Taking On the Analysts: Ignorance Is No Excuse 24 comments
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This may come off as an unpleasant rant. Between a couple of articles I found over the weekend and watching the Consuelo Mack show on PBS, I came away with a very low regard for the way some folks do things.
First up was an article from Morningstar about what they got wrong in 2008. I have been writing about how worthless the analysis is for as long as I have been writing. They are a bottom-up shop and, from what I can tell, it is a rare day when bottoms-up warns of a bear market. Low PEs and other ratios don't matter when the market is going to roll over into a bear. When the market is going up most stocks go up, so a good bottoms-up might find stocks that go up more than market, but being right about the market would seem to be more important. So with that backdrop, Morningstar says they learned a bunch of things in 2008. I would wonder what they learned in 2001 and why that seemingly did not help in 2008.
This article from Seeking Alpha contributor Marc Gerstein posits that collectively the crew at Morningstar is just too young. He believes that experience matters a lot when it comes to navigating the market. I find his take interesting because at 42 I am probably in between his definitions of 'too young' and 'experienced'. One reader commented that Morningstar has a bullish bias which hurts them. I don't know if that is true or not; there might be something to the youth angle, but I do think it is bigger than that. Look at Larry Kudlow, who must be close to 60 either way, or Art Laffer or even Brian Westbury (I think Brian is older than me) - they are all experienced and all missed this coming in hideous fashion, bizarre really.
This gets me to the Connie Mack show, which this week featured Brian Rogers from T Rowe Price and Chris Davis from the Davis funds. Brian's fund the T Rowe Price Equity Income Fund lost 35.8% in 2008, which was the worst year for the fund going back to 1985 "by a lot." He said that when there is a severe credit contraction there are very few places to hide. Even safe areas like utilities were "traumatic." Consuelo asked if there was anything he would have done differently or could have done differently and he answered "no, I don't think there is." He said they would continue to focus on good quality companies that have struggled, with good balance sheets and valuations. He then said there are things he would have done differently but he didn't say what.
So I guess the next time the market drops 38% his fund will be pretty close either way? Did he really not know that credit contractions cause problems in the markets? That is the entire idea behind the inverted yield curve.
Chris Davis didn't really distinguish himself with anything he said. He admitted completely missing AIG and underestimating the effects of constrained liquidity. For as long as I have been aware of the fund they have had a colossal weighting to financial stocks. I will concede the following is unfair but somehow when he speaks (and he is on this show as often as anyone) I get the feeling he is reciting someone else's thinking. His is a family business started by his grandfather so maybe that is what I think I am hearing, but something just never quite seems right there. Very unfair on my part, but that is the sense I get.
In past posts I have mentioned that mutual fund managers are not the asset allocators. It is reasonable for a fund manager to invest all of the money in his fund, so this post is a bit of a contradiction, but I was dismayed by Rogers' comments and to a lesser extent Davis'. So an active fund manager might be all in but these funds can invest at the sector level in any manner they want so they could have underweighted or avoided financial stocks (financials clearly hurt Davis, not sure about Rogers but JPM, GE and WFC show up in his top ten).
I am so critical here because I think, well, if I saw something bad coming (but did not correctly guess the magnitude), how did these guys miss it so badly? They both are smarter than I am, and that is not false modesty. Davis might say something about the capital gains embedded in the positions (a point made on past episodes of the show), so maybe no one should buy the fund going forward but that would also mean he made taxes the priority, which will lead to tears more often then not. Taxes should never be the first priority.
In a video a few weeks ago, I made a joke about never wanting to say to someone "I just never saw it coming," and while I'm not sure, it seemed like both Rogers and Davis said they never saw it coming. I'm sorry, but I find that inexcusable. I feel much better about being able to say I tried to protect your assets and then explain where it did work and where it could have worked better.
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If someone failed to call this crisis he is simply not worth his money, it's great and fine to know all the ins and outs of finance but you can neglect the big picture for so long.
Nor did we have clarity on the extent to which the Bush administration compromised the financial regulatory system by insisting that everyone on the team put on ideological blinders. Laissez faire was carried to the logical extreme of doing nothing until the sytem blew up. I was watching when Greenspan confessed his world view had been wrong for 50 years.
