Book Review: Stephen T. McClellan's Full of Bull

by: David M. Gordon

Stephen T. McClellan, the author of Full of Bull (Updated Edition): Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio, was a Wall Street investment analyst for 32 years, covering high-tech stocks as a supervisory analyst. He was a First Vice President at Merrill Lynch for 18 years until 2003, and ranked on the annual Institutional Investor All-America Research Team 19 consecutive times.

And so on. No doubt about it: Stephen enjoyed a storied career. I obtained first-hand knowledge of Stephen's research while he and I were concurrently at Merrill Lynch in the early 1980s. Stephen's analyses were renowned for being in-depth, thorough, lengthy, and exhaustive. Some readers found fault in those qualities, others did not; I was among Stephen's fans. (I believe it better to have too much information than not enough.)

Full of Bull, though, is in desperate need of a good editor, for it is no less than two distinct books in one loosely-knit package. The book's initial chapters are chock-a-block full of Stephen's reminiscences about Wall Street research: its role, its history, its relationship to other company units (primarily, investment banking and retail brokerage) and to a firm's clients, etc. The middle chapters diverge into a primer for investors; the final chapters return to the starting topic of Wall Street research and the life of the research analyst.

Two words kept coming to mind while I read the book: disintermediation and contradictory. Disintermediation, because Stephen goes on at some length about the changes that wreak havoc with Wall Street today, brokerage firms' research departments included. Stephen was fortunate to live and work during Wall Street's halcyon days of the 1980s, 1990s, and early 2000s, when the money flowed seemingly with no end. Whether that heyday will ever return is moot, but change is here and the easy money flow has stopped. Stephen spends many pages ruing these changes. I say, "Get over it."

More disconcerting, though, is Stephen's contradictory comments and advice. For example, on page 58 Stephen recommends, "Investors need to do some homework. Pay attention. Invest carefully. Be conservative. And take a long term approach." But on page 192, Stephen says, "... my daily investment regimen... I tune into CNBC and Bloomberg television every morning with my first cup of coffee. After poring over the sports page, I study the New York Times business section and the Wall Street Journal. Then I sit down at my computer to peruse my holdings and any pertinent company or industry sector news. On the weekends, I cannot live without Barrons. Forbes arrives every two weeks, and I read relevant articles in other investment or business magazines online. I tap into conference call replays in my car if I have a drive of at least 45 minutes. And on an Excel spreadsheet, I track key data on my stocks: date of purchase, original price, estimated dividends, yield, and gains and losses. My brokerage accounts are online, so I can monitor them easily. Day to day and week to week I strive to keep up with the market..."

Does this sound like a fellow who takes a "long term approach" or a day-trader? No doubt, Stephen 'pays attention" just as he likely misses his 5am to 6pm workday, and fills it with... well, all the items he shares in the quote above.

I must correct you, before you think I detested Stephen's book. Sure it could have benefited from better editing. Sure it could have benefited from a tighter focus -- memoir of a research analyst or primer for investors? When Stephen focuses on an objective, though, his insights soar. For example, Chapter 3 (Chapter 1 of the primer for investors) offers the following guidelines...
● Find unique, focused companies leading a new or niche market
● Look for specialized, simple businesses
● Seek double digit growth or robust cash generation
● Pursue healthy, stable, or expanding profit margins
● Insist on a robust balance sheet and quality finances
● Look for all-around quality in executives
● Avoid arrogant, over-confident management
● Prefer smaller companies over giants
● Avoid weird stock structures or sweetheart management setups
(I copied above and below only some of the section headers, not Stephen's lengthy explanations and reasoning.)

Continuing in chapter 3, under Investment Strategies...
● Invest in themes and rising industry sectors
● Hold only a modest number of stocks, choose familiar companies
● etc

Stephen whittles down to its essence his experiential wisdom, codifies it, and presents it to you. Much of this book will be familiar to readers of this blog, but do not let that stop you from appreciating Stephen's book; insights, especially investing insights, benefit from their being repeated and thus reified. Consider the question that Stephen poses on page 12, in which the investor's dilemma has never been more subtly or cogently stated, "Is an under-perform stock in an out-perform industry more attractive than an out-perform stock in an under-perform industry?"

Full of Bull, despite its diffuse presentation, is loaded with many examples of excellent advice and professional insights; Stephen really excels when sharing his years of experience as a highly-regarded research analyst and private investor.

Full Disclosure: Full of Bull deserves, and repays, your interest.