Welcome to the premier issue of "Beyond the Hype." I read and come across a lot of information each month, and I’ll pass on items that I think will be of interest. We’ll start with an article found in the April 3rd issue of Business Week, which was appropriately about the "Hype Machine."
This is an article that hits the nail right on the head. It covers three major areas investors need to be aware of. First, it points out the incredible rise in advertising by brokerage firms painting unrealistically rosy investment opportunities for amateur investors. The dominant message is that Wall Street can make you rich, fast. The goal appears to create an army of "momentum" investors, trading on all the news and information that is available. "Taking control" by actively trading stocks on your own is sold as an absolutely beneficial activity, when every study shows that the short-term trades encouraged by the discounters is harmful to most portfolios. Ad campaigns by brokerage firms were up 95% last year, totaling $1.2 billion. Education is not the goal of these ads. According to the Consumer Federation of America, only 38% of investors know that when interest rates go up, bond prices go down. Fewer than one in six investors know that commission expenses can lead to lower returns.
Another concern is that the organizations that might be providing financial education are instead touting as many stocks as they can get on the air. CNBC has become the mainstay of armchair momentum investors, and its guests are expected to give stock tips. Mark Haines, host of the "Squawk Box" morning show, confesses that one of his worst experiences came when a guest told him, before going on the air, that he couldn’t discuss specific stocks. "How," he wondered, "was he going to fill the time?" Money managers have an incentive to hype a stock and then dump it immediately, which apparently happens so often that CNBC decided to enact an ethics code. But the business model still requires that the viewer be short-term-oriented and trading on gossip.
The third leg of this stool is the celebrity analyst-people who spend much of their time being interviewed on the air about stocks they follow. The article suggests that these people are paid to get on the air and not to analyze stocks in any significant way, but rather to provide a constant stream of bullish messages. The evidence bears out this unhappy analysis: buy recommendations outnumber sells by a staggering 72 to 1 today, up from 10 to 1 a decade ago.
Keep this in mind when you’re reviewing analysts’ ratings on a particular company! I mean "buy," or was it "sell?"
Speaking of buy recommendations and analysts, there was another interesting article in the March 27th issue of Business Week. Business Week talked to analysts off the record, and they say some incredible things. For example, they will publish a "buy" rating on a company to appease that company, but tell their biggest clients to sell, because they really don’t like the company’s prospects. They then get the best of both worlds: continued access to the company, and credibility with the big institutional investors who pay their bills.
It’s obvious who loses. The real thinking never reaches the average investor. Business Week confirmed the practice with a lot of analysts, and then talked to some on the record who denied ever doing such a thing, but confirmed that everyone else was doing it. Often there will be something you want to downgrade, and your firm will say, "it’s not a good time," one analyst told the writer.
Web-site of the Month - www.bloomberg.com
This is a great overall site for comprehensive financial news and information. In addition to easy to use quotes, charts, and other tools, Bloomberg attracts some excellent writers who contribute timely and interesting articles. Both serious investors and financial professionals can find a lot here.
"If you don’t know where you are going, you’ll end up somewhere else." Yogi Berra