FOR WHAT IT’S WORTH
|By: Ron Brounes
is good!!!” Or so we were first told by
Gordon Gekko in “Wall Street” and then again by Seth Davis in “Boiler
Room.” In reality, though “art imitates
life,” we don’t have to see these movies to realize that we are living in very
greed oriented times. Popular TV shows
offer a million dollars to anyone with a decent knowledge of pop culture or
insane enough to marry a rich stranger.
(I am still waiting for my applications to be accepted.) However, no where is that greed factor more
apparent than in the day-to-day “exuberance” of the stock markets. Today there
is a new paradigm; “buy and hold” has been transformed into “get rich
quick.” Lots of so-called geniuses have
been created in the great bull market.
Their true test will come when faced with some adverse market
conditions. (To many, that means anything less than 20% returns.) Greenspan’s “irrational” comments a few years
back were meant to bring the short-term investment mindset down to earth.
Instead, the market (Dow Jones) is now several thousand points higher with no
end in sight. Today, more investors than ever are able to participate in the
rising stock market and are better off because of it. That’s the good news. The
bad news is, in many cases, investing has become sheer speculation. The tide
will turn one day; it may get ugly.
THE CAUSE OF MY CONCERN
few days ago, I was chatting with a CPA friend of mine, a pretty intellectual
gal with a good mind for numbers and a history of common sense. She informed me that she was making a killing
these days in the market. A buddy of
hers (real estate broker) had given up his day job to solely track the
movements of the stock markets, and was sharing his “hot tips” with his closest
friends. He had subscribed to a number
of newsletters written by market “gurus” (others who had quit their
non-investment jobs six months earlier).
My friend had no clue about many of the companies she now owned. Not the products sold; not the services
offered; not even the industry they were in.
Furthermore, she bought these stocks on margin (borrowed money) in an
attempt to hit that homerun. While this
allowed her to buy more shares than she may have been able to afford, it also
added considerable risk should her stocks suddenly fall out of favor. No chance of that happening, however. They were, after all, recommended by a real
old college chum apparently made enough money on a few technology issues that
he no longer needed to practice law.
(Personal injury, I believe, so it’s a good deal for all of us.) Today, he shares his wisdom by circulating a
newsletter recapping his daily analyses of the markets, the economy, the global
trade picture, even a few movie reviews.
To the best of my knowledge, he has no formal training in equity
analysis other than the countless hours he spends watching a screen and reading
such expert sources as “thestreet.com” and “the motley fool.” In all fairness, his portfolio is doing great
(though his movie recommendations are lousy). I am also the “lucky” recipient
of another market publication that advises the novice investor about trading
options, futures, and other derivative securities. Having significant academic and professional
experience in this area, I was curious about the backgrounds of these
strategists; I was comforted to learn they had been headhunters (recruiters)
just one year ago.
enjoy watching Wall Street analysts spread their wealth of knowledge on
television. To my dismay, these
professionals are rarely over 30, yet they discuss the markets like seasoned
veterans. In most cases, they were not
in the business to experience Black Monday (in 1987, many would have been in
high school), and have seen few years when the market was not up double
digits. To them, any market pullback is
short-term and offers tremendous buying opportunities. Often, they disregard “ancient” valuation
methods like PE ratios and show little concern when they see companies with no
near-term profit expectations trading with billion dollar market caps. Apparently, as long as a “.com” is attached
to the name, the sky is the limit.
GLOOM AND DOOM
get me wrong. I do not begrudge anyone
for their investment successes. On the
contrary, I too have experienced some good fortune, and like many others, my
portfolio is too heavily weighted on tech issues. (At least I know what
businesses the companies are in.) Still
I am quite concerned that the “market” has become a self-fulfilling prophesy, a
trend that may one day be reversed. The
Internet has transformed the economy in ways we could have never imagined. We
can now communicate and transact business faster, farther, and more efficiently
than ever before. Productivity is up;
inflation is down. Individuals make more
money to spend on goods and services (and stocks). Businesses earn greater revenues and their
stock prices rise. As the markets increase, investors have even more money to
spend and the trend continues. Strong economy, high incomes, increased
spending, skyrocketing stocks. Because
so many tech plays have gone through the roof, impatient investors seek to find
that next Dell, AOL, or Qualcomm (+2600% in 1999). They make a buck or two on
one issue, double up on the next, borrow/margin to invest even more, quit their
jobs to trade full time, and reap the fortunes of the “new” market.
something will happen to cause the economy to slow: an ill-timed comment by
Greenspan, an unexpected rate increase, additional production cuts by OPEC,
another Asian contagion, a currency collapse in Latin America, an act of
terrorism abroad. Subsequently, incomes
will drop; consumer spending will subside.
Company revenues (not to mention profits) will decline, stock prices
will fall, and investors will panic. They will be forced to pay back their
margin and may need to sell other securities to raise cash, thus, causing the
market to pull back even further. This time, the lower prices will not
represent buying opportunities. Investors will realize that even advancements
in technology do not guarantee profits for all Internet players.
am not advocating you liquidate all positions and hide the proceeds under your
mattresses. Just be careful and exercise common sense. At the very least, it may be a good idea to
understand your investments and lighten up on that margin. It may not happen tomorrow, next month, or
even next year. For the sake of my
portfolio (and personal greed), I hope it doesn’t happen for a long time. But inevitably, the “correction” will occur,
and may even last longer than a day or two. Not all companies will suffer; not
all stocks will crater. The Internet economy
will still produce many winners, and in the long run, the markets will be far
healthier. But when we start taking investment advice from real estate brokers
and headhunters, it may be time to reevaluate.
“Greed is good” (to some extent), but remember even Gekko and Davis
suffered in the end.
FOR WHAT IT’S WORTH is a publication of brounes&associates.com focusing on business
marketing and general communications strategies. Please call Ron Brounes at
713-432-1910 for additional information. These comments were not meant to
offend anyone, but merely reflect an “irrational exuberance” warning and
concern for the future. I wish everyone
prosperous trading for many years to come.
Hopefully, we will all become millionaires many times over (without even
having to study up on pop culture or marry a rich psychopath).