The Informed Tech "Investor's" Destiny with Gamblers Anonymous: A
Broker's View
May 8, 2000
Ten years in the securities business does not make one an expert, but when something does not feel right, you know
it. Being a proponent of fundamental analysis and the theory that historical averages will eventually revert
towards their mean in periods of excess, it is clear to me that in today's environment the thirst for instant riches
has made even the most conservative individuals turn into race track gamblers.
Where investing was once associated with research and due diligence, along with identifying good risk-to-reward
prospects, the shift to compulsive and irrational behavior has been encouraged by the mainstream media and the
analyst community. This "touting" is being done regularly by our so-called "experts" without once thinking about
their fiduciary responsibility to the general public. Witness the tossing out of absurd price targets, many done on a
daily basis, often linked to the most recent tech conference covered by CNBC as if it were the countdown to the Final
Four.
The few highly respected voices of reason left today - who I believe have correctly identified this as the greatest
stock market bubble in history - have been taunted and chased away because they did not play the numbers game.
Unfortunately, they will also be given the "broken clock is right twice a day" treatment when they are proven
right. Their advice to lighten up during the parabolic rises most likely will never be quantified in dollar terms.
This is an unfortunate fact, because it's hard to determine how much they have "saved" those who have listened and
profited from the mania. In contrast, the "buy at any price" experts, who always seem to get off the hook for their
recklessness and disregard for the outcome of their touting, always walk away with halos and million-dollar
bonuses as long as they bring in their fees.
Even if you are a "new era" bull, it is no longer a market where "buying the dip" is a foolproof method for instant
riches. Just ask those buying the darling tech stocks over the past few months. The whipsawing swings recently
encountered have seen the Nasdaq fall from 5,100 to 3,200 in a few short days. This has put many investors who
bought the top in a hole, which may take some time to recover, and in some cases many individual stocks may never
come back.
That said, the real problem is that many of today's participants are late to the tech party, believing we are in a
so-called "new economy" where stock prices eternally go up and they always come back.
Looking back, I can still clearly remember many high-profile analysts slinging 6,000 Nasdaq targets the day we
broke 5,000, this coming on the heels of an absurd run from 3,000 a few short months ago. Now the same analysts
who said buy at 5,000 are saying "Gee, we've fallen 30 percent. Buy some more!" What's amazing to me is that
they have failed to notice or even once mention how far we have come in the past six years alone, and that a
50-percent retrace of that move is a possibility that could put us at 2,900 or less, "assuming" we are still in a
bull market.
By taking a snapshot of where we have come, few pundits mention our massive leap from 700 on the Nasdaq -
beginning in April 1994 - to 5,100 in March of this year. That's a six-year annualized return of 105 percent,
with much of the move coming in the past two years. Unbelievably, the number of 5-, 10- and 20-fold moves in
stocks and mutual funds in these two years is enough to satisfy most financial models' average historical returns
for 10 or 20 years. However, in today's market it is not enough to satisfy the novice dice thrower's quest for
30-percent weekly returns.
Another observation is, why are today's prices always analyzed from the top down - and not the bottom up -
regarding percentage gains in individual stocks and indices over the past several months? It is rather evident,
after reviewing the balance sheets of recent earnings reports, that true fundamentals and quality of earnings are
becoming as rare on Wall Street as an Eskimo wearing short pants and a tank top in January. I have long forgotten
when I last saw a clean earnings number released without the words "pro forma" or "less one time charges" next to
it for a high-profile tech stock. It is staggering to think of the number of funny-money billion-dollar stock deals
floating out there that are still going to be absorbed into many balance sheets over the next three to five years.
From a social perspective, we have been "taught" to ignore that stocks no longer carry the potential for loss of
principal (this being the manifestation of the oft-mentioned moral hazard our Fed is so frightened of). This
indicates that there has been a "paradigm" shift in the U.S. stock markets where equities are assumed to be risk
free, since they "always" come back. Being the leaders that we are, this thought process has now spread across the
globe, as bubbles have popped up in nearly every index trading in every country. Witness Brazil's move off the low
of 5,000 last January to 19,000 in 15 months as an example. Want some champagne?
