HT to my friend James, for bringing this to my attention today.  In the last hour, the market ran up dramatically, then quickly dropped.

This kind of price movements is hardly an unique occurrence in the world of stock charts, where institutional investors by and large dictate pricing with their gargantuan orders.  The market has been relatively quiet for the whole day, with little data released, nor shocking announcements made.  So either there’s a large investor (or several) out there running up prices, then quickly dumping them.  Alternatively, there’s information or rumours swerving around, privy to a few.

This happens, regularly.

Plus, Joe Nocera is poking holes in the efficient market hypothesis.

Jeremy Grantham from GMO rails:

“The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight. ‘Surely, none of this could be happening in a rational, efficient world,’ they seemed to be thinking. And the absolutely worst part of this belief set was that it led to a chronic underestimation of the dangers of asset bubbles breaking.”

Academia has largely accepted the theory within the vacuum of its constructed economies, with little challenges.

As Mr. Fox describes it, much of the early academic work that led to the efficient market theory was aimed at simply showing that most predictive stock charts were glorified voodoo — just because a pattern had developed didn’t mean it would continue, or even that it had any real meaning. Dissertations were written showing how 20 randomly chosen stocks outperformed actively managed mutual funds. (Hence the phrase “random walk,” to connote the near impossibility of beating the market regularly.) Mr. Thaler, the Chicago behavioralist, says that evidence on this point — “the no free lunch principle,” he calls it — is clear and convincing.

Addressing market volatility over the 30 years, Grantham says:

“There are incredible aberrations,” he told me over lunch not long ago. “The U.S. housing market in 2007. Japan in the 1980s. Nasdaq. In 2000, growth stocks were three times their fair value. We were quoted in The Economist in 2000 saying that the Nasdaq would drop by 75 percent. In an efficient world, you wouldn’t have that in a lifetime. If the market were truly efficient, it would mean that growth stocks had become permanently more valuable.”

picture source: kaz0085

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The New York Times has gone Oprah! Remember last year when she fronted her magazine O with the big “How could I have let myself go” headline? The Times is attempting the same cheap populism with its personal finance focused magazine this past weekend.

One article that stood out and subsequently got a lot of attention was a personal credit crisis “confessional” from one of its own economic reporters.  He has a book to promote, so naturally, the paper is there to serve as the springboard.

Many bloggers have applauded the “insight” and “braveness” of the writer, while heaping a string of other nauseating superlatives to the lengthy excerpt.  I cannot share the same sentiment.

First of all, the irony of an economic reporter having financial difficulties is just screaming for a movie deal, right? Oh wait, the movie had already been made, it was a box office bomb called Confessions of a Shopoholic. Granted, the story in this case is slightly less vapid, but equally inexcusable.

As far back as the early 2000s, Andrews had been reporting on the economy, including alarming signs of predatory lending practices emanating from the housing and mortgage industries.  In June 2004, a mere two months before his purported new chapter in life kicked off with an unaffordable mortgage, Andrews wrote the following gem titled “The ever more graspable, and risky, American dream”. Summarized by the Times in its archive, it says:

Array of mortgages for people with little cash or overstretched budgets has enabled families of modest income to take on debt once beyond their reach to buy homes, spurred by low interest rates and confidence that house prices will continue to rise. Some experts worry that recent first-time buyers will be squeezed by rising interest rates on adjustable-rate mortgages, possibly causing housing prices to wobble in some high-price markets on East and West Coasts.

With access to knowledge and information that an average house-buyer could only dream of, if anyone was aware of the leery waters of borrowing beyond one’s means, it should have been Andrews.  While most might’ve been in the dark on the prevalence and the extent of fraudulence of certain mortgage brokers and their lending practices, this guy had all the information one would ever need to make good decisions.

But he didn’t.

Instead, forgetting lessons learned from all the interviews he conducted and the reporting that followed, he “walked out of the settlement office with my loan papers, I couldn’t shake the sense of having just done something bad . . . but also kind of cool. I had just come up with almost a half-million dollars, and I had barely lifted a finger. It had been so easy and fast. Almost fun.”

It gets worse from here.  Upon discovering he was broke in early 2005, instead of leveraging down his mortgage and settling into a more modest and affordable dwelling, Andrews decided to do what millions of broke Americans resorted to: credit cards. Clearly lacking basic mathematics skills required for rudimentary budgeting, he asked his guileless wife “How the hell could we have run through so much money so quickly?”

The tragicomedy continues with him listing his wife’s frivolous consumption habits.  That, combined with his inability to grasp the financial obligations of supporting 6 children (God bless them) and two households, leaves me dumbfounded.

You must wonder what went through his head as reports on the mortgage industry became more eye-catching. In fact, in 2005, in his own piece on the industry, Andrews quoted a banking commissioner addressing consumer complaints on predatory lending. The commissioner advised, “Today, none of our complaints are about denial of credit. They are all about what happened after the credit was given.” So needless to say, unless the articles were written by someone else, and unless he’s the thick sod that he’s made himself out to be, the much belated alarm must’ve rang by then.

