Loans and cash

Experts Are Pressured to Conform to Prevailing Ideology

admin — Sat, 10 Oct 2009 19:56:24 +0000

“Asell signal from an analyst is as common as a Barbra Streisand concert.” Arthur Levitt, Chairman of the Securities & Exchange Commission It is not just the company, clients, and brokers who exert psychological pressure on analysts to maintain a positive attitude on the popular stocks they follow, although that would be more than enough. There is also pressure from other analysts to conform to the bullish point of view. If you are a mainstream Wall Street analyst and you have decided to turn bearish on a stock or an industry that is being recommended by virtually all of your analytical colleagues, you had better have your facts straight and be prepared for some criticism, veiled and otherwise. Curiously, the inverse is not true: It is perfectly acceptable for an analyst to turn bullish on an industry when everyone else is bearish; trying to be the first to catch the bottom, apparently, is within the rules of the analytical game.
But if an analyst tries to catch the top by turning negative on an industry or an individual stock everyone else loves, watch out! On November 22, 1999, The Wall Street Journalran a story entitled “Bearish Call on Banks Lands Analyst in Doghouse.” The story described the travails of Michael Mayo of Credit Suisse First Boston, and the doghouse to which Mr. Mayo was exiled was owned and operated by other Wall Street banking analysts who saw only blue skies ahead for the bank stocks. When Mr. Mayo peered into the distance and announced that he saw some storm clouds brewing for the banking industry he was treated like the Wall Street equivalent of a stinky wet dog trying to shake itself dry.
The head trader at Sun Trust Funds, said The Wall Street Journal, “angrily grabbed a picture of Mr. Mayo, blew up the photo on the copier, scribbled ‘Wanted’ over his face, and pinned it to her bulletin board.” When questioned about this response by The Wall Street Journal, the trader replied that “my impression [of Mr. Mayo] as a human being is that he’s somewhat self-promotional,” as though this were a rare trait among analysts on Wall Street.
Another bank analyst, angered by the sell signal, referred to Mayo derisively as “Mayo-naise” in a conference call with clients, according to The Wall Street Journal. Other analysts also questioned Mayo’s motives, both publicly and in private. Some of them whispered that Mayo was in cahoots with short sellers who were in a position to profit if bank stocks declined in price. Others said that he was gunning for publicity in an attempt to earn a high ranking in an upcoming analyst survey by Institutional Investor Magazine.
Even after Michael Mayo’s negative call on bank stocks turned out to be accurate, the critics refused to let up on him. Afew months after his cautionary report on the group, Bank One, a Wall Street darling, collapsed in price following the surprising news that problems at its credit card unit, First USA, would lead to lower than expected earnings. Mayo had put a “sell” on Bank One (ONE) at $59.81 a share; the stock ultimately fell as low as $23.19 following the disappointing earnings, a 61 percent decline.
But even that did not keep the critics quiet. Instead of giving Mayo his due for his gutsy and accurate call, the bank bulls decided that nitpicking was now called for.
Mayo’s general negative attitude toward the bank stocks stemmed from his belief that the earnings growth being reported by many banks was of “low quality”; in other words, the accountants were becoming increasingly creative in their ongoing effort to give Wall Street the earnings momentum it craved and expected. Anyone who understands financial accounting knows there are about 50 different and perfectly acceptable ways to look at almost everything and that your earnings may be up 5 percent, up 10 percent, or even down 10 percent, depending on which way the accountants decide they are going to paint the picture this particular quarter.
Eventually, though, the accountants’ bag of tricks gets depleted, and if a company is not growing all that rapidly—or worse, if creative accounting has directed analytical attention away from a festering problem—the piper must be paid.
This is not an uncommon occurrence with popular stocks that are under tremendous pressure to meet Wall Street expectations, and the general observation that a particular company or an industry, in general, has begun to resort to accounting gimmicks to meet Wall Street expectations—i.e., that reported earnings are of “low quality,” as Mayo stated—is a valid and sufficient reason to turn negative. If you smell something rotten, you don’t have to rummage through the garbage to figure out what it is—you can just walk away from it. When Bank One revealed that problems had been brewing in its credit card operations and that its earnings would be way below expectations, that should have been enough to shut Mayo’s critics up. But it wasn’t.
“Critics say,” The Wall Street Journal reported with a straight face, “that Mr. Mayo had not pinpointed the credit card problem.” When another bank stock cited by Mayo as having “poor earnings quality”—National City Corp.—warned that earnings would be lower than expected, that stock took a nosedive as well. But, The Wall Street Journalpointed out, “Mr. Mayo didn’t specifically have a ‘sell’ recommendation on that stock.”
The overall tone of The Wall Street Journalstory on Michael Mayo was that he was sort of a self-promotional kind of guy who sort of lucked out by issuing a generally negative call on the bank stocks and turned out to be right for the wrong reasons, and that he was not all that popular among colleagues and clients.
