new vocabulary. Shipbuilding became “marine systems.” Zinc mining became the “space minerals division.” They talked about “market matrices” and “core technology fulcrums.” Nobody on Wall Street knew what those words meant, but it sounded impressive.

It all came apart in January 1968 when Litton Industries, the grandfather of conglomerates, missed its earnings forecast after nearly a decade of 20 percent annual growth. Conglomerate stocks dropped about 40 percent. The FTC and SEC launched investigations. Investors realized that 2 plus 2 did not equal 5. Some wondered if it even equaled 4.

Performance investing and concept stocks

Next came the era of “performance.” Fund managers realized that showing short-term gains attracted more investor money. So they chased momentum. Buy stocks with exciting stories, flip them fast.

Fred Carr’s Enterprise Fund returned 117 percent in 1967 and 44 percent in 1968. The S&P 500 returned 25 and 11 percent those same years. Money poured in. These managers became known as “go-go fund” managers, or “youthful gunslingers.”

This led to the “concept stock.” The concept didn’t even need to be real. As one fund manager admitted, “We hear stories early. Enough people will hear it in the next few days to give the stock a bounce, even if the story doesn’t prove out.”

Malkiel’s favorite example is National Student Marketing, run by Cortes Randell. The concept: a single company to serve the entire youth market. Randell flew around in a white Learjet named Snoopy, owned a castle with a mock dungeon, and sold institutional investors on the dream. The stock went from $6 to $143.

Then there’s Minnie Pearl, a fast-food franchising company that renamed itself Performance Systems. At its peak, the stock had an infinite price-earnings ratio. There were literally no earnings. Both companies crashed to near zero. Randell pleaded guilty to accounting fraud.

The Nifty Fifty: blue-chip speculation

By the 1970s, Wall Street said it had learned from the sixties. No more speculative junk. Only blue-chip stocks. IBM, Xerox, Avon, Kodak, McDonald’s, Polaroid, Disney. These were the Nifty Fifty. Big, stable, proven growth companies.

The logic sounded reasonable. These are “one-decision” stocks. You buy them once, hold forever, and never worry again. Even if you overpay today, the growth will bail you out eventually.

But look at the prices. Sony traded at 92 times earnings. Polaroid at 90 times. McDonald’s at 83. Disney at 76. No company, no matter how great, can grow fast enough to justify a multiple of 80 or 90.

As Malkiel puts it, “stupidity well packaged can sound like wisdom.”

When the mood shifted, the Nifty Fifty crashed hard. By 1980, those multiples had collapsed. Sony went from 92x to 17x. McDonald’s from 83x to 9x. The same managers who worshiped these stocks made a second decision. To sell.

The Roaring Eighties: rinse and repeat

The 1980s brought the exact same pattern, just with new names. The new-issue craze returned in 1983, bigger than ever. The total value of IPOs that year exceeded the entire preceding decade combined.

Companies like Androbot (personal robots) and Stuff Your Face, Inc. (three restaurants in New Jersey) went public. When Muhammad Ali Arcades International filed to go public at 333 times what insiders paid, and people noticed Ali himself didn’t buy any stock in his own company, the mood soured. Many investors lost 90 percent.

Then came biotech. What electronics was to the sixties, biotech became to the eighties. Genentech nearly tripled on its first day of trading. Analysts predicted billion-dollar sales for cancer drugs that barely existed. Some biotech stocks sold at 50 times sales, not earnings. They had no earnings. Analysts even argued that having no current products was an advantage because there were “no old products with declining revenues.” That’s right. Having zero revenue was pitched as a feature, not a bug. By the late eighties, most biotech stocks had lost three-quarters of their value.

And then there’s ZZZZ Best. A carpet-cleaning company run by a teenager named Barry Minkow. He started cleaning carpets at age ten, became a millionaire by eighteen, drove a Ferrari, and told investors his company was better run than IBM. It traded at over 100 times earnings. Turns out it was a Ponzi scheme laundering money for organized crime. Minkow was convicted on fifty-seven counts of fraud and sentenced to twenty-five years.

The Japanese bubble

Malkiel also covers the biggest bubble outside the US. From 1955 to 1990, Japanese real estate values increased 75 times. By 1990, all Japanese property was worth almost $20 trillion, about 20 percent of the world’s wealth. Selling metropolitan Tokyo could theoretically buy all of America.

Japanese stocks rose 100-fold over the same period. At their peak, they sold at 60 times earnings and 200 times dividends. NTT, Japan’s phone company, was worth more than AT&T, IBM, Exxon, GE, and GM combined.

When the Bank of Japan raised interest rates, the bubble popped. The Nikkei index fell from nearly 40,000 to 14,309 by mid-1992. A 63 percent decline comparable to the US crash after 1929.

The pattern is the point

Here’s what makes this chapter stick. Every bubble follows the same playbook. A real trend or technology creates genuine excitement. Prices go up. People invent new ways to justify the high prices. Then reality shows up.

The most important takeaway? Institutions are just as capable of building castles in the air as regular people. Having a professional manage your money doesn’t protect you from speculation. The pros fell for the tronics boom, the conglomerate trick, the concept stocks, the Nifty Fifty, the biotech bubble, and every other fad in between.

Malkiel’s warning on new issues is worth remembering: most IPOs underperform the broader market. The people selling you those shares are company insiders trying to cash out at the peak. If even the pros keep falling for this, what chance does an individual investor have trying to pick the next hot stock?

The answer, as Malkiel keeps hinting, is that maybe you shouldn’t try.

Previous: Tulip Mania, South Sea Bubbles, and Other Market Madness Next: The Dot-Com Crash and Housing Bubble Explained Part of the series: A Random Walk Down Wall Street Book by Burton G. Malkiel | ISBN: 978-0-393-08169-5