APPENDIX C1
Greater Fools
From my October 18, 1999, Forbes column.
What can we learn about this year end from 1942? First: That Y2K won’t hurt the stock market. It may even drive a nice rally.
What does 1942 have to do with Y2K? Well, 1942 shows how the market works, which isn’t in a way that now allows a disaster from Y2K. Those who still fret Y2K’s market impact don’t fathom the markets, and you simply should be dismissive of them all.
There are two principles here. First, markets don’t wait for known events; they move ahead of them. Second, folks who wait for events to drive prices often get trapped and trampled by stampedes.
Which was a bigger risk: Y2K in 1999 or Adolf Hitler in 1942? Yet, in 1942, long before anyone could possibly know with any certainty that we would win the war, the S&P 500 rose 20%. In 1943, it rose 26% more—in 1944, 20% more; in 1945, another 36%, before peaking early in 1946. That last year was largely driven by folks who held back cash waiting for certainty—and then threw in their money, very kindly bidding up prices for those who had bought earlier.
How did the market know to rally in 1942 and 1943, long before definitive news? It’s what markets do. They decline before a war or recession or something else ugly starts. Usually, they move with a long lead. They rise long before events improve. Hence the age-old adage, “The market knows.” The market is also a “discounter” of all known information. That means whatever we all know, fret, read and cluck ...
