Editor's note: The following column was written by author and former Wall Street analyst Stephen McClellan.
After toiling for more than three decades as a Wall Street stock analyst
, I walked away at the age of 60 and immediately took off for the ski slopes of Utah. On the plane, within minutes, no sooner had I finally started to distance myself from the securities
industry than some nettlesome business-class airline passenger was inundating me with naive stock-market queries.
During my professional career, I had dealt exclusively with mutual fund portfolio managers
and similarly sophisticated insiders. Now, though, I was suddenly confronted with an unversed innocent, a chap who was oblivious to confounding brokerage firm
tactics that invariably lead ordinary investors astray. With a combination of exasperation and sympathy, I realized that my traveling companion actually took Wall Street research directives literally (a mistake that no pro would ever make). Then a jarring thought struck me. There is a whole world of such individuals out there.
Wall Street's best advice is intended to benefit its best clients: large institutions
like banks, insurance companies, and hedge funds. This community of full-time equity
investors has developed and perfected its own nuanced patois, which can be nearly incomprehensible to outsiders. (The same thing happens in every specialized field, whether it be football coaching or copper mining or higher mathematics.) The "anointed" understand one another and respond effectively. Outsiders, however, might be left grasping at straws -- misinterpreting messages, taking deceptive code words at face value or otherwise "wandering off the reservation."
Thus, for the small investor, there exists a big disconnect. What has been missing is someone who will unscramble the jargon and convert it into language that any intelligent layperson can grasp. Only if you can "read" the Street can you profit from what it has to say. And, ironically, that can often entail doing exactly the opposite of what the experts appear to be recommending! Wall Street operates in strange, ambiguous ways that its denizens would prefer to keep to themselves. Its research cannot be trusted. Individual investors are an afterthought, generally neglected by analysts and brokerage research departments.
In
Full of Bull, I candidly debunk conventional Wall Street "wisdom."
Individuals need objective and succinct guidance, but they rarely get that from the pros. So I urge individuals to steer clear of elaborate (and expensive!) brokerage-promoted equity strategies; instead, I urge them to concentrate on simple, sensible, durable investments. Wall Street abhors that sort of patient, prudent strategy because much of its profit is derived from frantic trading, complex transactions, and buying and selling -- in short, action!
The approaches set forth in my book are designed to help individuals stay in the game and come out ahead. By following my guidelines, individuals can learn to do their own security analysis -- that is, their own research -- and thereby avoid the many painful pitfalls that await those who reflexively jump at every euphoric or alarmist nugget of "noise" that emanates from the canyons of lower Manhattan. The book is replete with firsthand "been there, done that" insights.
For instance:
- Stock ratings below the "Strong Buy" level normally connote caution or even pessimism on the part of the analyst. And believe it or not, any downgrade from the highest level is truly tantamount to a "Sell" recommendation. From the published rating alone, it is impossible to discern the magnitude of an analyst's enthusiasm or skepticism.
- Recommendations vary in degree of fervor. Sometimes a "Buy" can be a table-pounding, jump-out-of-your-shoes, don't-delay indicator (that is, the virtual equivalent of a "Strong Buy"). By the same token, an ostensibly neutral "Hold" can be infused with positive implications -- as when the analyst is in the process of gravitating toward an eventual upgrade to "Buy." However...
- "Hold" can also be a warning! It can mean that, although he thinks a company's business outlook and stock prospects are in fact dismal, the analyst hesitates to irritate influential vested interests by applying the dreaded "Sell" term.
Moving on to personal investment policy, I suggest owning no more than five to ten different stocks. Too many spells trouble. A casual friend, who fancied himself an avid investor, once sat next to me at a black-tie dinner and boasted that he held 300 equities! After gagging on my salmon, I inquired whether he was a portfolio manager at the Magellan Fund (which, despite its enormous resources, probably doesn't hold anything close to that many positions). My argument against hyper-broad diversification
is that an array of so-called alternative investments (examples could include precious metals, agricultural commodities, and emerging market stocks) customarily offers minimal protection during any broad downturn. Legendary fund manager Peter Lynch has elegantly defined stock over-ownership as "de-worse-ification." A survey by the Universities of Illinois and Michigan concurs, finding that investors holding a handful of names outperformed more diversified portfolios and that the performance of the latter portfolios slightly lagged the major market averages. The secret lies with knowledge, familiarity, and information: The fewer the companies, the greater the investor's comprehension of each one.
Counterintuitive though it may be, then, the bottom line is that Wall Street research, corporate promotion, and media hype do a huge disservice to the individual, do-it-yourself investor. So conduct your own analysis. Be your own judge. Preserve your capital
. And, above all, don't let yourself be suckered by the Street.
TSC Staff
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