Investors can learn plenty of lessons from the
disaster. Be careful of stocks that Wall Street analysts just love. Avoid companies with business models that are impossible to understand. And -- in case the collapse of the tech market has somehow turned into a faint memory -- don't pay too much for a stock.
But you'll hold on to even more of your money if you remember this too: Be wary of buying into a company that's receiving a growing amount of glowing press.
Journalists, myself included, are flawed. Sometimes we write stories not because a company is a good investment but for other, less noble reasons. The following are a few examples.
You frequently hear that you shouldn't jump into a stock after it has had a good run. Don't chase performance, right? Well, that's the very reason journalists end up writing about many stocks and mutual funds. They're hot, and we're going to cover them.
But this invariably means that you end up reading about one overvalued stock after another.
is in the trendy area of security software and is getting some favorable press. To be sure, its business is making a comeback under a new management team. And its stock was up 517% last year. But it's also selling at 70 times this year's earnings estimates. That ain't cheap.
Certainly, I'm guilty of this. Right before the tech market began to crumble in early 2000, I was writing about exchange-traded stock baskets called HOLDRs, which Merrill Lynch was launching. What a great way to invest in exciting areas of the market, such as B2B, Internet architecture and Internet infrastructure! At least that's what I thought. "They're straightforward, cheap and easy to buy and trade. You can pick up shares from any broker," I wrote back in March 2000 -- just days before the
did a swan dive.
Avoiding the Unknown
If you use what you read in the press as a basis for investment decisions, you're going to wind up with a portfolio that looks a lot like the top of the
index. You see, we like to write about the big guys, the Microsofts and Ciscos. Not the Robert Halfs and Fiservs.
There is little doubt that the largest companies are important simply because of their sheer size. They dominate their markets, and many people own stakes in them. But at the same time, a large number of lesser-known companies get overlooked. Consider
. This company processes ATM and debit-card transactions.
"How boring is that?" asks Pat Dorsey, Morningstar's director of stock analysis. "But it's also done better than Microsoft over the past five years." Indeed it has. Fiserv's five-year annualized return of 32% easily beats
24% annualized performance over the same period.
To avoid this trap and expand your horizons, Dorsey suggests that you begin developing your own "mental Rolodex of companies." You can start by reading the thoughtful shareholder reports put out by some of the country's best mutual fund managers. The reports from Mason Hawkins at
Longleaf, Bill Nygren at
Oakmark and Bill Miller at
Legg Mason are impressive and informative. They will provide you with insight into how these outstanding managers pick stocks, and introduce you to some companies that are off the media's well-worn path.
A company also will get a lot more attention from the media if it's run by a colorful personality who could serve as an engaging character in an otherwise dry financial story. A corporate executive who is blunt, outspoken, opinionated and maybe even a little nuts will get a lot more media time than someone who is, well, boring. Unfortunately for investors, an outsize personality doesn't always mean a great corporate leader.
When Al Dunlap started running Sunbeam in 1996, he was a media darling. He was brazen and blunt. He could sum up his management approach in short, incendiary quotes: "Downsizing is a way of life in America," for example. He even came with a couple of catchy nicknames, "Chainsaw Al" and "Rambo in Pinstripes" -- both of which he earned for his aggressive cost-cutting at other companies such as Scott Paper. He was great copy for the press, but a bad chief executive for Sunbeam. Dunlap got the boot in the middle of 1998 as accounting irregularities surfaced at the company, which is now bankrupt.
Moving With the Pack
Another problem: One story begets another and another and another. Call it the pile-on effect. Journalists move in packs, and we don't like to buck the conventional wisdom. And if an editor sees a great story about a company or an executive that's in another publication, it's not unusual to hear, "Why didn't we have that? Get on it and find an angle for us." That can result in a torrent of stories that may or may not be deserved.
The L Word
And just like everyone else, reporters can get lazy. It's certainly easier to write a puff piece that some PR professional spoon-feeds to you over a two-hour lunch than to do some serious digging to uncover the real story behind a company.
This apathetic attitude is not the norm. But it is a stark reminder of why investors need to do their own research on top of what they read in the press.
And, yes, that includes this column.
In keeping with TSC's editorial policy, Dagen McDowell doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Dagen welcomes your questions and comments, and invites you to send them to