You can see that the bar is raised considerably higher when you are bearish than when you are a conforming bull. The Wall Street Journalcould have run a story about the 99 percent of analysts who were incorrectly bullish on Bank One, for example, and interviewed theirclients, to see how they enjoyed riding that stock down by 61 percent. But it didn’t. Instead, The Wall Street Journaldissected Mayo’s bearish (and correct) call with a fine-tooth comb, and created the impression that while he turned out to be right, he wasn’t really all that right and that he was a publicity hound to boot.
Michael Mayo’s reward for being bearish on the regional banks was to be fired. On September 29, 2000, he announced that Credit Suisse First Boston had terminated his employment. “It’s hard to do investment banking for a client with an analyst who is negative on that client,” a source told Reuters.
It doesn’t work the other way around, by the way. If you’re a cheerleader for a stock and it goes up, nobody complains that it didn’t go up for the reasons you said it would. You’re just a brilliant analyst who made the right call. But if you’re a bear on the bank stocks because you think that earnings quality is deteriorating and that some banks have been stretching to make their earnings forecasts and that this cannot go on indefinitely—if you say all that and you turn out to be right—that is still not enough. You have to pinpoint exactly what the problem was or your correctly bearish call can be dissected, analyzed, and ultimately criticized anyway.
The whole thing would be funny if it were not so important to you, as an investor, and these cautionary tales involving Mr. Mayo and Sunbeam analyst Andrew Shore are meant to illustrate a truth: If you really want original, independent research and you think you are going to get it from Wall Street, you may be in for a big disappointment. Back in the 1980s a group of penny stock brokers had just completed a public offering for a company that was trying to develop a cure for cancer derived from shark fluids. I ran into the brokers at a restaurant one evening and they were so enthusiastic about this company’s prospects they could barely contain themselves. The stock had run up from $0.10 a share to $1.30, and there were plans for a secondary offering to finance further research into new drugs once the company had proven it could use shark fluids to cure cancer. Everything was going swimmingly until the scientist who ran the company called the president of the brokerage firm with the bad news that the process doesn’t work.
“What are you talking about?” the brokerage firm president said.
“We cannot cure cancer with shark fluids,” the scientist said.
“Yes, you can,” said the brokerage firm president.
“No, we can’t,” said the scientist. “The process doesn’t work.”
“Yes, it does,” said the brokerage firm president.
The scientist was taken aback at this response. “I wish it did work,” he said again. “But it doesn’t.”
“Hold on,” said the brokerage firm president.
When the brokerage firm president returned to the line, the scientist found himself in the midst of a conference call with every broker in the office. For the next half hour the brokers browbeat the scientist into submission, trying to convince him that he could, indeed, cure cancer through the use of shark fluids. The scientist tried his best to hold his ground. “It doesn’t work!” he said pleadingly.
“It has to work!” screamed one broker. “Your stock is at $1.30, all of my clients own it, and we’re almost ready to do your secondary offering!”
And so, at the urging of his “constituency,” the scientist agreed to go back to the drawing board to try to find a cure for cancer using shark fluids, trying to fulfill the fervent hope of a group of penny stock brokers that such a cure could be found so that these brokers could do a secondary stock offering. Yet, the scientist knew full well, as he continued his research, that the process didn’t work.
The scientist admitted, long after the fact, that listening to those guys nearly convinced him that he had missed something. I was reminded of this story on December 1, 2000, when The New York Timesreported that certain analysts were “skeptical” of computer maker Gateway’s shocking announcement that it was lowering its revenues and earnings forecasts for the quarter because its sales had unexpectedly plunged 30 percent over the weekend following Thanksgiving. Like the shark fluid brokers, these analysts just could not accept the bad news that Gateway delivered. Instead of accepting the news and revising their forecasts, some analysts tried to convince themselves (and Gateway) that the sales slump didn’t mean what Gateway said it meant, which was that business was turning rotten. Loaded with Gateway shares in client accounts and stuck like SuperGlue to their overly bullish forecasts, these analysts accused Gateway management of “overreacting,” which only goes to show you that whether we’re talking about shark fluids and penny stock brokers or computers and big-time Wall Street analysts, there are few things so constant as human nature. As songwriter Paul Simon reminded us in The Boxer, “a man sees what he wants to see and disregards the rest.” That is a fundamental truth of Wall Street that every investor should keep firmly in mind.
So, one thing to keep in mind when you’re listening to the opinion of an expert: Who is the expert’s constituency? Or, to put it more bluntly, who pays the expert’s salary? If it isn’t you—and it usually will not be you—consider the possible agenda of the expert and/or constituency and view the expert’s point of view in that light. Even experts who are honestly taking their best shot and are not influenced at all by an agenda or a constituency can get things all wrong.