Yet he did nothing.

Even when fortune smiled upon him and gifted his new wife with a $60,000 job, their expenses kept piling up on the credit cards. This shopping list does not sound like everyone who is scared shitless about their financial obligations. It is one utterly out of touch with reality. If you sniff hard enough, you might catch a whiff of, boasting?  I guess in the era of reality-TV, even financial train wrecks carried out by Times prodigies are the stuff of pride. And books.

In the previous December alone, we charged $2,845 on the Chase card for Christmas gifts, food, gasoline, clothing and other expenses. The charges included almost $350 for groceries, $700 in clothes from J. Crew, $179 at GapKids and $700 for airplane tickets for two of Patty’s children to visit their father in Los Angeles. Our balance climbed from $14,118 to $17,135, and in January 2006 we maxed out at our $19,000 credit limit. And there were other expenses on other cards: $1,200 in dental work for Patty’s son Ben; $1,600 to rent a beach house the previous year for us and all the children. Granted, the beach house was an embarrassing mistake. But given that Patty had landed a solid job, it seemed like an indulgence we could work off later.

Now, to what really grates me in this whole dumbness. For a dual-income family pulling in just under $200,000 a year; with high, but predictable financial obligations to his previous family, budgeting is hardly rocket science.  Should he had found himself in the hole due to unexpected medical emergencies or other crapshoot that life dumped on him, that’s a different story.

But in this case, we have a member of the media elite who was more informed about the mortgage industry and its fraudulent lending practices than 99% of the population.  Yet despite his privileged position, he fell prey to the same wishful self-delusion and narcissism as the rest of the country.

And now he’s selling a book that chronicles his fall from financial grace, possibly to prevent foreclosure on the home he’s squatting on.  The writing is buffoonish and gratuitous, and I am not sure what emotions he is trying to elicit from his readers. Disgust? Sympathy? It’s one thing to have been financially irresponsible, it’s another to write a book in an attempt to capitalize and justify those actions.

At this point, you might stop me and say, wait, this financial responsibility stuff is hard.  The guy just wanted to get married, and have the life he wanted.  Yes, and I just want to wake up with Bill Gates’ bank account balance.  It’s high time that everyone realizes that we need to stick to the life that we can have (read: afford), not the life that we wish we could have (read: borrow).

One last thing.  Why is the Times tolerating such populist me-too sentiments? Is this an attempt to make its readers feel good about their shambled finances? Is this ritual of public atonement meant for the big guy to say to the small people: it’s ok you got shit-faced with debts, even our best and brightest succumbed to those temptations?  That’s like a personal trainer getting fat along with his clients to make them feel better when they fail to lose weight.

Sometimes you can be inspirational, sometimes you can be a crowd pleaser.  There are times when you can be both.  This is not one of them.

And one wonders why the Times is in trouble.

picture source: loosa23

Investing is hard for professionals, and even harder for amateur investors.  Especially when success is not measured in a cumulative manner – a dozen years of good work can be undone by a bad quarter.

I have written about the many difficulties of achieving consistent good performance: from minding the myriad of intersecting forces in order to stay above the water, the skills needed to balance long-term investment principles with technical knowledge, to blocking out noises that only confuse investors.  On top of all that, it also serves to see the big picture, particularly forces related to social and demographic shifts.  There is a lot to take in – which would explain why so many of us delegate the task to other people.

Yet for all those financial advice we consume from both paid and free sources: advisors, newspaper columns, personal finance and investment magazines, business TV programs and water-cooler conversations, most small investors find themselves unprepared and worse yet, unprotected from the financial storm that swept through much of the world in the past half year.  After coming across Jeffrey Goldberg’s recent article, I am more convinced than ever that it is next to impossible for a small investor to make it in the stock market.

The small fish gets Jiffy Lube advice

Most of us have assets less than, say, $10 million.  And that’s about the threshold that determines whether one gets the attention of a top-flight money manager, or a print-out from a cookie-cutter computer program.

In the article, Goldberg highlights the pressure to provide conventional advice.

Advisers only recommend what’s conventionally palatable. They tend to say 60 percent stocks, 40 percent bonds, and they’re not likely to move away from that, no matter how extreme valuations are. They’re not likely to move away from it when the market is really high, or really low. A big part of the problem is that there isn’t a perfect answer to any of this. No one can tell you how to allocate your assets 100 percent of the time. The average investor is not getting Warren Buffett to look at his portfolio; he’s getting a printout from a computer model.

Knowing the average investors’ aversion to risk, but feeding on their hopes for ever-higher returns, an investment advisor cannot be blamed for holding up the mutual funds and stock market charts that always “trend” up and to the right.  And not wanting to miss out the double digit returns from merely parking one’s money in an investment account, most investors hand over their assets and turn on their “buy and hold” mode.

Timing matters a lot

In fact, much of the personal finance field spews out more or less the same bland and conformist conventions.  Some of the advice has proven to be sound and timeless, but many are much too general.