A bottom up analyst obviously is not looking for these types of occurences, and makes the assumption that the company he is reviewing operates in a logical economic and regulatory environment. Such assumptions were very expensive over the past year.
There really are two variations of the why-I-got-clobbered theme:
1. Ignorance ("I didn't see it coming."). That is a problem. I suggested the inexperience angle at Morningstar. For a grown up fund manager to miss like they did, that's a big-time problem. That seems to have been the case with these managers, although Ms. Mack didn't seem to have nailed it down properly, mainly because she may have missed the other possibility . . .
2. Breakdown ("I saw it coming. I appropriately adapted. But my defensive strategies failed me this time around,and here's how I'm going to try to do better in the future."). This happened a lot even among veterans of past bear markets. Here's where I'm really frustrated by the interview: Would Rogers have acted differently or not? I'd be troubled by any interview that ended here. The whole point of experience is to learn from it and if a fund manager isn't doing that, then this is news!
Your description of the Davis interview leaves me very confused. If that's an accurate reflection of what aired, it says little for this PBS show.
Treadonme, I usually sympathize with analysts, having walked in their shoes. But I don't buy into the crystal ball line. This mess was so obvious, no credible investment professional needed magic to see it. Version 2 above is the appropriate answer for any legit pro who got pummeled last year.
All these guys and gals bought into the Cornucopian fantasy that even with a few downturn years here and there, it was a perpetual bull market, with buy and hold as the strategy du-jour.
And why not? Since, in the words of Dick Cheney, "Reagan proved that deficits don't matter", we have as a government and as a people believed we can just borrow our way into a perpetual financial, service driven, techno-utopian state. I mean it has worked since 1984.
Right?
The last serious recession that I experienced was 1982....and for God's sake, I was a freshman in college and did not experience the pain. I imagine many of these so called analysts are around my age as well.
The Larry Kudlow's of the world believe that if you unfetter the "free" market that all will be well. And they seemed to have the proof for a while. Unfortunately, these same dolts who clammer for ever tougher rules and laws governing criminal behaviour seem to think that human nature doesn't apply in the free market.
You speed you get a ticket. You don't buckle up you get a ticket. You sell drugs you go to jail. You steal you go to jail.
But NO, NO, NO, we need LESS GOVERNMENT OVERSIGHT when dealing with WALL STREET, because after all, THEY ALL HAVE OUR BEST INTEREST AT HEART.....RIGHT?
So let's REPEAL the Glass-Steagall Act. Let's DEREGUALTE DERIVATIVES while we are at it. (Thanks for both of these, former Republican Senator "We Are A Nation of Whiners" Gramm).
Let's put a bunch of worthless cronies who will bend over at the sight of George the Idiot in the SEC (like SEC head, former Republican Congressman Cox) knowing they will close their eyes to the growing scam.
All we needed was 3 things.....
Debt
Deregulation
And a hoard of confidence men and women to perpetually drone on about putting money in the market so to keep stock prices perpetually inflated.
The last has been epsecially true for the last decade or so, since we have pawned off our manufacturing to foreign soil and the things we still do manufacture are not world class anymore.
So..yeah..now these analysts are all sitting in a big pile of dung asking how is that possible when the elephant in the room they have been feeding for 25 years had never crapped a big one before.
It's simple guys....everything craps.....and craps BIG once in while. You just have to know what you are feeding. And take proper precautions AND have proper REGULATION concerning the feeding.
Isn't that the currency that's going to save Chrysler?
On Jan 26 01:18 PM debtacid wrote:
> I was looking for a good analyst several years ago but all I found
> was a bunch of salesmen trying to sell me financial “products”. I
> even had a shocking conversation with a 1998 graduate from USC business
> school who didn’t know what a fiat currency was.
>
Naturally this causes the entire firm's analysis often to be pretty worthless if their regional economics teams are bad which most are. After all they are in the same bind as the Fed and Treasury. They are using the heavily manipulated government numbers that are always too rosy until they are revised down months later. Rather than being right, these analysts are ranked on how close they come to the government's numbers on the first release of them. So their objective is to call the government's wrong number right. No wonder they are off the mark.
It's a very very dumb exercise. The fact anyone listens regional team analysts anymore proves how bad the fund managers and retail customers are as well. Please modify any analyst company forecast acordingly.