What lessons can we learn from this episode?

admin — Thu, 01 Oct 2009 19:54:22 +0000

First, keep in mind that Andrew Shore never told anyone to sell Sunbeam. He merely downgraded the stock to “neutral.” Investors were forced to read between the lines of the recommendation, and those who did were spared the bulk of the Sunbeam carnage; the stock eventually fell to $0.25, down 99 percent from its Dunlap-mania high, as the news from Sunbeam got progressively worse.
But even that downgrade to neutral caused fear and soul-searching for Andrew Shore, which gives you an idea of why so few “sell” recommendations emanate from the mainstream Wall Street research departments. And the venomous reaction from PaineWebber clients and brokers to the Sunbeam downgrade should also go a long way toward explaining why the “messenger” is often so reluctant to deliver the bad news. When the reaction is criticism and anger, what is the incentive to tell the truth?

Case Study: Sunbeam Corp.

admin — Wed, 23 Sep 2009 19:53:01 +0000

If you want to get a feel for how difficult it can be for mainstream Wall Street analysts to say “sell” when they know they will incur the wrath of the company in question, their clients, the brokers who work for their firms, and possibly even their employers, consider the brouhaha that greeted PaineWebber analyst Andrew Shore in 1997 when he merely downgraded his opinion on Sunbeam Corp. from buy to hold.
Sunbeam stock had taken off like a rocket, rising from $12 to over $50 following the arrival of a reputed corporate savior named Al Dunlap. Dunlap had a history of cutting costs and streamlining operations at poorly managed companies, and in fact had just engineered a turnaround at Scott Paper, which was then sold to Kimberly Clark and resulted in huge profits for Scott Paper shareholders. Wall Street expected Dunlap to perform the same miracle at Sunbeam, an old-line appliance manufacturer whose stock was in the doldrums due to what Wall Street perceived to be poor management of a potentially powerful brand name. Al Dunlap arrived, full of bravado, and proceeded to lay off employees, close down plants, and issue optimistic projections for the future. Wall Street totally bought Dunlap’s performance, and Sunbeam shares took off. Virtually every analyst who followed Sunbeam sang Dunlap’s praises and expected a breathtaking turnaround, followed by an eventual takeover of Sunbeam—in other words, they expected an exact replay of the Scott Paper scenario.
Mr. Shore, however, had his doubts. He was somewhat skeptical of Al Dunlap from the start, wondering how layoffs and plant closings could possibly turn a low-margin business, faced with cutthroat competition, into a growth stock phenomenon—but he recommended the stock along with everyone else based on the premise that Dunlap’s name and reputation alone would probably take the stock for quite a profitable ride. The trick, he thought, would be to get out in time. Finally, in 1997, Andrew Shore began to notice warning signs deep within the Sunbeam financial statements filed with the SEC. As it turned out, these warning signs were harbingers of huge problems lurking beneath the shiny surface of Sunbeam which eventually pushed the company to the brink of bankruptcy. Shore decided he would pull his buy rating on Sunbeam; yet, even though he suspected a massive deterioration of Sunbeam’s financial situation, he could only bring himself to change his rating from buy to “neutral.” But even this move, which in retrospect proved to be a timid and incomplete decision, made him a virtual Nostradamus compared to his colleagues.
The first reaction to Mr. Shore’s decision to pull his buy recommendation on Sunbeam came from his research associate, who told Shore that he risked a negative reaction not only from Al Dunlap and Sunbeam, but also from PaineWebber clients and brokers. “You realize what you’re doing here, don’t you?” he asked Shore. “If we’re wrong we’re going to be fired,” Shore replied, “but we have to do this.” Shore even felt compelled to contact the legal compliance department at PaineWebber to explain his downgrade of Sunbeam before the downgrade was issued.
When you stop and think about the fear and soul-searching that preceded a mere downgrade from buy to neutral, you have to laugh out loud. Here was a well-known and established security analyst literally shaking in his boots because he was going to downgrade a popular stock to neutral. He was so fearful of being fired— fired!—if he were wrong that he felt compelled to explain his decision in advance to the PaineWebber compliance department, just in case the stock continued to go up and he had to explain himself later. On April 3, 1997, Andrew Shore got on the PaineWebber “squawk box” and reported his downgrade to PaineWebber’s 5000 stockbrokers. Within minutes Sunbeam stock dropped $4 a share. Shortly thereafter, when Andrew Shore checked his voice mail, he was stunned to hear a barrage of “caustic and bitter messages.” “Most of the callers,” author John A. Byrne says, “wanted Shore fired.” Shore, according to Byrne who documented these events in his book Chainsaw, was “horrified by the content” of the messages, which ranged from calling him “stupid and irresponsible” to even worse. “It was a nightmare,” said Shore’s assistant, who bore the brunt of the flak from clients and brokers reacting to Shore’s downgrade. The story had a happy ending for Andrew Shore. Shortly after the downgrade, Sunbeam shocked Wall Street with the announcement that earnings would come in far below expectations. Those who had acted on Shore’s advice saved a bundle—and of course, the congratulatory calls began to flow in.

WHY EXPERTS CAN BE WRONG (part 2)