For example, if one marches into an investment advisor’s office today and ask for advice on dealing with a much lighter portfolio, one is most likely to be told to extend her “investment time horizon”.  This obviously doesn’t work for someone ready to cash out of his 401K after a lifetime of work and savings, or parents counting on the market to pay for their children’s impending education.  And the investment industry is hypocritical for attempting to dispense advice as though we are starting from zero, and not the minus fifty percent that many of us are finding ourselves in.

On that note, I think it’s good to stress that a singular commitment to the traditional buy-and-hold strategy, without taking into account the issue of market entry and exit timings, will get investors into trouble.  The market moves cyclically, and in the long run, it usually moves up.  Unless you’re in Japan, of course, where the market has sunk to 1983 levels.  But in most cases, let’s suppose the rightward and upward trajectory holds.

But if and when someone is caught in the peak and trough of an economic cycle, where their financial surplus and obligations are in fact more fitting for something of the reverse, then a blind faith in the long-term wisdom of the market will either have you enter the market when it’s already overbought, or cash out at a time when the market is oversold.  To mitigate such risks, financial planning needs to incorporate not only market movements, but whether volatility and riskiness of staying in the market is commensurate with one’s changing financial needs.

Customer of many, friend of none

A small investor doesn’t have a lot of friends.  At least not many that actually have their interests at heart.  The wealthy are taken care of by “wealth management” businesses that “gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don’t lose it all at once.”

The everyday investors must sift through the many personal finance columns, magazines and questionable business television programs for some sensible advice.  And those media outlets are only too happy to occupy the vacuum left by institutional and hedge fund managers.

Run-of-the-mill advice are for the uninitiated and get pretty old fairly soon.  But once investors decide to become more actively involved in self-education, he is bound get confused very soon.  Contradictory advice abound: gold or dollar, inflation or deflation, recovery or bear market rally?

The various models and theories used to price assets, measure progress and project the future are just that, models and theories.  There are people behind the scene performing stress tests, incorporating more variables, performing tweaks and adjustments all the time.  The interconnected economies complicate matters, political interests and politically dominant corporations complicate matters, unexpected behavioural shifts complicate matters, and sociological and demographic shifts complicate matters.  The market is influenced by so many unknowns, even economists can best provide outlook and analysis based on what they know.

Curiously enough, economics is also one area of academia that opened up its laboratory to the masses.  Very few of us will ever get to witness a medical procedure, or participate in a chemistry research project.  But almost all of us are involved in an ongoing social and economic experiment that is spearheaded by the stock market.  And through either voluntary or induced participation, we are required to live with a level of uncertainty not commonly known to some parts of the world.

Perhaps some of us will elect to step out and stay out of the market after this wild ride comes to an end.  Because finding someone competent enough to advice you is very hard when you are a small investor.  And finding advice on a piece-meal basis is even more dangerous, because to be selectively informed is worse than being uninformed.  In Bill Gross’ opinion, “The system is rigged.  It’s difficult for the average investor to even conceptualized what we’re talking about.” But if you insist on finding good returns from the market, then you should at least “find someone who isn’t overpromising or overcharging.”

picture source: ~Cypisek666

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The human mind cannot grasp the causes of phenomena in the aggregate. But the need to find these causes is inherent in man’s soul. And the human intellect, without investigating the multiplicity and complexity of the conditions of phenomena, any one of which taken separately may seem to be the cause, snatches at the first, the most intelligible approximation to a cause, and says: “This is the cause!”

Leo Tolstoy, War and Peace [via The Big Picture]

The populist pitch-forking movement has duly commenced, and fingers are pointed in all directions. In a classic case of pot calling the kettle black, all the players are now seizing populist rage to divert attention from itself. The momentum must be maintained, should the public calm down and re-assess, everyone is culpable.

Government

The whole debacle surrounding the AIG bonus is ridiculous. The government passed the legislation with the inserted lines that allowed for bonuses in the first place. Even if Chris Dodd is the culprit, surely it only serves to highlights the incompetence and indifference of the system. If what he’s saying is true (that the administration made him do it), then it shows complicity. This indignant outrage shown by politicians from both sides is nothing but political grandstanding to placate mass anger. Better this mess is channeled towards the evil executives than at the government, right?

The de-regulation of US financial system started with Clinton, and continued with the Bush administration. Policies from ten years ago directly contributed to the California black-out (Enron), and the current mortgage crisis. Without the government’s collusion in both banking deregulation and predatory lending practices, corporate greed would’ve had little opportunity to spread.

It doesn’t take much digging to see the hypocrisy of politicians now railing against exorbitant executive compensation or incompetence. For the most part, those very politicians were responsible for the rise in reckless risk-taking behaviour of those financial Einsteins. Members of the public are beginning to see the thinly-guised witch hunt as a way to deflect blame and secure public support. This kind of shameless and ingratiating behaviour from publicly-elected officials is insulting and condescending: because it pushes accountability away from itself, and props up effigies of greedy corporate executives for the public to burn.

