Slump of 1973-1974 shapes philosophies

October 19, 1997|By NEWSDAY

It may be that more investors will notice the 10th anniversary of the Oct. 19, 1987, market crash. But it is the memory of the 1973-1974 stock market debacle that shaped the philosophy of some fund mangers and still makes them shudder.

For Charles Royce, head of the Royce Funds in New York City, the 1987 crash "was up and over so fast that you missed it if you blinked."

"The market lost 25 percent in two weeks, but even that wasn't as devastating as 1973-74, when you could lose 50 to 75 percent of the value in your stocks and there was no place to go," he said. "It just dragged on and on. In 1987 there was still liquidity and you could buy things you wanted, and a year later people didn't remember it."

The 1973-1974 period, when oil prices, interest rates and inflation were all rising simultaneously, is a scar on the memories of managers who experienced it.

The Standard & Poor's 500-stock index lost about 42 percent of its value, falling 26 percent just in the third quarter of 1974. It was a long two years, a period that seemed to linger through the rest of the decade, until stocks began recovering after inflation peaked in 1981.

Now, 23 years later, David Testa remembers that third quarter of 1974 as "grinding and demoralizing."

"Every time you thought you had some place to go, things got worse," said Testa, chief investment officer for the T. Rowe Price funds in Baltimore. "It was certainly more traumatic -- and, in the end, did a lot more damage -- than 1987."

Those years colored how some managers invest to this day.

"It was the defining period for what I am," Royce said. "My whole lack of toleration for excessive risk developed in those years. It wasn't only that the stock market was lousy and inflation high, but you couldn't change course. I got a major education in how much risk can really be present in speculative growth stocks, and I took all the standard vows that it wasn't going to happen again."

Testa said the 1973-1974 market "made you very careful about the price you pay for things, and leery of pushing more and more money into a market that gets very expensive."

Royce acknowledged that the risk-averse management techniques he learned in the '70s have carried a price. "Since the bottom of the market in 1990, if we had been more aggressive, put the pedal to the metal, we would have done a lot better."

Figures from Lipper Analytical Services Inc. show that as of Sept. 25, Royce's Premier small-cap fund was up 137 percent for the last five years, compared with 159 percent for the small-cap category as a whole.

But for some investors, like the manager of the Third Avenue Value Fund, Martin Whitman, later market declines have been buying opportunities.

Crashes like 1987 didn't faze him, he said. Whitman buys distressed stocks and bankrupt companies, so bear markets are good times to buy. "Since 1974, every major industry has been in a depression as great as 1929. Oil. Land. Steel. That created a lot of investment opportunities. We are always looking for specific securities. People who pay attention to the general market, they are amateurs."

If some managers learned caution in 1973-1974, Testa believes it's a lesson lost on some investors today.

"The people who are sitting out there borrowing against their credit cards to play the market ... If we hit an air pocket, it is going to be a disaster for them."

Pub Date: 10/19/97

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