admin — Wed, 16 Sep 2009 19:51:21 +0000

Oliver North, who lied to Congress and was rewarded with the Republican nomination for senator from Virginia and then with a nationally syndicated talk show, refused to criticize Jerry Falwell for selling videotapes accusing President Clinton of murder, and responds to a question on Larry King Liveby calling the tapes “alleged tapes,” which apparently means that North could not even bring himself to acknowledge that such tapes even exist. If he had acknowledged their existence, after all, it would have reflected badly on Falwell, a philosophical and political ally.
Everybody, it seems, has an agenda. Cigarette company executives testify to Congress, under oath, that they do not believe nicotine is addictive. Even the sports world is not immune. In 1994 umpires confiscated the bat of Cleveland Indians slugger Albert Belle after the Chicago White Sox accused Belle of using a corked bat. American League officials X-rayed the bat, cut it in half, and then announced that the bat was illegally corked and suspended Belle for 10 days. When the media confronted Belle’s agent, the agent borrowed a page from the O.J. Simpson defense playbook and claimed the incident was “concocted by the Chicago White Sox.”
So, given the surging supply of “experts” and the heightened probability that any given expert you may be listening to is promoting an agenda, don’t be terribly concerned if you seem to have uncovered an exciting stock or two that is totally bereft of analytical “sponsorship.” Even Federal Reserve Chairman Alan Greenspan is a “spinner” with an agenda. In his book The Agenda—an appropriate title for this discussion—author Bob Woodward says that Greenspan managed to convince then–Treasury Secretary Lloyd Bentsen, early in President Clinton’s first term, that the bond market would respond favorably if the Federal Reserve were to begin raising interest rates. Bentsen, impressed with Greenspan’s reasoning, performed the spin on Clinton, who bought it hook, line, and sinker. Greenspan, Bentsen, and Clinton then performed their spin for the financial community, and everyone involved began to believe their own baloney to such an extent that they were all genuinely surprised when the bond market and the stock market headed lower following the Federal Reserve’s interest rate hike. So, one reason why an “expert” may be off the mark is that he or she is selling you a bill of goods, i.e., promoting an agenda, rather than trying to get at the truth.
Another reason experts don’t always hit the mark is that they are not really tryingto deliver the goods for a different reason, and that reason is that they’re not always rewarded for telling the truth— especially when the truth is something their superiors do not want to hear. Sometimes they are even punishedfor telling the truth. In his book 1929 Again, author Terry R. Rudd points out that “one of the underlying problems making it virtually impossible for knowledgeable people to tell us the truth is that we can’t accept it without reacting unfavorably.”
“When the recipient doesn’t receive news in a manner beneficial to the giver, “ Rudd writes, “there is no incentive for the giver to do so.” It is a well-known fact among Wall Street professionals, for example, that there is little mileage in taking a negative attitude toward the stock market or the economy. Optimism sells, and if you want to do business, you are almost always better off taking the rosy view of just about everything on the investment scene.
Perhaps the classic example of this fundamental truth took place on September 5, 1929, just a few weeks before the Great Stock Market Crash. Economist Roger Babson, speaking at a major business conference, made the following statement: “Sooner or later a crash is coming, and it may be terrific. Factories will be shut down . . . men will be thrown out of work . . . the vicious cycle will be in full reversal and the recession will be a serious business depression.”
Now that is about as accurate as you can get in terms of predicting the stock market and the economy. Babson’s reward was that he was ridiculed and criticized as a fearmonger. Rudd says that one major brokerage firm actually took out an ad in The Wall Street Journal raking Babson over the coals and stating that “we will not be stampeded into selling stocks because of the gratuitous forecasts of a well-known statistician.”
The stock market actually began declining on the very day Babson made his historical forecast, and that particular drop became known as the “Babson Break.” By late October the crash that Babson had predicted was under way, culminating on “Black Tuesday,” October 29, 1929, the worst day in stock market history.
And what was Babson’s reward for being so accurate? Some people had the temerity to criticize Babson for being early in his bearish prediction, and others actually went so far as to blame the stock market crash and the ensuing depression on Babson’s “fearmongering.” This is a lesson that has been learned and relearned in varying degrees over the years by anyone who has had the misfortune of turning prematurely bearish on the stock market or the economy or having the nerve to issue a “sell” signal on a big-name company with a popular stock and a penchant for doing investment banking business. Therefore, you should not expect much help from the “experts” when it comes to predicting bear markets, recessions, earnings disappointments at large, well-known companies that do a lot of investment banking business on Wall Street, or in other areas where the forecast of bad news might be met with, shall we say, a bad attitude. One of the all-time great examples of an “expert” receiving an icy attitude toward his honest point of view is the Russian economist Nikolai D. Kondratieff, who was exiled to a labor facility in Siberia and died there after he wrote a 1925 treatise in which he suggested that capitalism was a perfectly legitimate economic system that would always recover from depressions if left to its own devices. This point of view was not something the Communists particularly wanted to hear, since Moscow had taken the position that capitalism was a flawed system that contained the seeds of its own destruction. And so, the father of the “Kondratieff Wave,” which turned out to be one of the more enduring theories of economics, was handed a pickax, or whatever they gave you when they shipped you off to Siberia, and is most likely preserved in ice for future inhabitants to thaw and scratch their heads at.
Not all experts receive such harsh treatment for trying to report the truth as they perceive it. Some of them, like the brokerage firm analyst who issued a negative report on one of Donald Trump’s companies several years ago, merely got fired. Others meet with a more subtle form of resistance.