Regulators

It’s hard to see how the phrase “financial innovation” could return with any kind of goodwill. Driven by his “Ayn Randian passion for regulatory minimalism”, and fearing lack of competitiveness that regulation weighed on said “financial innovation”, Greenspan opened the Pandora’s box.

In the aftermaths of banking collapses and Ponzi schemes, the SEC can hardly deny its failure in oversight. In one embarrassing expose after another, SEC is blasted for its inept and financial illiterate handling of warnings, its cozy relationship with the very bankers it was charged to regulate, and became a puppet that was captive to the powerful industry.  So the court can put the likes of Madoff away and the public can demonize the banking executives all they might, but the SEC deserves just as much wrath as its former wards.

Media

No matter how the broadcast media plays it, it will always run one of two risks. One is setting high journalistic standard, cover the news it deems worthy, works to inform, to investigate, and to inspire. It then runs the risk of appearing out of touch with the public. In the US, where news is de-centralized and competition is fierce, fear of low ratings has sent most networks to the latter approach. This now dominant reporting technique sensationalizes. Reporters claim that this will resonate better with its viewers, which more often than not, send all the networks racing towards the lowest denominator. For an outsider, coverage of highway chases, celebrity mishaps and other juicy scandals does nothing but dumb down its audience.

The broadcast media then commit a severe error in omission. By catering to the public’s guilty indulgences in vices and gossip, the media has missed its calling. So while the excessive liquidity and sub-prime crisis was brewing under the surface a few years back, we heard little serious discussion on the economy and its sustainability. Remember, those were the popular stories of 2007 and 2006.

And then there is the business reporting media that cannot decide which side they are on. The conflict of interest is glaring. Do they exist as mouth piece to the CEOs and analysts invited on the show with a scripted message, or do they exist to slice and dice data in order to inform its viewers? Considering the party footing the network bills, and the ongoing gamesmanship that nobody bothered to call out, are they not just as responsible for failing to do their jobs? Since the Cramer versus Stewart showdown, CNBC and its bretherens have been largely silent on accusations lashed upon it, and instead threw themsleves whole-hearted into the chorus of public fury. Are they silent in their atonement, or merely evading public scrutiny?

Education

Capitalism is a beautiful thing, especially the version taught in business school. It’s competitive but fair, rational and deterministic, and most of all, it’s supposed to be a force for good.

Needless to say, in the past few months, the public has begun to uncover the darker side of capitalism, especially when infused with greed and corruption. Educational institutions are not immune to public probe. Deans of business school across the US are admitting to “widespread failure of leadership”. Its decline in global reputation, along with questionable US economic prospects, has led to a drop in international student enrollment in American MBA programs.

By acts of omission, b-schools nursed a culture that inflated egos, placed a premium on performance at the expense of balance, instilled a reverence for mathematical models (in finance) or salesmanship (in marketing). It also funneled an acceptance of the status-quo corporate hierarchy. My post on some of the shortfalls of business school was picked up by Shafeen Charnia in his discussion of leadership. He says:

In both teaching and the corporate world, experience can give you the confidence to be adept in front of a room, but it doesn’t ensure leadership. It seems that one is taught how to use authority versus leadership. We all know that authority is about power. And power (and its abuse) are why we still and likely always will need workers’ rights laws and unions. It is also why some students don’t get to learn.

The Public

It would be unfair and naïve to not place a fair portion of the blame on ourselves. Granted, when times were good, it was hard to work up the will to ask tough questions. But there were signs, as well as a sizable and vocal group that voiced their concerns over the mortgage market, the banking system, and the economy as a whole.

If nothing else, this recession will force the general public to become more discerning citizens. Whatever trust that existed between the people and the government, its regulatory bodies, its hawking media, will be rigorously tested.

Greed is ingrained in our nature. Many organizational psychologists recognize this indisputable character of businesses and its executives, and work very hard to find a way to align corporate interests with consumer interests. End of the day, it is my belief that only consumers and investors can force and enforce corporate responsibility and accountability. In a society where technology is the barometer for transparency, businesses are finding it increasingly difficult to hide behind carefully orchestrated PR campaigns. Authenticity is not just a buzzword anymore, because the public is becoming more astute. If we can somehow translate our need for transparency and accountability towards a system that either rewards or punishes a business for its corporate behaviour, perhaps then we will no longer rely solely on the government and its regulators to safeguard our investments.

picture source: theakker3

Jon Stewart tore CNBC a new one this week, sending ripples throughout mainstream media and blogosphere. “CNBC hating is mainstream!” Screams one headline. Then came the slew of media pundits, rushing to defend CNBC and by proxy, itself. This one in particular is especially lengthy and defensive. Below are some of the author’s grievances in face of much critique of financial reporting, and my thoughts on them.

