I'd like to start off the first column of the second half of 1999 by addressing a few lingering email darts that have stuck in my side for the past few months. The first is for those of you who send sarcastic emails to the effect of "Who cares what you think? How can I make money off this column?"
Let me say this about that complaint: My "charge" as
Buysider is to provide a view on both what is happening from the perch of an institutional investor and why it's happening. In doing so, I hopefully cut through some of the pathetic jargon and stock-plugging that so much of what passes for financial commentary indulges in. Some of this involves specific stocks, but only when they illustrate a larger point in the attempt to understand how stocks are "really" valued and what makes them move. Some I own (there's an old saying that if you don't own it, you aren't entitled to an opinion) and some I don't, and I try to explain why in each case.
What I try not to do is use this column as a platform to continually plug stocks that I own or to turn it into a "stock du jour" column. I don't have 52 great stock ideas a year. It's more like eight, of which four probably turn out the way I thought. So please don't expect a specific idea on what to buy or sell in every column. I am particularly reticent to mention small-cap ideas, given the liquidity and the propensity for violent short-term moves after a favorable mention.
Besides, if I own what I am writing about, you should take it with an extra grain of salt, because a portfolio manager's message is often drowned out by the volume of him talking up his position. Take advantage of our disclosure: I rarely read or hear of any financial publication or program that requires its contributors to state whether they own the stock in question. But more should -- it would make everyone more accountable.
That said, I thought I would pick up the theme from an earlier
column -- things are changing -- from an unusual source,
The New Yorker
. (Yes, I know -- life is too short to read
The New Yorker
!) Way back in March 1997, the magazine had a wonderful article by Louis Menand, titled "The Iron Law of Stardom," which focused on the concept of celebrity. It postulated that stars and stardom only truly blaze the sky for three years before falling back to earth.
I clipped this piece and have carried around its now-tattered pages because it struck me that if you simply substitute "stock" or "stock market" for "star" or "stardom" in the article, you have some compelling anecdotal arguments for the principle of reversion to the mean. Not to mention a beautiful explanation of why the second quarter's trend of small/value/neglected stocks surpassing large/growth/Nifty Fifty stocks is the beginning of a multiyear shift.
Please note that while we have technically been in a bull market since 1982, the past few years clearly stand out as a separate epoch. And it's no coincidence that, in that time, stocks have displaced celebrities as the No. 1 topic of idle conversation in much of the country and, in some cases, have clearly reached the status of cultural icons, making Menand's article even more appropriate than when it was clipped.
Menand begins by asking that since
won the Academy Award for Best Actor in 1993 and 1994, is there some law that prevents him from winning every year?
The answer is yes. ... It is the Iron Law of Stardom. This law dictates that stardom cannot extend for a period greater than three years. It is not just a rule of etiquette or a statistical norm, or a social scientific conceit, like theories about birth order. This is the true a priori, the reality that explains all realities.
Menand then spends a few pages providing examples such as the
comeback phenomenon. But, he continues:
The Travolta revival itself can only last three years. It will just seem like forever because that is the nature of stardom. Stardom is the condition in which the star penetrates reality so thoroughly that you feel you can no more run away from it than you can run away from oxygen. Then suddenly, there is different oxygen.
While this perfectly explains the most recent few Travolta movies, doesn't it also hit home in the money-management business with regard to Internet stocks and the Nifty Fifty trend in the first quarter? Wasn't the siren call to buy
at 150 and
at 200 as powerful as the force of gravity?
Menand goes on to explain the forces at work.
What causes the fadeout after three years isn't the star. It's the large number of moons that get pulled into the star's gravitational field. It's not the Beatles; it's the Monkees. And where there are Beatles, sooner or later there must be Monkees. Talents are continually launched in the direction of the Zeitgeist, and when one intersects every other talent tries to follow the same trajectory. The result is a steady increase in wattage that eventually burns out the whole furnace.
This is a lyrical description of reversion to the mean that we value managers hold so near and dear. Or indeed, what better way to view what has become a veritable flood of Internet offerings? Doesn't everyone want to be the next
Now there do seem to exist in the business world some organisms with competitive advantages that transcend the Iron Law, such as
, et al. But the point is these are the exceptions, the very few companies that may enable investors to pay current prices and still come out smelling like roses in three years.
Yes, certain stars will continue to burn brightly in the second half. But the second quarter is a harbinger of things to come. And we'll check back in three years to see if the Iron Law holds up.
Jeffrey Bronchick is chief investment officer at Reed Conner & Birdwell, a Los Angeles-based money management firm with about $1 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value Fund. At time of publication, RCB was long Berkshire Hathaway, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at