Bull! A History of the Boom by Maggie Mahar $43 Cdn 490 pages Harper Business

I don't usually like books written by journalists, but Bull! was somewhat different. And Bull! was recommended by none other than Warren Buffet in his 2003 letter to shareholders. The author and journalist, Maggie Mahar, talked to the right people: Among them were: Richard Russell, James Grant, Gail Dudack, Bill Gross, Jeremy Grantham, Martin Barnes, Robert Shiller. When ever you find material written by these people, read it carefully. They are independent thinkers. For instance on page 313, about James Grant, Mahar says: Jim Grant "is one of the most interesting market analysts alive".

DIVIDENDS There is very little in this book about dividends. However, toward the end of the book, in a section named "Income: the Royal Road to Riches", I found some marvelous statement about dividends. This data on page 360, for instance, shows how important dividends are. Over the years, stocks have returned an average of seven percent a year after inflation. How much of this seven percent was contributed by dividends? Four point nine percent (4.9%) Could one say most of the return from stocks over time is from dividends? I think so.
"Without them [dividends], an equity investor would have lost money in more than a third of those 56 years" [from 1926 through 1981] 378 "Unlike earnings, dividends are forever; they can never be restated" 380 "Investments without cash flows are risky, uncertain." 379
MARKET CYCLES It is important to understand cycles because you are certainly not going to be informed in the press that a bull market is ending. Street people don't want to talk about bear markets. Street people like to emphasize the 20% rule: unless the market is down 20%, it's not a bear market. Of course, by the time prices are down that far, it's too late to sell. As a result, it is worthwhile reading about how a bull market tops. Tops are diffuse. Mahar goes into this on page 315. Here are some of her examples: the advance decline ratio on the NYSE topped out on April 3 1998; Dow Transports crested in May of 1999; the DJIA in January of 2000; and the Nasdaq peaked three months later. It's a gradual procedure. There are no headlines. (My own cost of dividends chart peaked in May of 1998 at $34.19) There was a lot of time to prepare if you wanted to sell. I didn't. I was buying. The best time to buy dividend-paying stocks in the last decade was in the spring of 2000. As the storm began, investors sought a haven: they bought dividend-paying stocks. Prices of the dividend-paying stocks I follow went up as the broad market crashed.
You have to learn the signs of a market topping for yourself. Maggie Mahar go into some of the signals. Insider selling, for instance, began six months before the top in the fall of 1999 317. Not realizing that the market had peaked, Americans put $260 billion into equity funds in 2000 325 . Toward the end, only a few stocks lead the charge. (In Canada, in the summer of 2000, it was Nortel and BCE causing the index to be skewed.) people did not see, or want to see, the writing on the wall. Sell into strength is one of John Neff's precepts.
On page 39 of Bull!, there is a terrific chart of the Dow for the period from about 1966 to 1974 supplied by Richard Russell's Dow Theory Letter. I think the first decade of this new century will unfold the way this period played out. In May of 1970, the Dow fell to 631. By January of 1973, it had rallied to1050. Only then did the Dow take its final, fatal nosedive that ended in the crash of 1973-74. The Dow fell below its previous low to 577. The next bull run did not really arrive until 1982. One of the reasons I read about events like the great bull market was to get an inkling about people's behaviour. Why didn't they sell, for instance. Mahar did not get into this topic in a big way but I found a few ideas. 1. Most people did not realize the market was topping. For instance, inflows into mutual funds were still strong in 2000. 2. "I did not sell", one person said, "because I didn't want to be stuck with the taxes" p336. 3. Or this thought on page 338 "I assumed it was a correction."

STOCK OPTIONS are explained in Chapter 8 124-148. This material is excellent...especially the sections about how Wall Street and corporate America combined forces to stymie reform of securities laws and accounting regulations. Here are some sample statements:
125 "options did carry a very real cost and it came directly from shareholders' pockets"
130 "by burying the cost of options, corporations were deceiving their shareholders"
133 "Options packages also encouraged management to reduce dividends."
136 "Options grants represented an unparallel transfer of wealth from shareholders to corporate management"
138 "Stock options are the only kind of executive pay which a company can deduct from its taxes as an expense, but which it is not required to include in its books as an expense." Arthur Levin
What riles me most about executive options is that they encourage management to reduce dividends. Mahar explains why on page 133. And share buybacks. Don't get me going. Mahar handles this topic beautifully too. To this day, most investors believe that share repurchases benefit shareholders. Investors have been conned! Read Bull! Learn all kinds of 'stuff'.
Reading Chapter 17 about Henry Blodget will convince you never to rely on the recommendation of an analyst again. Their guess about the future price of a stock is as good as your guess. "In truth, Blodget's research as not that cavalier. But when it came to setting a price, he was at a loss. How high? Who knew?" 290 There is more on Wall Street's analysts through out the book. Here's one: "Often their firm's profits depended on investment banking fees from the very same companies that they covered. No wonder 'sell' recommendations were rare" 29

When you read the pages in Chapter 18 about what Louis Rukeyser did to Gail Dudack because she was bearish on 'his' program before the crash, you will not listen to his program ever again. "Lou lacked the intellectual integrity to tolerate a different opinion, and to wait and see if Gail would be correct."308 . Gail Dudack was correct: Rukeyser's other elves were wrong. About 'experts' on CNBC, Mahar quoted Mark Haines a co-anchor of a CNBC program: "Investors who didn't understand that the "experts" who appeared on CNBC would be biased were simply "too naive" to be in the game". 30

LOOKING AHEAD Bull! is worth buying for the last chapter alone, especially pages 362 to 367. Chapter 21 is called Looking Ahead. Here's an example about avoiding mistakes from page 367. In a bear market, not making mistakes is what's most important. "The goal is to conserve capital. When a long bear market ends, those with cash will find bargains galore." Mahar selected a good example: If you lose 40% on one $50,000 investment, you need to make up more than 60% on the remaining $30,000 just to get back to square one. If you had chosen a more conservative 5% opportunity, over three years, 5% compounded adds up to more than 15%.

The five charts in the appendix, the chart on the inside covers and the ones on pages 39 and 356 are splendid too. The graph by Martin Barnes of the Bank Credit Analyst out of Montreal is worth a good portion of the price of the book alone. It's a composite index of the peaks in the Dow Jones (1922-29), gold and silver (1973-86) and the Nikkei (1982-95). Look for a flat market going out for the next decade or so, if history is to be any guide.

Other points I liked in Bull!
You can't get your investment advice from the media, they tend to deal only with the white-hot stocks that make headlines. 334
"Accounting abounds with imprecision" 138
"Value investors search for...truffles on the forest floor." 204