WHY EXPERTS CAN BE WRONG (part 1)

admin — Thu, 10 Sep 2009 19:51:09 +0000

So, what is it with these “experts” anyway? How can so many well- informed people be so wrong so often?
Part of the problem may be that the pool of “experts” is getting diluted.
A few years ago, before the proliferation of talk shows and the Internet, you had to be well versed in a particular subject before you were invited to appear on television or radio.
Not anymore. These days, talk shows have multiplied to such an extent that the supply of “experts” has increased to meet the demand. Of course, common sense will tell you there is a limited supply of experts on any particular subject, but this doesn’t seem to matter very much because there is so much babble sprouting up in all forms of media that it’s possible to say almost anything, no matter how outlandish or uninformed, and get away with it. The proliferation of Internet financial sites has also created demand for more “experts.” Every site needs columnists and “analysts” to expound on the daily developments on the financial scene. Most of them are excellent writers, and it sure soundslike they know what they’re talking about. But who are they? What are their backgrounds? How much experience do they have? Have any of them ever even experienced a bear market or anything other than “momentum” and “index” investing?
It’s tough to tell if you’re reading truly informed analysis or just plain nonsense that has been created to provide content. This nonsense cuts across ideological boundaries. No matter what your personal, political, or business agenda, it is possible to put your own “spin” on almost anything—even historical matters that are not really open to debate—and chances are you will not be challenged. And even if you are challenged, so what?
Rush Limbaugh, for example, has blamed the oil shortages and gasoline lines of the 1970s on Jimmy Carter, saying that “those gas lines were a direct result of foreign oil powers playing tough with us because they didn’t fear Jimmy Carter.” But the first—and worst—OPEC oil price hike took place between 1973 and 1974, during the administration of Richard Nixon. Not only that, but one reason for OPEC’s initial oil price hike was the Nixon policy of wage and price controls, which caused OPEC to feel it was not receiving a fair price for its oil. Everywhere you look, “experts” are spinning facts to promote an agenda. To this day, Democrats still try to deny that the economy performed well under Ronald Reagan.

WHAT IS AN “EXPERT,” ANYWAY? (part 2)

