Chapter 7

Listening to Wall Street

For four years back in the late 1950s, I was the soloist and announcer with the Air Force Band and Singing Sergeants. That was government work, however, so we only worked two hours a day when we weren't touring about a quarter of the time. So I got a job with a New York stock exchange brokerage. I learned some enduring lessons:

• The firm made recommendations for us to sell to our clients that were in the best interest of the brokers; sometimes the trading department had stocks in inventory and had higher-than-normal profit margins, and promised higher commissions.
• We were under constant pressure to sell higher-margined financial products, such as front-load mutual funds, tax shelters, and other financial-planning instruments.
• The firm's more mainstream recommendations were always aligned with the consensus of Wall Street, which turned out to be pretty darn wrong more often than not.
• No customer would buy a stock if you weren't bullish on it, so it was easy to convince yourself that you were bullish because you were a commissioned salesman. No bullish recommendations would mean no buy orders and no commissions.

After I finished my four years with the Air Force, I tried to continue in that business, but I determined to become more discriminating and use my best judgment. Until then, I had just been a loyal employee and I trusted the house, believed their recommendations and sold them. But when I started exercising my own judgment, there were a lot of high-profit items I couldn't make myself sell, so I didn't sell much, and I didn't make many commissions, and my family was near starving. That's when I decided to get out of the business.

Since I became a financial newsletter editor 25 years ago, my respect for Wall Street has sagged year after year, until now it is nearly nil. The worst thing you can do is blindly accept the consensus of opinion on Wall Street and follow their advice. Most of the brokers' recommendations are—sometimes subtly, sometimes not so subtly—in line with their self-interest.

THE DINES SAGA

Back in the 1960s, James Dines was one of the stars on Wall Street. He was a gifted technical analyst, and, in fact, he wrote books that are still classics of technical analysis. He was everyone's fair-haired boy.

During that time, however, his technical analysis told him that gold was headed for a bull market in the not-too-distant future, so he began recommending gold and became bearish on the stock market. This did not sit well with his employers or his colleagues on Wall Street who didn't sell gold, so he became a pariah and eventually lost his job.

I've known Jim for many years, and you just can't intimidate him that way, so he created a new career for himself as “The Original Gold Bug,” and founded and wrote a very successful financial newsletter. He was dead right during the gold bull market of the 1970s (and so was I, by the way), making a lot of money for a lot of people.

Despite his Gold Bug status, Dines has also been bullish on the stock market when it was appropriate, and he was usually right. He is a financial newsletter legend.

The lesson I learned from Jim Dines' history is: If you want to get along with Wall Street, you go along, and it doesn't matter if they're right or not. And there is very big money for talented people who go along.

If you were watching the financial channels, like Bloomberg or CNBC, during the late lamented bull market bubble of the 1990s, you heard many bullish stock recommendations, all assuming that the bull market would continue and that trees grow to the sky. In fact, the bullish recommendations peaked on the day before the market peaked. On that watershed day, 90 percent of the recommendations were “buy” and 8 percent were “hold.” Only 2 percent were “sell.” The next day the bubble started to deflate and the panic began that has lasted more than three years—the biggest bear market in the history of the New York Stock Exchange. We have since found that Wall Street had been recommending stocks that not only were not profitable, but that contained nothing in their pro-formas to indicate they ever would be profitable. They were stock promotions pure and simple. Many of those companies are now gone, simply because they needed continuing rounds of new capital just to stay alive, and the venture capital markets dried up as panic-driven capital investors ran for the hills.

I had become bearish in November of 1999 when I spoke to a major investment conference and told the audience we were in the middle of a bubble and it was time to start averaging out and soon be completely out of the market. I was laughed at, and there were a few boos and hisses as everyone in that audience was caught up in the bull market mania. Of note, I haven't since had any calls from people telling me how right I was when the market peaked in March of the next year and began its long downhill slide.

So, do I watch CNBC or Bloomberg? Sure I do, but I only want to track market performance and to see what Wall Street believes, so I can consider whether or not to be a contrarian that day.

What's the bottom line of all this? Wall Street is no different from you; we all act in our own self-interest and Wall Street needs to be bullish whether it is appropriate or not because bears don't sell stock, produce commissions for salesmen, or accumulate profits for the company. The bullish attitude is essential to the very life of Wall Street brokers, so like a stopped clock that is right twice a day, there are periods when they are right on, but only when it aligns with their self-interest or they get lucky. Wall Street is not the place to look for objective or accurate financial advice.

When you attempt to make money on Wall Street, you are competing against cold-blooded professionals, and they really are a separate breed. Most are short-term traders; very few are long-term investors like Warren Buffett. They tend to be in early in upswings in individual stocks, and out before the top—just about when you're excited that that tree will grow to the sky and you start to buy. The average investor can't make any money in the stock market competing with those hard-nosed professionals. Because of the emotions described elsewhere in this book, most investors lose money even in bull markets.

To top it all off, in my lifelong experience with wealthy people, I have only found one who became rich in trading the stock market, and thousands who have lost a lot of money in the market.

We were once on a cruise ship with a group of my subscribers. As always, they would ask me to look at their portfolios and make recommendations. One gentleman, whom I believe was 90 at the time, showed me his portfolio, and I gasped. He had averaged more than 30 percent a year for two decades, which was better than I had done—a heck of a lot better! The interesting thing is that his portfolio consisted almost entirely of disasters. When Wall Street was bearish on something because a calamity had occurred and the stock had nosedived until no one wanted it, that's when he bought. He bought Union Carbide when its Bhopal, India chemical plant blew up and killed hundreds of Indians, and Wall Street was heading for the hills. My friend bought it cheap, hand over fist. It was basically a sound company and when the inevitable comeback materialized, he quadrupled his money. And just about every stock in his portfolio had a similar story. In other words, he made a fortune going the opposite way of Wall Street, and he's the only person I have ever met who had the ego strength to consistently do that.

Wall Street is also subject to some malign influences within management. We now know that many of their recommendations were fraudulent simply because the financial consulting arm of the firm wanted a fat consulting contract with the company under discussion. So their analysts became bullish on that stock, which pleased their employer, and the brokerage house was rewarded with a fat consulting contract. I'm not saying that some of this was not sincere, but a lot of it was just flat-out crooked. Again Wall Street operated in its own self-interest, and now some of those people are going to prison along with some accounting firms, and there are a lot of them walking the streets that should be in the pokey.

In addition, brokers are as human as you and I. They are as prone as you to get caught up in manias and in their personal self-interest.

In the final analysis, is Wall Street the place to get your financial advice? With their track record? Where should you get such advice? Is there such a place? Should you even be in the market? I will deal with those questions later.