We were ignored, then we were cut

It’s been a lousy decade or so for print publishing, and it’s getting worse. Budgets have been cut, newsrooms slashed. Business reporting in most cities is pretty bad, often an adjunct of local chambers of commerce. In other media, there’s been a turmoil of business models, as the Web crowded in, bringing with it a different style and lots of new bodies. Roles have changed. Anyone with a clue (many without) now writes a column or a blog. The business seems full of younger folks (a function of advancing age perhaps); the era when every newsroom had a cranky wise man with a cigar that had seen it all is sadly over. This is particularly a problem in financial journalism, which demands historical perspective and expertise. To make matters worse, finance has grown dramatically more complex, opaque, global over the past few decades. And despite that complexity, the rise of financial television and financial blogging has simplified coverage to an equity horse race, with an omnipresent pressure to predict. Besides, since when has most journalism at any given time been all that stellar? Who correctly called the Great Depression anyway?

Whoa, easy there with the gripings! The newspaper industry did suffer from a drop in readership (some were made up on the web), and a significant drop in advertising revenue from some of its now-bankrupt clients. But the article failed to mention that the largest contributor newspaper failures are the massive debts incurred between 2006 and 2007. For example, had the Tribune Company not triple its debt in one single transaction in a deal to take LA Times and Chicago Tribune private, they would still be able to report earnings in the 10-20% range of their revenues. But the burden of debt changed all that.

As for the complaint that the web “crawled” in and somehow stole mainstream media’s spotlight and authority? Thank you and oh please. Anyone who has followed both streams of reporting can attest that first, mainstream reporting is far from disappearing; and two, the blogosphere supplies and supplements what most media outlets cannot provide: on-time, succinct, cut-to-the-chase reports and commentaries. Some are highly opinionated, even agenda-driven. But at least they do not hide behind the pretense of “objectivity”.

Pickled over the dominance of young bucks in the newsroom? Ha, ha, and ha. What a way to confuse effect for cause! In their own self-serving attempt to attract a more lucrative demographic, the networks brought in attractive anchors to sex up financial reporting. So when the reporting goes south, should these vapid, arrogant, and obviously not wise young studs masquerading as journalists be left holding the bag, alone? Are we meant to believe that the stuffy, stale, and cranky wise men in the control rooms are rendered powerless by the decisions made by the very same stuffy, stale, and cranky wise man with a cigar that had seen it all?  They could’ve easily replaced those young cubs with cranky wise men, but what difference would it make? The anchors are beholden to the same corporate interests.  So you end up with an older, crankier, and most likely more cynical anchor that spews out, more or less, the same garbage.  But with less sex appeal. You lose viewers.

The last point is almost too irksome to address. So a more complex financial environment is too much to handle for financial television (the point about financial blogging is just plain wrong: there’s an abundance of highly involved analysis out there). The implication here is that the public is too stupid to comprehend the in-depth analysis that reporters have thus far failed to deliver. So as a profession, the financial reporting community should not be put on the pedestal as some kind of sage with a crystal ball?

But nobody expects financial journalists to even attempt to predict the future, never mind getting it right 100% of the time. But the public does expect the reporters to ask questions, to investigate, and to report in an unbiased and objective manner. Extricating itself from missing fraudulent activities and irresponsible corporate practices by citing inadequate resources, while having plenty of reporting power dispatched to cheer on the ramp-up to the good times, is sorely dishonest and self-forgiving. This stuff is complex. But that’s why we need those specialists to dig into financial statements, be alert and on the lookout for potential fouls and misadventures, to truly investigate when leads arise, and not become a corporate mouthpiece that merely parrots statements released by the companies themselves. Not aspiring to higher standards, but instead asking the public to expect less of the profession, is just plain sad.

Lowest denominator rules

There’s a chicken-and-egg problem here that’s very difficult to resolve: If you write stories predicting the apocalypse, your apocalypse better happen on time, and your readers better care, or you’ll be covering the garden club next week. Hell, many newspapers around the country have killed off business coverage entirely because they felt no one cared. Boring. Too complicated. And look at the pathetic way network TV news covers business and finance. If they thought the audience cared as much about subprime as about Madonna, they’d trouble themselves to go beyond the Dow. But they didn’t. And at the time they weren’t wrong.

Now he’s blaming the audience for twisting the network’s hands in serving the dumb-down news that it does. Because instead of seeking to educate, inform, and maybe (I’m over-reaching here), inspire its viewers, the author concurs with the networks’ decisions to sink to the lowest denominator. It’s not a game of chicken-and-egg; it’s a game of chicken! What if a network is daring enough to take itself out of the race to the bottom, stop infantilizing its audience, and reports on news that is in fact newsworthy? Then instead of changing itself to suit what it believed to be the audience, why not try to turn it around?

Who’s policing whom?

Finance is a complex, nonlinear system, full of noise, chaos, complexity and ambiguity. It’s defined by all the waywardness of human psychology. That’s what makes it such a fascinating phenomenon to observe and to write about (and also why risk management may be an oxymoron). But if investment professionals and regulators fail again and again to master its perturbations, as academic studies have always shown, then why on this green earth would a financial journalist succeed at predicting the future?

