Their Rightful Owners

“In bear markets, stocks return to their rightful owners.”

I used to like this quote which is attributed to J.P. Morgan. I thought of it as a variation of the Buffett line of thinking, “The stock market is a device for transferring money from the impatient to the patient.” But after hearing William Bernstein talk about it in a conversation with Ben Carlson, I have very different feelings about it.

How do stocks redistribute during a bear market? J.P. Morgan very famously said “In bear markets, stocks return to their rightful owners.” Which unfortunately is wealthy people. If the average 401(k) holder sells out of their stocks right now and the market goes down even further and they completely sell out or they sell out like they did in 2009, who is on the other side of that transaction? Well it was the one-tenth of one percent.

This was an aha moment for me. It’s unlikely that Morgan was thinking about the patient investor, he was thinking about himself. To give you a sense of this mindset, here is an anecdote from the Ron Chernow’s The House of Morgan. 

Amid a mad rush of Wall Street profiteering, Pierpont financed a deal in 1861 that, if not unscrupulous, showed a decided lack of judgment. One Arthur M. Eastman purchased five thousand obsolete Hall carbines, then stored at a government armory in New York, for $3.50 apiece. Pierpont loaned $20,000 to a Simon Stevens, who bought them for $11.50 each. By “rifling” these smooth-bore weapons, Stevens increased their range and accuracy. He resold them to Major General John C. Fremont, then commander of the Union forces in Missouri, for $22 each. Within a three-month period, the government had bought back its own, now altered, rifles at six times their original price. And it was all financed by J. Pierpont Morgan.

During this current downturn, some people’s finances won’t be affected, for others it will feel like a recession, and for others it will feel like a depression. Wealth inequality is only going to be exacerbated by the decline in economic activity.

By wealth inequality, I’m not referring to the millionaire next door, I’m talking about the billionaire who could lose eight figures and not even notice.

Please do not take this as an attack on billionaires or our system. I think capitalism helps the masses way more than any other economic structure that’s ever been devised, and I’m encouraged by some of the leadership being shown at the top of our pyramid. For example, the Gates’s donated $100 million to fight the virus, and Bezos is donating $100 million to food banks. With that said, one of the inevitable downsides to capitalism is the political and societal unrest that we’re experiencing when you have such extreme levels of inequality.

Unfortunately if the market continues to deteriorate, stocks will return to their owners, even if they have no rightful claim on them.

Check out this conversation with Ben and Bill Bernstein.