admin — Thu, 10 Sep 2009 19:42:05 +0000

“The 1988 A’s,” the story said, “are the best team the American League has sent to the World Series since Charlie Finley’s teams of the early 1970s. These A’s may be even better.” Having thus been anointed one of the greatest baseball teams of all time, the A’s went on to lose four straight World Series games to the Cincinnati Reds. The “experts” aren’t very good at predicting recessions either.
Economic recessions do not announce their arrival the way Jack Nicholson announced his arrival in The Shining—by breaking down a door with an axe and scaring Shelly Duval out of her wits as he announced: “Honey! I’m home!” Rather, recessions tend to arrive on muffled oars, quietly, arousing little or no suspicion until one day the Commerce Department announces that, “Guess what? We have been in a recession for the past 6 months. Have a nice day, and good luck paying off those loans that you took out to expand your business at precisely the wrong moment.”
Yet another classic example of the “experts’” inability to predict recessions was evident in July 1989, when Fortuneannounced there would be “No recession this year or next.” Of course, the reces- sion of 1990 was already in the process of beginning, but none of the experts Fortunerelied on saw it coming.
You can use the media to call turning points in both interest rates and oil prices. Here’s a classic. On September 16, 1987, The Wall Street Journal’s front page lead story was headlined: “The Bond Bears: Debt Securities Prices May Slide for Years, Many Analysts Think.” The implication was that interest rates would be rising for years into the future. This front-page story, amazingly enough, coincided with the exact peak in long-term interest rates. When this story appeared, the 30-year Treasury bond was yielding around 10.25 per-cent.
Bond prices then embarked on a relentless 6-year rally, which carried the yield on the 30-year Treasury down below 6 percent by late 1993.
In another classic example, Associated Press managed to catch the exact bottom in crude oil when it ran a story on March 9, 1986, entitled: “No Bottom to Oil.”. This story managed to appear at the precise bottom in the price of oil, which rose from $12 to $36.50 a barrel within 4 years of the story’s appearance.
How did The Wall Street Journalmanage to run a lead story that was negative on bonds at precisely the peak in interest rates? How did the Associated Press proclaim that there was no bottom in sight for oil prices at the exact bottom for oil? They did what came naturally: They got used to a persistent trend and felt compelled to write about that trend for their readers. When The Wall Street Journaland Associated Press reporters went to their “expert” sources, these sources had also gotten used to a trend that had been in force, and simply extrapolated that trend into the future. It’s always easier to explain what has been happening than to stick your neck out and suggest that something new is about to transpire, which is why you tend to see the media make a very big deal out of trends and people just as they are about to fizzle out.
Pack rat that I am, I have numerous examples of the media shining the spotlight on the wrong trend or the wrong person at precisely the wrong time. Here is one more example, a cover story dated October 26, 1987. This issue of Fortunehit the newsstands the very week of the 1987 stock market crash, and it said: “Why Greenspan Is Still Bullish.” On October 19, 1987, the same week this issue appeared, the Dow Jones Industrial Average fell 508 points, a 1-day plunge of 18 percent.
Of course, following the monstrous stock market decline, the very same news magazines that had been touting prosperity and a forever-rising stock market shifted gears and began running cover stories about the coming recession and possible depression. The message of the stock market debacle, we were told, was that “hard times” were coming and that investors and businesspeople should batten down the hatches. Wrong again. The media went overboard on the meaning of the 1987 crash, just as it went overboard on the rally that preceded the debacle. The consensus of the media and its “experts” following the 1987 crash was that this could be just the beginning, a harbinger of severe economic problems for the world financial system. Even Robert Samuelson, Newsweek’s economic columnist and a man about as mainstream as you can get, ran a column after the crash entitled “The Specter of Depression,” in which he asked the question: Did the market crash serve as a warning that an economic depression was imminent? His answer, delivered not entirely convincingly: “Probably not.”

