A really good article by Dave Kansas. Makes a lot of sense. Also is a reminder that watching CNBC for serious market news is like using tinker toys to build a bridge:
The recent revelations that Wall Street stock analysts may be tainted
stock pickers has felt a bit too Casablanca. We're all shocked, shocked
that our fair-minded Wall Street analysts could have done anything
other than rigorously pursue the truth.
But why the shock? This group, by and large, can never bring
themselves to say "sell," preferring (on rare occasions) the term "hold."
And these same financial analysts kept recommending Internet shares
right into the basement, shifting price targets by moving decimals.
Still, it is a good window onto the Big Truism on Wall Street: Everyone
has an agenda. The Big Truism's corollary is: If you really have a good
idea, you won't tell anyone until you've already acted on that idea. In
other words, investment world commentators aren't in the Good
Samaritan business. They are in the money-making business, and the
information they provide is filtered through that lens.
Investment comments aren't unlike political stories. If you read about
Washington politics, stories are laced with anonymous quotes aimed at
advancing agendas. But despite these agendas, the information
provided is invaluable to understanding Washington. And the same is
true on Wall Street. Despite the criss-crossing agendas, more
information from the interested crowds, not less, is what is required.
Agenda pushing is pervasive, and it appears in places an investor might
not expect.
Take this past weekend. The Oracle of Omaha, Warren Buffett,
opined that a nuclear attack in the U.S. is a near certainty. Casual comments from a wizened man?
Perhaps. But Berkshire Hathaway, Mr. Buffett's company, is also deeply involved in insurance and
reinsurance. So you could also surmise that a little nuclear chatter means more perceived risk and thus
higher premiums for his firms.
Last week I discussed how short sellers can sometimes shade information to help their position,
especially when the market is going against them. Longs do the same thing. On Wall Street, traders will
joke about "getting help" to escape a bad position. Here's how it works in its darkest form. A long will call
a tip outlet [Business Week's Inside Wall Street, Barron's and the Wall Street Journal's Heard on the
Street1 are favored outlets for this tactic] and say "Kansas Industries may be in takeover talks." The long
will lay out the fundamental case for a takeout, and that story will get published. Novice investors, thrilled
at this morsel of information, will gobble up Kansas Industries shares, but what they don't know is that
the tipster is sometimes the one selling the shares. When a takeover doesn't occur, the stock settles
lower, much to the novice investors' chagrin.
A more subtle -- and common -- method is going on television or giving an interview to talk about the
stocks you own. Viewers and readers often will blindly follow the money manager's soothing story about
how Kansas Industries is a market leader with a great future. But remember the corollary to the Big
Truism. He's already got his.
Each time you hear someone involved in the investing game offer an opinion on a stock, be sure to find
out as much as you can about that person. If a money manager recommends a stock, you want to know
if they are adding to that position (conviction!) or merely holding the stock. (Please help my price
appreciation!)
Earlier this year the National Association of Securities Dealers proposed ways to improve the fund
industry's disclosure of information, but as of now the fund industry has remarkably light disclosure
requirements. Fund firms are only required to issue firm-wide holdings each calendar quarter and a
mutual fund only has to disclose its holding twice a year. Some fund companies do update their holdings
more frequently on their Web sites.
Given the weakness of the disclosure rules, when a commentator speaks, investors must rely on their
intermediary, often the press, to pin the speaker's agenda down. If you see someone quoted without
context or watch someone on television speak without having to reveal positions, I would recommend
caution. At the same time, I'd recommend you contact the intermediary and demand better disclosure.
No context is a lazy disservice to viewers and readers.
There are tracking services that can give you snapshots of fund positions such as Morningstar.com2,
10k-Wizard.com3 and Lionshares.com.4 These services don't have real-time holdings data, but they can
help you understand more generally where a fund manager is coming from. As for hedge-fund managers,
they only need to report to their investors, so it is difficult to get data on their holdings. Some high-end
shareholder intelligence shops do try to track holdings in close to real-time. But these services cost
thousands of dollars and are usually used by companies trying to track who owns their shares.
The Securities and Exchange Commission has rules against price manipulation and so-called
pump-and-dump schemes where someone buys a stock, talks it up and then sells that stock into the
enthusiastic crowd he has just whipped into a frenzy. But investors should be aware of more subtle
information games that don't fall under the SEC's rules.
Jeff Vinik, former Fidelity Magellan fund manager and a former hedge-fund manager, has displayed
great mastery at the information game. In 1996, questions were raised about Mr. Vinik's positive
comments about Micron and Goodyear, made while his mutual fund was selling those shares. The SEC
looked into the issue but decided not to take any action. Shortly thereafter Mr. Vinik left Fidelity to launch
a hedge fund.
After leaving Fidelity, Mr. Vinik found a different way to play the information game. He focused on
accumulating large positions in small-cap shares. When his positions topped 5% he was compelled to file
with the SEC that he held that stake. But as those reports would hit the wire, followers of Mr. Vinik
would bid up the shares ... even as he was unloading them.
A good example involves Innovex, a company involved in electronics miniaturization. On Jan. 7, 1997,
Mr. Vinik's fund, VGH Partners, filed with the SEC saying it had lifted its stake in Innovex to 6.7%, or
959,000 shares. By Jan. 13 Innovex was trading at 34.25, a gain of 30% from the filing date. But on Jan.
13, SEC filings indicated, Vinik was selling shares, unloading 228,000 shares by Jan. 16.
Perfectly legal. And a perfectly good illustration of why you need to make investments not based on
filings by a wizard, but based on your own homework.
Even economists can be conflicted. For instance, the bond trading desk at Jumbo Securities may have a
big short position in the Treasury market. That might explain why Jumbo's chief economist is braying
about inflation.
Business writers have become more aware of how investment agendas are advanced through the media.
At last week's Society of American Business Editors and Writers conference, several speakers
expressed concern that the business press has been too lax in policing its sources, especially financial
analysts. Some wondered if stock analysts should be quoted at all in stories, given the Merrill Lynch
revelations. Most agreed that more must be said about analyst conflicts when they are quoted in a story.
The bottom line is that it is impossible to find commentators without an agenda. It is the business press's
responsibility to outline the conflicts a commentator has for the reader so the reader can make an
informed decision on how to treat such information. There's nothing wrong with quoting someone who is
long or short or analyzing a stock. What is important is telling the reader every detail about the person's
position. |