Another feeble outcry: if government regulators failed to see the warning signs, how could we have? Yes, because the complexity, noise and chaos are precisely the reason why the system went bust. Greed and corruption had nothing to do with it.

Just like the US is governed by three independent branches that checks and balances each other, the business environment is supposed to work with the same level of regulatory oversight. To simplify corporate governance, a business is run by the management team, which is supervised by the CEO.  The CEO reports to the board of directors (BOD), and the BOD answers to the shareholders. On top of that, regulators are charged with responsibilities to monitor the businesses; and the financial reporters are supposed to watch over, well, all of them.

Overtime, lured by money and power, the various supposedly independent parties got a little too cozy. Here are just some examples. 1) In some cases, the CEOs double as the board’s Chairman, which then set board directors’ pays and perks – whose jobs are to assess the performance of the CEO. 2) The SEC was captive to the industry it sought to regulate: a good relationship with the very investment banks or funds they were ordained to monitor could lead to a high-paying job down the road. Needless to say, this further weakened its will to impose standards and investigate wrongdoings. 3) Business news networks get their largest advertising revenues from those very banks and corporations that they should scrutinize. Across the board, the media has yet to fess up to the fact that they missed the cross-examination of a rotting system, because they were in effect, bribed. As I said in an earlier post:

Next time you see Maria Bartiromo, Erin Bennett or Becky Quick, you need to realize who’s paying their bills. It’s the advertisers, usually financial service companies that fill up these 10-20 second slots right after they tell you they’ll be “right back”. And who do they return with after the commercial breaks? Oh don’t you know it, it’s the in-house economist/strategist/analyst from those very firms.

It’s difficult to say who snoozed off first. But in the aftermaths of such wreckage, is it not fair to say that all share some responsibility, including the business reporters? It should not come as a surprise that nowadays, some of the most vigilant and trusted watchdogs of the financial and political worlds are no longer professional journalists.  Instead of rejecting its share of faults, perhaps the business reporting community should take this chance to reflect on that loss of trust and prestige.

Since posting, here’s another instance of financial reporters refusing to own up to their failures.

This article is featured in Pimp Your Finance‘s Carnival of Twenty Something Finances.

picture source: ~TomasAIRA

Does the name Abby Cohen ring a bell? It does for me, and it broils my blood. Chances are, if you were at all invested during the tech bubble in the early 2000s, you would recognize the name too. Dubbed “perpetual bull“, she championed the rise of tech and telecom stocks all the way to the stratosphere.

At that time, she was the star analyst at Goldman Sachs. The companies she covered loved her (which should’ve been a warning sigh all by itself), the market loved her, as wave after wave of heart-stopping rises made her outrageous bullish calls nothing but prophetic. In fact, in the midst of the March 2000 sell-off, she was still lauding for another bullish run.

So it bugs me to no end that a few weeks ago, the name Abby Cohen popped up on my screen again. It seems like over the last few years, Ms Cohen was back to her old tricks, spreading her never-ending cheery outlook throughout 2007 and 2008 on any media outlet that would have her. Her standing at Goldman was seemingly undiminished till mid-2008 when she was finally replaced (or self-demoted) in her role as the chief strategist. Yet her name still pops up, ready to hypnotize another generation of ill-informed investors, eager for a quick buck in the casino of stock trading.

My question now is this. How could this happen? How can individuals like Abby Cohen not only survive, but thrive as an analyst, with consistently bad calls on the market? If a supermarket stocker routinely make mistakes while stocking, fail to input the right information into the computer and create nothing but inconvenience for the customers, he would be fired, right? So why can’t the same accountability be applied to a stock market analyst when it is her job to be, at least, be more right than wrong?

It might be negligence, ignorance, or outright incompetence. But the media, so keen on scrutinizing every piece of breaking news on its 24-hour network, seems to lack both the will and the ability to call out the inconsistencies.

And I can hardly imagine the conversations that would go on behind closed doors at Goldman (and undoubtedly many others) when it comes to dealing with puppet analysts such as Cohen. The thing is, the stock market can only go two ways, up, or down. So whichever way you call it, you are going to be 50% correct. I wonder if these advisory outfits divide their analysts into two groups, the uppers and the downers, each inextricably bound to their roles as surely as they are to their bonuses. And just like a traveling puppeteer workshop, they would whip one or the other out when the occasion calls.

Perhaps with the impending restructuring of the entire investment/banking industry, some level of scrutiny, accountability and integrity will be injected into the system. These basic human decencies should be demanded of our bankers as much as any service providers we pay for.

After all, these are values we demand from each other in almost every other aspect of our lives. We ask for it from our educators, our politicians. We don’t always get it, but we ask for it, don’t we? Then why don’t we place the same standard of consistency and integrity to these so-called experts that roam between their computer monitors and the TV screen?