WHAT IS AN “EXPERT,” ANYWAY? (part 1)

admin — Fri, 04 Sep 2009 19:38:20 +0000

One wonderful definition is that an expertis “somebody from out of town,” which is another way of saying that distance lends enchantment.
Another definition, and probably the best one for our purposes, would identify an “expert” as anybody who manages to get quoted in a newspaper or magazine or has a publicist with enough clout to wrangle an interview on television or radio. Considering the explosion of media outlets in recent years devoted to finance and investing, including the proliferation of financial Web sites, this definition of an “expert” would have to be considered fully diluted, if you get my drift.
“Experts” have always had a difficult time predicting the future, although this has never stopped any of them from making predictions. And it probably will not surprise you to learn that the U.S. government ranks right up there when it comes to the list of “experts” who have made pronouncements about the future that have turned out to be spectacularly wrong.
For example, every now and then over the past 30 years we have been subjected to an “energy scare” and we are told that energy supplies are running out. Every time these energy scares have surfaced, they turned out to be false alarms. But did you know that dire predictions of an imminent “energy doomsday scenario” have been going on for the last 115 years?
But even a genuine, card-carrying expert with a track record of accomplishment and insight can be completely out of sync in any given situation and therefore way off the mark. Why? For one thing, even genuine experts are out there taking their best educated guess, just like the rest of us. And they can be influenced, like everybody else, by the subconscious idea that a trend in force for a long time will simply continue, indefinitely, into the future. And that means that most experts are not very good at identifying major turning points in the economy, the stock market, or the individual stock that has been in favor or out of favor for a long time.
One rule of thumb that has developed over the years is that whenever a certain trend in the economy or the stock market manages to make the cover of a general-interest magazine like Timeor Newsweek, it’s time to consider the possibility that this particular trend has pretty much run its course. Aclassic example of this phenomenon is the Newsweek cover, dated December 2, 1974, entitled, “How Bad a Slump?” When this issue of Newsweekhit the stands, the economy was in a severe recession, the stock market had been sliding for two years, inflation and oil prices had spiraled out of control, and interest rates were in the stratosphere. So “How Bad a Slump?” seemed a perfectly legitimate question to ask. What nobody knew at the time was that the slump had already ended, the stock market had already hit bottom, and both inflation and interest rates had already peaked. Amore recent example of a magazine cover signaling the end of a financial trend was the December 27, 1999, issue of Timemagazine in which Amazon.com founder Jeff Bezos was named Time’s “Person of the Year.” That issue of Timecoincided with the exact peak of Amazon.com’s stock price, which proceeded to fall from $113 to as low as $19.38 over the following year. This does not imply that Jeff Bezos did not deserve the honor—only that Time’s cover story resulted in large part from a very newsworthy trend (the incredible stock market performance of the Internet stocks), which had been in force for a long time and which by that time had reached a ridiculous extreme. Time’s cover story signaled the end of the bull market not only for Amazon.com but for every other Internet stock, all of which plunged dramatically during 2000, and many of which actually went completely out of business.
This strategy of betting against magazine covers should not be confined to economic and investing issues, by the way. Here is another classic example of expert opinion that was off the mark. In the October 17, 1988, issue, Sports Illustrated ran a cover story on the invincible Oakland A’s, who were about to face the Cincinnati Reds in the World Series.