Look at government statistics, and then look at the "surprise" home sales reported today in the fox watching the henhouse category. I’m sure The National Association of Realtors has absolutely no interest in manipulating the data on home sales – sure). Then move on to rating agencies and don't forget the accounting firms (Arthur Anderson comes to mind).
Garbage in, garbage out... Then, if your employer is into selling the hype -- forget it. You’re guaranteed not to get an accurate reading on anything...
It's the *Stock Mutual Fund Industry* who should've seen this coming years ago and prepared for it. Instead the entire industry, to a fund, missed it or ignored the warning signs. If you don't believe me, check out the dismal 2008 performance of NoLoad FundX which tries to outperform by continuously choosing the winning funds.
To me, this is an industry of shysters or incompetents who have no business being in the game. Day after day, even now, they downplay the real casino risk of their game to anyone dumb enough to bite.
If you can't understand a balance sheet, cash flow statement, or income statement, you have no business investing in anything but bank CDs. Don't expect to hear about the next great "ten-bagger," as Motley Fool always advertises, on some website or from some "financial advisor" who receives a company newsletter each week on which stocks to pump. And don't expect your advisor to tell you to sell in order to avoid a possible market crash - what an act of self-sacrifice that would be! Also, if you own shares in a company and cannot explain (a) what their main products or services are, and (b) how profits will be affected by different economic scenarios, then you should sell those shares immediately and get bank CD's. Yes, you'll only make 4%, but you'll lose money in the market.
Secondly,
If you refuse to do your own homework (or even learn how to do your own homework) don't be mad at the pundit or advisor that you outsourced your thinking to. Especially don't be so foolish as to chase the performance of various pundits/advisors, always buying the market's leading sector at the highest price.
Finally,
Don't be one of those people who gripe about the bullish bias in investment research and commentary and then also gripe about short sellers and company critics. That is logically inconsistent. Do you want contrarian information or not?
I do agree that age has something to do with outlook. Those of us who are a bit older, tend to be more sceptical, particularly if we were around during the more lengthy recessions and bear markets of the 70's and 80's. Young people are, by nature, more optimistic. And if all they have seen is a market that goes up and up, and when it hicups, as it did in 2002/2003, it immediately turns around and shoots up again, they are tempted to assume that this is how markets always behave.
They can say to the company, "Will you bank with us?" followed by, "If you don't we'll give you a big fat downgrade." "Thank you for your business."
Independent research in itself is flawed too, but that is a whole other bear to tackle. Bottom Line: SOMETHING IS WRONG HERE
On Jan 26 02:52 PM Chris B wrote:
> Bottom line:
> If you can't understand a balance sheet, cash flow statement, or
> income statement, you have no business investing in anything but
> bank CDs. Don't expect to hear about the next great "ten-bagger,"
> as Motley Fool always advertises, on some website or from some "financial
> advisor" who receives a company newsletter each week on which stocks
> to pump. And don't expect your advisor to tell you to sell in order
> to avoid a possible market crash - what an act of self-sacrifice
> that would be! Also, if you own shares in a company and cannot explain
> (a) what their main products or services are, and (b) how profits
> will be affected by different economic scenarios, then you should
> sell those shares immediately and get bank CD's. Yes, you'll only
> make 4%, but you'll lose money in the market.
>
> Secondly,
> If you refuse to do your own homework (or even learn how to do your
> own homework) don't be mad at the pundit or advisor that you outsourced
> your thinking to. Especially don't be so foolish as to chase the
> performance of various pundits/advisors, always buying the market's
> leading sector at the highest price.
>
> Finally,
> Don't be one of those people who gripe about the bullish bias in
> investment research and commentary and then also gripe about short
> sellers and company critics. That is logically inconsistent. Do
> you want contrarian information or not?
Let's note that these are mostly long fund managers and their fund charters do not allow them to take significant short or even cash positions. So, they can't afford to be bearish. If they were bearish and told their customers that they expect markets to crash, they would not have any customers left
So, instead, they first deceive themselves into thinking that "it will not be so bad" and then pass this deception on to customers and in the process coloring these visions with the traditional industry statements about dangers of market timing. That's what the reasonably honest ones do and then, of course, there are crooks like Madoff, Nadel, Schrenker and others - these fellows really make me sick to my stomach...