Bear market likened to slump of 1973-1974

Mason makes comparison at annual meeting of Legg shareholders

July 24, 2002|By William Patalon III | William Patalon III,SUN STAFF

With the market meltdown of July, the two-year bear market in stocks looks strikingly like the punishing downdraft of 1973-1974, the chairman of Legg Mason Inc. told shareholders at the company's annual meeting yesterday.

"It's very similar," Legg Chairman and Chief Executive Raymond A. "Chip" Mason said in his remarks to shareholders at the Center Club in the Legg Mason building downtown. "This market looks the same, acts the same, walks the same."

The bear market of 1973-1974 - until now the worst since the Great Crash of 1929 - so sapped investor confidence that a sustained bull market didn't begin anew until 1982.

The early 1970s was the time of the "Nifty Fifty," stocks that seemed so bulletproof that an investor could buy them without having to worry again. General Electric Corp. and Coca Cola Inc. soared to ultra-high levels, Mason recalled for the audience of about 100. The subsequent bear market proved those stocks weren't so nifty, and the market leaders were pummeled, just as the market darlings of the late 1990s have been.

The downdraft that started in 1973 "was an extremely tough market," Mason said. "It's sort of like this market. ... You get pounded and pounded and pounded."

Mason said bear markets serve the purpose of cleaning out the speculative froth and eradicating irregularities, such as the current accounting scandal. And when investor sentiment has bottomed out - and when least expected - stocks turn around and head higher, he said.

In the 1970s, the Watergate scandal, virulent inflation and an energy crisis that took crude-oil prices from about $5 a barrel to $35 - with a seeming certainty that prices would reach $100 a barrel - heightened pessimism. Oil prices never got that high, Mason said, just as many of the doomsday forecasts of today will not come true.

But fear lingered, Mason said. "It took years before the public got comfortable with the idea of stocks [again]," he said. "This has the same kind of feel to it."

Legg has taken steps to handle rough stretches. With its acquisitions of specialized investment-management firms such as Private Capital Management LP, Royce & Associates Inc. and Western Asset Management, analysts say, Legg transformed itself from a regional brokerage house to an asset manager with an international reach and a presence in the stock and fixed-income markets.

The importance of that strategic shift has been underscored by Legg's ability to deliver strong financial results even when the commissions from stock transactions have fallen off, Mason said yesterday.

As investors eschewed stocks, money flowed into fixed-income investments, allowing Legg to capitalize through its Western unit, which surpassed $100 billion in managed assets recently. Managed assets deliver a steady stream of fees and are less volatile, delivering earnings that are more predictable, Mason said.

In the three months that ended June 30, net income was 39 percent higher than in the year-ago quarter.

"We worked very hard to diversify our businesses," Mason said. If the company hadn't succeeded, "we would have no other horses to ride on" when the downturn began, he said.

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