Granted, the skewed relationship between the media and the investment industry doesn’t help, so interest does not often favour the everyday investors. Changes should, and must happen. In the meantime, any serious investor who still wants to venture into the market needs to take some serious steps in self-education.

picture source: *deaddays

Modern finance has three perspectives on the workings of the stock market. Inefficient, semi-efficient, and perfectly efficient. For the most part, market observers nowadays believe in a semi to perfectly efficient market. That is to say, information regarding a company is priced into its stock almost instantaneously.

Financial statisticians devote years churning out data to prove that the market, for the most part, is extremely efficient in factoring in new information. And stock prices: barring insider information and uncouth accounting manipulation, is an accurate barometer of the intrinsic value of the company.

Except this is hardly the case. The assumption of market rationality can only be taken so far. We have all seen what happened to the market during the tech bubble and the now real estate bubble. Waves of market decline we are witnessing now may very well signal irrational pessimism: there are many businesses now trading well below their intrinsic value.

Now we need to separate the true investors from the speculators.

Most market experts are behind the notion that buying low and selling high is the right approach to investing. In other words, a successful investor should consistently buy at the lowest point in the market and sell at the point of irrational exuberance. Considering nobody has a crystal ball and thus very few can consistently “time” the market successfully, the industry of technical trading sneaks its way into the investing world. Jargon like resistance, support, and moving average enter the popular vocabulary.  Many people go for it hook, line, and sinker, then get burned attempting the impossible. The impossible being trying to outsmart everybody by applying the gambling mentality to investing.

And then there’s Warren Buffet and his disciples. First, they separate the notion of using stock prices to measure the value of a business. They distrust the oscillatory swings of the market and the speculative herd that drive it. Buffet views buying stocks or bonds akin to owning a slice of the business. If the business is sound, why worry about fluctuations in price? Secondly, the timing issue is eliminated. Berkshire Hathaway does not seek to enter the market at the lowest price, nor exist at the top. Instead, BH makes a point of exiting the market as soon as the stocks are thought to be overvalued, thus providing its shareholders a fair return on their investment regardless of their chosen time of exit.

What a relief, to take back control instead of beholden to a schizophrenic market.

Which brings us back to you as an individual investor. Sure, it would be hard to own a piece of the business you invest in without Buffet’s capital base. But it does bring the point home that you don’t need, nor want to be an opportunist when it comes to investing. If you do bring the gambling mentality into the investment game, then be prepared to lose it all.

But if you are firm in your belief in the competent management and health of a business, and embrace the fact that the market has always been, and will always be driven by greed and fear. If you concede that the market will rarely place a fair or correct value on the stock, but trust that sooner or later, the market will correct itself, then you can sleep much better at night.

picture source: roseandthorn

Puzzling?

Let me explain.

I am a huge gossip hound, I don’t read People or US Weekly, but I do follow a number of gossip bloggers almost religiously. I love one in particular, not only because she’s highly entertaining AND introduced me to Fight Night Lights, but because her insights allowed an outsider like me glimpse into the cynical workings of the entertainment industry. How else could I have come to understand the dire consequences of plastic surgery addiction, passive-aggressive diatribes of an insecure diva, and the many layers of hidden media manipulation that’s unbeknownst to most of us?

Time and time again, the lesson that I take away from the smut is this. The IT boys and girls come and go, but the Meryl Streeps of the world do their jobs, go home, and wake up to see another decade or two of good works ahead of them.

Now, this is not a gossip blog, and there is a point to be made here, I promise. The thing is, just like an actor, an economist or analyst has a very long working life ahead of them (if they are lucky). And like Hollywood, the waters of Wall Street and the investment industry is just as treacherous. It’s hard to get ahead or get noticed in those ultra-competitive and dog-eat-dog kind of environment.

So when an analyst suddenly gets exposure by mastering some new trading anomaly or has a part of his or her research predictions come true, their status is swiftly elevated. It’s not unlike a starving actor in LA, rejected after years of unsuccessful auditions.  His luck turns, he unexpectedly lands a starring part in some Josh Schwartz hit show. And just like that, he becomes household name in a desirable demographic.

But Wall Street, just like Hollywood, is fickle. The media is always looking for a fresh perspective, much the same way Hollywood paparazzi are always on the look-out for fresh faces to sell pictures. The end motivations are the same: getting people’s attention, whether it comes in the form of a contrarian opinion or drunken debauchery on Rodeo Drive. Media looks for controversy, and there are always willing participants.

They are usually always too happy to be typecast in a role. Whether it’s the perpetual bull, perma-bear, or the new party boys and girls frequenting Il Sole. What they don’t realize yet, is the limited shelf life of their newly minted status, and how quickly the media will tire of them and hold auditions for the next cast when the time comes. It may be a new kind of show the audiences turn to, or it might be the market taking an unexpected turn for the better or worse.

Then, as quick as it came, fame departs, and the IT stars of yesterday will be forgotten. Squeezed dry of their appeal by their handlers, pigeon-holed in their respective niche, they are left fending for their careers by groveling on their knees for scrappy roles, or occasionally getting exposure by pulling stunts that capitalize on their fading fame.

