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Beware of Industry Consultants Who Think Differently Than Investors

 Many people wrongly assume that industry consultants make good investors as long as they stay within their sphere of knowledge. The thinking goes that industry experts know more than anyone about their respective sector, making them an invaluable investment resource. Unfortunately, supposed experts like retail consultant Howard Davidowitz have little grasp of the investing world, which limits their value for those on Wall Street.

Davidowitz is a frequent guest commentator on CNBC and other major media outlets, but his comments are always construed as being about stocks when really they are only directed at specific retailing operations. Although you may think those two go hand in hand, they rarely do. I am not questioning the expertise of folks like Davidowitz, but it is important to caution that investment merit and near-term operational insights are not closely correlated.

Consider comments Davidowitz made recently in the press. They are very extreme and meant (I presume) to get people’s attention, but they come across as silly to many market observers, myself included. The folks over at Tech Ticker summarized some of his best one liners:

* “The retail business is terrible… It’s almost all negative.”
* “We’re going to close hundreds of thousands of stores.”
* “We are in the tank forever. As a country we are out of control, we’re in a death spiral.”

What is interesting about these takes on the fundamentals for the retailing sector is that the stocks themselves have been on fire lately, helping to lead the market higher. Why the dichotomy? Because current fundamentals mean nothing to investors. As potential buyers of stocks, we care about the future outlook for these companies. The market clearly does not believe that retailing is dead and America is in a death spiral.

How can this be? Well, for one the retail sector is not dead, based on actual data points anyway. Davidowitz is supposed to be on top of industry fundamentals, but clearly he is not. Retail sales have been declining by rates in the low single digits in recent months. Factor in inflation and population growth and you get average household spending down somewhere in the mid to high single digit range on a year over year basis. If consumers are spending 5-7 percent less this year versus last year, does that really mean retailing is dead? Of course not, and the market is smarter than that.

Interestingly, the last one liner from the Tech Ticker interview shows that Davidowitz knows he has little knowledge when it comes to stocks and the markets.

* “We’re in terrible shape. That’s what the fundamentals tell me. I can’t explain the stock market.”

Now if only the financial media would admit this and stop booking him as a guest commentator on financial markets programming.

Disclosure: None