Why we should remember Jon Lovelace
Last September, when the financial markets seemingly crashed overnight, I joined many others in believing and feeling that we were living through an historical moment few would soon forget. Sadly, what we also felt was a sudden, massive and collective loss of confidence in the financial system.
During this traumatic period, when Lehman Brothers went bankrupt, AIG was saved from bankruptcy and Congress stepped in with the biggest and most unprecedented bailout of the financial industry in American history, I thought often of Jonathan Bell Lovelace, a legendary investor who turned out to be a wise prophet about the financial folly of his times.
Lovelace, who lived from 1895 to 1979, is not well known in popular history, but as we pass the 80th anniversary of the Great Crash of 1929, he remains an investing legend for practicing what he preached — wise investing based on rigorous research and embracing strong fundamentals of valuation.
A native Alabaman, Lovelace became a successful investor in Detroit during the mad margin rush of the late 1920s. He became increasingly troubled by what he saw as no rational connection between stock prices of companies and the underlying financial values of those companies. He wasn’t the only to notice the “irrational exuberance” (to borrow a later term from Alan Greenspan) of those last few years before the crash, but he acted on his belief that the market was heading for a major fall and sold his stake in the investment bank and brokerage firm E.E. MacCrone & Co.
By the time of the crash in 1929, Lovelace had pulled almost all of his investments out of the stock market. Out of respect to MacCrone, who feared that customers might take notice that their star investor was leaving and divesting from the market, it is believed he left a small portion of his investment portfolio there, which was lost in the crash. But by then he had put himself and his family on a train to California and he was financially shielded from the worst of what was to come.
While Lovelace may be little known, the same cannot be said of the Capital Group Companies he originally founded in 1931.
Lovelace and his enduring lessons matter. He was not fooled by the incredible amount of margin debt being run up by individual and institutional investors nor was he impressed by the creative ways that companies and investors deceived themselves into believing they were wealthier and more financially solid than they actually were. He did not give in to the herd mentality of his day.
Some habits of human behavior transcend the generations. It was margin in the 1920s with wealthy and not-so wealthy people taking on debt to have their turn at the stock market “roulette table of ever-escalating returns” — that is, until the wheel stopped spinning. Our current situation has roots back to the 1970s, when leveraged debt started to make its way into merger and acquisition deals. In the 1980s, it was the allure of junk bonds — and a real estate boom fueled through loosened regulations that allowed once prudent savings and loan institutions to make risky, and then ever riskier, loans.
In the 1990s, it was the tech boom and bust. In this decade, we have seen the glorification of debt at every level. The crash of 2008 hammered investment sinners and saints alike. We all got a haircut in our portfolios, even Warren Buffet. Many of us were deeply concerned about the growth of a parallel financial system that appeared to redefine the boundaries of acceptable risk. And while bubbles and manias can’t be eliminated, their damage need not be catastrophic.
Tom Sedoric is managing director-investments of The Sedoric Group of Wells Fargo Advisors in Portsmouth.