Then you have someone like Warren Buffet. You can’t typecast him in any particular sectoral or trendy investment class, because he is in a class of his own. Because for half a century, he’s been the only thing he has ever claimed to be: a value investor. He did not dabble in anything sexy that modern finance dangled on a plate. He was not interested in making quick profits with complex leveraging instruments, he didn’t believe in beta nor the benefits of diversification for his customers, he was highly suspicious of mergers and acquisitions, and he disapproved of aggressive accounting standards. How straight-laced can you be, huh?

Do you remember the last time Warren Buffet went on CNBC and MSNBC to defend his investment views? That’s probably as likely as seeing Meryl Streep or Tom Hanks on the cover of gossip rags by the supermarket check-out. Why not? Because they were too busy doing their jobs to attract unnecessary publicity. And what do you do when you bunker down to do your job? You get respect, a rarely talked-about commodity that is sometimes more valuable than money. End of the day, these guys realize the career they have is based on value and substance, and not the ability to generate hype and controversy.

So why are so many analysts out there making the rounds with their one-trick pony show? Why are so many talented guys and gals chasing that illusive IT status that’s both unsustainable, and ultimately, self-defeating?

I will leave you this snippet from an interview with Meryl Streep not so long ago.

She sketches a frame around herself with her finger. ‘This is all you have, and the fewer compromises you make on this template the better off you are, I think. Especially when you’re young. I mean, I understand the economic necessity of doing something. But very early on you’re putting stuff into the world, so look at it carefully.’

photo credit : Alan Light photo credit: nanahk3

Where I used to work, we rotated MSNBC, CNBC and CNN Business in the background non-stop. Every market movement relevant to the energy market was followed, analyzed, and regurgitated on those channels. For the oil trading desk I worked next to, every threat of Iranian oil embargo, every possible hijacking off the Somalian coast, every Nigerian riot, would send the trading guys off in a flurry of activities.

Back in 2007, oil was trending up into infinity and beyond, and everyone was in a great mood. I don’t know about now. But my point here is, these kinds of reporting are great and useful.

For a trader.

But you are not a trader, are you? You don’t trade Forex or options for a living, do you? Because if you are an investor – and I define an investor as someone that holds investing instruments for the medium to long-term, then SHUT OFF the TV. They are worse than useless. They are downright detrimental to your investment portfolio.

The business reporting business, much like the regular media outlet, is like a stage. There is a cast of characters. They play their roles to the T, and they do not improvise. The networks themselves are self-serving media machines that get turned on for one reason and one reason only: to make a profit. Next time you see Maria Bartiromo, Erin Bennett or Becky Quick, you need to realize who’s paying their bills. It’s the advertisers, usually financial service companies that fill up these 10-20 second slots right after they tell you they’ll be “right back”. And who do they return with after the commercial breaks? Oh don’t you know it, it’s the in-house economist/strategist/analyst from those very firms.

Do you see what I see here? I see irreconcilable conflict of interest. I see many of those guests coming on the show with a very clear agenda in promoting a certain investment style, a sector which they are experts (and happen to do business) in. The intentions are not always malicious, but it does place a bit of a gag order on the interviews themselves. After all, should a disagreement arise, how far can an anchor go on challenging their guests’ positions, knowing fully well their counterpart is partially footing her salary.

And then there are those anchors that leave you scratching your head. These are the personalities that would be better off working in the pits of the Chicago Options Exchange. Because they seem to confuse their responsibility in covering useful business and economic analysis, with pulling hourly trading tricks out of the hat. Watch this (especially towards the end) and tell me there’s any integrity in what they are doing here. What’s the obsession with actionable items, are they trying to cure a rash? I don’t know if what they are selling is going to show up on some late-night infomercials, but I ain’t buying.

Lastly, there’s the experts themselves. Now given these are rational, intelligent analysts and economics that have swum against the tide and now at long last proven right. They come on the show with little to sell. What happens? Firstly, there’s very good research indicating that (much) more often that not, one year of correct outlook is usually not followed by another. So statistically speaking, the much celebrated genius you are watching on screen is probably going to be wrong in whatever it is that he is championing right now.

Secondly, there is the issue of ego. Imagine if you are an academic that has been writing papers on some obscure anomalies in the market or impending doom for years, floundering in relative obscurity. To be proven right all of a sudden, exalted to rock-star status, touted on cable news as the sage, paraded trough conferences like a peacock, what would that do to an average man’s ego? They may be genius, but they are still ego-centric just like everyone else, right?

It’s easy then to see how they could be affected by newly-found fame, attention, influx of respect and adoration. Not wanting to disappoint, or merely driven by stubbornness to continue being right, it’s no surprise that success in market predictions are rarely replicated, year after year.

So with all these: Conflicts of interest, confused role-playing, ignited by gigantic egos. Are you not better off by turning off the cable news? Pick up the FT or WSJ, brush up on the investment classics. There’s more than enough sense out there to keep your money safe.

picture source: smashshell