Experts: What Do They Know?

admin — Sun, 30 Aug 2009 19:36:46 +0000

By taking the fork in the road marked “superstock investing,” you often will find that you have little, if any, analytical or “expert” support. This may produce an uncomfortable feeling at first. This series of posts is designed to get you over that feeling. Once you begin to think in terms of the “new paradigm” of stock selection, you will have to get used to the idea, when you go off the beaten path, that you’re not going to have a lot of company. In investment terms, the path in this blog is definitely the road less traveled. It’s perfectly natural for any investor to feel more comfortable when buying a stock that is recommended by a large number of “expert” analysts. And yet, as you will see, the more analysts who are following a particular stock, the less likely it becomes that you can come up with any significant insight that hasn’t already been factored into the stock price. Not only that, the more analysts who recommend any given stock, the greater the likelihood that all of the positive news and potential surrounding this particular company is already more than reflected in the stock price. This means that the slightest disappointment will result in an immediate and significant drop in the stock, which could wipe out months or years of profits in a single day. In Heaven Can Wait, James Mason, an emissary from heaven, reveals a basic truth of life when he tells Warren Beatty that “the likelihood of a person being right increases in direct proportion to the number of people attempting to prove him wrong.” This is another way of saying that if you are looking for truth, insight, or really great stock ideas, don’t be afraid to go down that untrodden path—and don’t waver simply because most people don’t think the way you think or can’t see what you see. When you apply the principles described in this blog to your stock selection process, you often will wind up with stocks that for one reason or another have been neglected or are out of favor. And yet, the Telltale Signs you’ll learn to spot will strongly suggest that, beneath the surface of a sleepy, out-of-favor stock, a metamorphosis is starting to take place that has not yet become apparent to the mainstream Wall Street establishment, i.e., the “experts.” By the time you finish this series of posts, you will recognize many of these Telltale Signs that metamorphosis is in the making, but that will be only half the battle. Even after you’ve spotted a potential winner, analyzed the situation correctly, and taken the plunge by buying the stock, you will probably have to suffer through a frustrating period during which whatever was blindingly obvious to you is completely overlooked by the experts who influence stock prices. It can be pretty lonely and sometimes spooky when you’re strolling down the untrodden superstock path. To help you get through these inevitable periods of frustration when your confidence in your own judgment will be tested, and to help you remember that it is perfectly possible for you to be right while the “experts” are wrong, we’ll show you some world-class examples of expert opinion that turned out to be completely off the mark.