Why Magazine Covers Are Historically Great Contrarian Indicators- Part II

In my most recent article, I went Back to the Future to examine the role magazine covers play as a contrarian indicator in fear-driven markets like we experienced in the 1970s (see previous story). Investing is both an art and science. While measuring the scientific aspects of the market can be more straight-forward, the behavioral and emotional sides to investing are more subjective. Magazines act as sentiment sensors to gauge the fear and froth pulses of the general investing public. Since last time we explored fear, let’s check out some froth from the 1990s technology boom.

How to Invest in the Hottest Market Ever (Click to enlarge)

Seeing the forest from the trees can be difficult when you’re trapped in the thick of it, but the March 2000 issue of Money magazine’s “How to Invest in the Hottest Market Ever” is a classic example of the mentality that reigned supreme in the late 1990s technology bubble. Objective, fact-filled articles that challenge the status quo are not necessary to generate sales, but articles and magazine covers that pander to the raw emotions of fear and greed keep the cash register ringing. If you don’t believe me, just read the sensational headlines at your local grocery store explaining how swine flu will kill us all and how there are millions to be made in melting gold coins and jewelry (read gold article).

I love some of the quotes from the article, especially from Pam, the 51-year old divorced New York City art museum volunteer who bought AOL, Microsoft (MSFT), and Qualcomm (QCOM) (which rose +2,621% in 1999) who dismisses diversification:

I feel pretty safe now. I think we are in a new paradigm now.

Yeah, a “new economy” that catapulted Yahoo (YHOO) to a Price/Earnings ratio of 400x’s earnings; Cisco (CSCO) 109x’s earnings; and Sun Microsystems (JAVA) practically a bargain basement steal at 88x’s earnings. For reference purposes, the S&P 500 index currently trades for about 14.6x’s estimated 2010 earnings and 19.5x on 2009 estimates.

GetRich.com (Click to enlarge)

Another landmark masterpiece I love is the September 1999 Time cover, “GetRich.com.” Never mind the unabated technology boom (excluding a brief hiccup in 1998) that inflated the bubble for a decade – Time still managed to unearth the “Secrets of the New Silicon Valley.” The article goes onto to express the get-rich formula:

Can’t program a computer? Not a techno savvy? Not a problem. If you’ve got a hot Internet business idea, Silicon Valley’s astonishing start-up machine will do the rest.

Like a drug dealer pushing heroin on an addict, the article goes on to entice its readers to question

Why have a boss when you and three buddies can build your own publicly traded company in two years? Windows this big don’t open very often.

A Few More Favorites

Great timing on this February 2000 cover…a month before the crash!

This July 1999 cover captures envy. Everyone's getting rich!

As we saw during the technology boom, media outlets have no shame in shoveling greed-inducing slop to the hungry general public. Like all historical events that end tragically, valuable lessons can be learned from our mistakes. Developing a discerning palette for the news we digest is a critical quality to generating an informed investment decision process. With the 1970s and 1990s behind us, as the last of my three part series, we’ll use time travel to another period to see if modern magazine editors fare any better in market timing as compared to their predecessors. Please excuse me while I jump in my time machine.

Disclosure: Sidoxia Capital Management (SCM) or its clients has a long position in CSCO and QCOM at the time this article was originally posted. SCM owns certain exchange traded funds, but currently has no direct position in YHOO, MSFT, or JAVA. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision.

Comments

[Faik Byrns:]

If magazine covers are great contrarian indicators then what do you deduce from todays covers for the next couple years?

Nov 12 06:50 AM

[battman:]

My only comment would be that while I find it interesting and some truth to it, you appear to be selective in your use of covers. Are you saying that these were the only times that the magazines had covers with this message? If that were true, then I would find this to be quite an interesting story indeed. Although the press now does blow things out of proportion, so it might not be quite the steady indicator as it once may have been.
As an example, last year we had the Avian flu that was going to wipe out civilization as we knew it, now we have the swine flu that will leave the earth a barren wasteland. Next year??

Nov 12 08:16 AM

[User 299340:]

I somewhat echo battman's comments. If examining all covers about investments, were any correct in calling a turn? If so, in what proportion to the incorrect predictions?

Nov 12 09:35 AM

[proxyjoe:]

Boring..

Nov 12 01:15 PM

[mbkelly75:]

Some classics here - thanks again for the chuckle. Battman - I do not know for sure, but my guess is that the magazine covers reflect the popular views so as to sell the magazines. It is very true that "When people are afraid, be greedy and when people are greedy, be afraid." or this quote:
"When everyone thinks alike, everyone is likely to be wrong."
Humphrey Neill in "The Art of Contrary Thinking" 1954
I think my point is made. :)

Nov 13 12:11 AM

[Angel Martin:]

I think it's more significant when the market is on general interest magazine covers like Time or Newsweek, than on a business or investment magazine.

If the market is on the cover of Time, it means that the story is so pervasive that almost all of the readers of Time will be interested.

It's the covers of the general interest magazines that can be a good leading indicator. Jim Cramer discussed a related phenomenon in "Mad Money". In that case he was looking for newspaper headlines, especially as an indicator of a bottom.

Nov 13 08:46 AM