The 10 notions that enrich Wall Street
By Thom Calandra , CBS.MarketWatch.com
Last Update: 10:57 AM ET Jun 24, 2002
SAN FRANCISCO (CBS.MW) -- Success, Gen. George Patton once said,
is how high you bounce when you hit bottom.
The U.S. stock market, which has a long way to go to hit bottom, is
headed there in part because of perverted financial rules Wall Street
feeds as investing gospel to Main Street. These are the 10 myths that
enrich Wall Street ... and bankrupt America.
Myth No. 1: After a relentless slide this year, the current stock
market is undervalued, or fairly valued. The fact is, stocks have no
fair value, by any measure. You can measure stocks by earnings,
dividend yields, return on invested capital, against the coupon of a
Treasury bond or against its industry peers. It's all a moving target, as
relative as it gets. Stocks don't have a fair value. They're driven by
many forces: psychological and economic. Fear of lost opportunity,
envy over the neighbors' new SUV, productivity, inflation, deflation,
product innovation, pricing power and global money flows are some of
the thousands of pieces of this puzzle.
Myth No. 2: Professional stock market strategists have reliable
insights. Not quite. Strategists at the major investment banks are paid
to have insights, and they're called price forecasts. These reports are
anything but reliable. In April, Abby Joseph Cohen at Goldman Sachs
(GS) said her targets for this year were 11,300 for the Dow and 1,300
for the S&P 500. The Dow is close to 9,000, and the S&P 500 is below
1,000. Cohen very well may see the stock market reach her targets by
year's end, but not before 90 percent of ordinary stock market
investors pull their hair out, overdose on Tylenol or file for personal
bankruptcy.
Myth No. 3: A weak dollar has little or no
effect on American stocks. Tell that to the
stock market. The euro has gained about 12
percent against the dollar since mid-January.
In the same span the S&P 500 basket of
America's largest stocks is down 15 percent.
Overseas investors have no reason to be buying
American stocks when the currency those stocks represent is
declining. Who wants to own a stock in a declining currency? Overseas
investors rang up a mere net $17.6 billion of U.S. stock-market
purchases in the first quarter vs. $41.7 billion in first-quarter 2001.
Myth No. 4: Mutual fund investors have a vested interest in buying
even more of their losing mutual funds, doubling down to lower their
cost average. Mistake. Most Americans are suffering portfolio pain
that amounts to 50 percent and greater losses for their personal and
retirement accounts. Do the math: a mutual fund (or a stock) that's
down 50 percent needs to rise 100 percent to reach the break-even
point. Mutual funds offer the added insult of the thick fees that
managers and administrators skim off the top. Oh, and while they're
losing money, mutual fund shareholders still pay capital gains for the
quarterly churn those glass-tower portfolio managers have mastered.
Myth No. 5: Not to worry, the stock market
will recover in the next 10 to 20 years, which
happens to be when most Americans see
themselves dancing away their retirements on
the decks of cruise ships. Here's the sad news:
If you bought stocks in the very good times of
1966, you probably didn't turn a profit until
1991. Sure, some of us will be waltzing away our golden years on a
Carnival Cruise (CCL), but it won't be stocks that pay for the berth.
Myth No. 6: This is a market for stock pickers. After all, people have
to invest in something, and sector rotation can benefit your portfolio.
This is classic Wall Street churn-burn; they churn you get burned.
Fact is, since the Jan. 14 Dow peak this year, 60 percent of all
American stocks are in the red, according to Standard & Poor's
Compustat database. This year alone, the entire stock market, as
measured by the Wilshire 5000 Index, has lost more than $1.5 trillion
of wealth for investors.
Myth No. 7: I'll just short-sell the market, or
buy put options as insurance against the
downdraft. That's what hedge funds do for a
living, not individuals. There's nothing wrong
with short-selling stocks, but you have to be
prepared for the long haul to really make
money. Short sales are expensive; they require
margin interest of 8 percent or more. Plus, the short seller pays the
dividends on the stock. Hedge funds hold their short-sale positions for
years, not months, and spend 10 hours a day on the telephone,
monitoring those positions. As for options contracts, one in five
investors probably make money on equity options.
Myth No. 8.: Gold mining stocks are
expensive. Actually, this one is true. Gold mining
shares such as Newmont Mining (NEM), the
world's largest, are selling for 15 times cash
flow. But as we said, it's all a moving target.
Gold stocks will get even more expensive,
fabulously more expensive, as the
stock-market and U.S. dollar declines become part-and parcel of
everyday life. Every $10 rise in the gold price is like rocket fuel to
gold miners' profit margins. With the price of spot gold flirting with
the $330 level, mining equities are poised to retain their status as this
year's biggest stock market gainers.
Myth No. 9: Holding cash amounts to lost opportunity. All I can say
to that is, forget the glory days and stop trying to forecast the
future. Cash is way under-rated these days. It still pays the bills.
Recipe for success: put all of your retirement cash in a basic
money-market account, let it sit for 20 years, sleep like a baby. When
you wake up, take that Caribbean cruise, first-class berth, please.
Myth No. 10: Now is the time to be looking
for bargains. Have you ever seen bargain
hunters at a swap meet? They're fast, they're
tight-fisted, they know exactly what they're
looking for ... and they rarely find it. What sets
them apart from the rest of the crowd is this:
bargain hunters know they have a 1-in-100 shot
at finding something they truly consider a score. The rest of us think
it's our birthright to buy things cheap. It's reality time. |
