Cramer Not Big on Q now>
Cramer Rewrites 'Pros and Cons of Pro Investors'
By James J. Cramer
1/29/00 1:42 PM ET
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This piece caused real heartaches on the boards. Many people were very upset about it. I write tons and tons of articles. I try to be as artful as possible. This one was written in a way that many people got confused about what I was saying. So I'm redoing it this weekend to explain things more fully.
What do people want out of companies? What kinds of numbers do we want to see that make buyers excited? What goes on in these conference calls that makes portfolio managers want to buy more rather than sell? (This piece addressed the process of evaluation that good portfolio managers go through during the quarterly earnings period. This is the most crucial period for our firm. We are sifting through literally hundreds of reports to be sure of how things are going. We want to spot companies that are doing better than we thought. At our firm, we are trying to answer three questions and make decisions based on what we find. 1. Is the company doing better or worse than Wall Street thought? 2. Is its stock cheaper or more expensive than it should be given those results? And 3. Even if the stock is cheaper, is there some alternative investment that could be even better for our fund?
This piece addresses parts 1 and 2 in this process. Internally at Cramer Berkowitz, I don't do much of 1 in tech, although I do it in every other field. I do mostly 2 and 3. Jeff Berkowitz and Matt "Where's the Rest of Me?" Jacobs, after Friday's drubbing, do 1, and Jeff also does 2 and 3.)
To understand this question is to understand the difference between the way the individual plays the market and the way the professional investor makes her decisions. (Again, I am continually drawn to these comparisons because most of our readers are not professionals. They are do-it-yourselfers. Many "amateurs," so to speak, took umbrage with this statement -- I find this ridiculous. It is a full-time job to listen to conference calls and check with analysts about expectations, and if you do those things you are per se a professional. If you trade at home a la Gary B. Smith you are a professional, too. I'm not trying to denigrate anybody with these characterizations. I am simply trying to explain, again, how we work vs. how hobbyists work. )
The typical portfolio manager is not sitting there with a point-and-figure chart hoping that the lines will show whether to buy or sell. (Ouch, my head trader, Todd Harrison, thought this was ridiculous. That's what he uses. I'm only trying to explain that it is not Matt Jacobs' job to tell me about breakouts and breakdowns and cups and handles.)
The portfolio manager has built a model of earnings for the future and she is trying to figure out whether her numbers are too low or too high. (Building models is Matt's game. He tries to figure out what the gross margins will be, what the selling cost of the products will be and the strength of the business. He's trying to predict how a company will do in the future.)
Take JDS Uniphase (JDSU:Nasdaq), which reported last night. When I go into Matt "Just Don't Sell Us" Jacobs' office as he listens in on the call, he is not doodling on a pad, or reading Sports Illustrated or checking out Knicks.com. He is looking at his model of what he expects JDS to earn in the future, a model built on expectations arrived at through working with the company and with Wall Street analysts. (Matt painstakingly puts together these models. He does a regular model and then a stretch model to see whether the company is really firing on all cylinders. In this case, JDSU exceeded his stretch model. Or, as he put it, "they did next quarter, this quarter." He loved JDSU. I couldn't believe anybody thought otherwise from this piece, but check the boards, they did.)
If he hears information about the sequential growth that is better than he expected, he is thrilled. Numbers have to go up. He jumps up and down when he hears that JDS may be hinting that its revenue figure for the next quarter is going to be bigger than the one he was looking for two quarters out. (This is what he did. He jumped up and down after JDSU.)
But he is very disappointed when he hears that the numbers ahead are not going to be as high as those in his model. (This is what he did after Qualcomm(QCOM:Nasdaq). They didn't hit Matt's stretch numbers. In fact, Matt was quite sure that Qualcomm's statements meant that we should play the company from the short side on any lift. This stock has gotten way, way ahead of itself.)That's a bummer. That's yesterday's Qualcomm experience. Or today's Dell(DELL:Nasdaq) fiasco (which, just so we are clear, was a really ugly one that will test those long-term holders while it creates a buying opportunity). (You want fiasco? Dell had it in spades. So many people were short it that it didn't go down as it should have. But there's nothing good there and it will be some time before that stock can be revisited as a investment.)
That's what makes him come in to me and say we should be selling, not buying. (Again, we are talking about Qualcomm.)
Of course, this is one of those areas where I think the professional is better than the amateur. The professional has the models, she knows what people are looking for. She can figure out instantly what is really better than expected, as opposed to all of this whisper junk you keep hearing about. (So much is made of the whisper number and all of these whisper sites. It's all garbage. Most of these whispers are just jokes, somebody tacking on a penny to what everybody on the street is looking for. I always cringe when I hear someone in the press talking about a whisper number because I know that some hedge fund guy has simply made up a number and passed it along. Yes, that really is what happens.)
This skill, however, affects stocks only at the margin. We may reach a decision to sell because the model is not beaten. However, there are more things at stake than just the numbers. Longer term, the short-term numbers may turn out to be meaningless. (This cuts to whether a stock should be owned regardless. We saw this with a bunch of stocks that reported great numbers this past week. It turned out that those numbers didn't really matter. The market flipped into sell mode and stopped rewarding anybody who reported anything terrific. Good, bad, better than expected, it didn't matter; it went down if it was in tech.)
Let's take Disney(DIS:NYSE). Those professional traders who extrapolated previous numbers off their models weren't able to see the breakout coming, because it occurred intraquarter. But those individuals who last year looked at Disney and said, "It can't get any worse than this, I will ride it out," turned out to be huge winners. (When professionals discover that a stock is going to have a down quarter, being one that is lower than the previous, it's extremely difficult to keep that position on your sheets. We all are held accountable in this business and very few professionals can ever dismiss a stock with the simple alibi that "it will come back."
That was the greatness of Warren Buffett for the longest time. He picked franchises that seemed immune to erosion. And he held on to them. But most professionals will see that money taken away if they ignore near-term considerations. And most brokerage houses have committees that meet constantly to decide what should be on the recommended list and to weed out any stocks that are going to have near-term problems. It makes sense. At a given firm, there are 30 or 40 analysts all fighting to get their best names on the buy list. Many companies are doing extremely well. Who has time for a Disney that looked like it would have down earnings?)
That's why I always give the long-term investing edge to the amateur. The professional can make excellent short-term decisions based on near-term revenue and earning projections. But the amateur can often make a long-term decision based on the true worth of an enterprise over many years. (Again, more misunderstanding. Do-it-yourselfers can create their own models and analyze securities with the best of them. My point was that most people look at stocks from the point of view of franchises with management and products, not with an eye toward how the next quarter might be. Sometimes when I'm out with people who are interested in the market and they ask me about a stock, I will say, I don't think that company's having a good quarter. And they will look at me like I'm from Mars. "Who the heck cares about the next quarter?" And I think, yep, maybe I am too close. But I can't lose money. It's my day job. )
And that's where the biggest money is made
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