Everywhere I turn, from ten-year-olds to grandmothers, people have been fully absorbed into the web of buying
"tech stocks" for a quick grand, as it is so easy and we will always be saved in the long run (thanks again, uncle
Al). Patrons of bars, barber shops and shopping malls who never knew what a ticker looked like are tuned in at all
times to the nearest TV running CNBC. Many investors have abandoned their mutual funds to participate, thinking
it is a no-lose situation.
In my practice, I have seen conservative individuals borrow from 401k's and paying back the loan with credit card
cash advances to buy bulletin board stocks, a 65-year-old near retirement leave because he was unhappy that he
was "only" achieving 12 percent on average over the past six years, and clients calling upset that a stock that had a
10-fold move in less than a year lost 30 percent in two weeks. The results are not an issue to me. It is the actions
that tell me something is wrong.
I wish for once the "gurus" would educate the public that these are not bingo chips people are playing with. It is
real money. It is years of life savings, with a lot of blood, sweat and tears poured into it. When they throw out their
next $1,000 price target on a shell of a company, they should justify why it should go there in real English using
real numbers - and answer for it if it people get hurt. This form of hype is one of the reasons why I received a
client call to buy three stocks where the individual only knew the symbols, and in the same breath could not tell me
the names of the companies he was buying. This request came after the same client pocketed $6,000 in gains in 48
hours, only to give it back to the "house" in 24 hours.
As the debate of old economy vs. new economy has now become a "needed" excuse to keep the gambling ball rolling,
conventional methods of valuation have been tossed out the window. As I see it, the price target game keeps the
gambler coming back to the window for another fix.
This may be all fine and dandy if you are an insider at a wire house who is about to throw a $200 target on a stock
trading at $120. Unfortunately, the misinformed mouse clicker often ends up swimming in margin calls - and
scrambling to find a credit card not maxed to the limit - just to stay in the game.
It is true these "informed investors" make their own decisions, but the "ingrained Pavlovian buy-the-dip crowd"
knows no better than to follow, because that is what they are taught to do. As the horror stories accelerate in the
coming months (and I have personally heard of a few six-figure wipeouts of "informed" investors this past week),
the truth will be known how severe the social issues will be on a psychological scale. To make a point, witness the
destruction of hundreds of stocks in the recent sell-off - many 50 percent to 80 percent lower, some likely never
to see their highs again, with many being peddled by analysts at prices hundreds of points higher as "must own"
stocks.
As this mania eventually wears its "addicted" participants down to tree stumps, and the house drains every last
penny from every unsuspecting price target believer who is in the midst of throwing life savings into anything that
moves, that is when we will realize the true social consequences the tech mania has wrought on those who followed
irresponsible advice. Most likely, the lines that once wrapped around the favorite brokerage house corner to buy
the last earnings surprise (or "beat the street" loss), will have drifted to the nearest gamblers anonymous office.
Eventually, there will be a time when you can once again become an "investor;" the only problem is that no one on
Wall Street will tell you about the current risk on the way down because they have to keep our new era stock
"addicts" in the game. So I expect there will be days with wild moves that keep the bettors in for a while.
One thing I do know is that if this really is an addiction, the gamblers will keep coming back until they lose it all,
and all signs point to the fact that the addicts are doubling down now. We shall soon see if my gut feeling was right
and if society is able to handle a downturn of more then three months, because that is a real possibility based on
current fundamentals, whether or not the pit bosses tell you "it is not remotely possible." At some point, the true
"investors" will position themselves for the next 10 years and there will eventually be a dip that should be bought.
In the mean time, I have never heard of anyone who ever left Vegas a winner three times in a row playing the same
number. So are we a stock market filled with addicts? I do not really know, but it sure feels like it to me.
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