Stock Tips

Dear Dr Knowledge:

Should I acquire United Panhandle at $34.75 or Throw Pillow International at $14.25?

E. F. Jones

Stock Market Predictions
I am often asked to use my great intellect to give stock advice, but I hope my answer below will discourage any further such requests. Not that I disapprove of making money, far from it. I believe, rather, such questions stem from a misunderstanding of the nature of intelligence. Allow me to explain.

Stock Markets: Irrational?
Now I admit that to a degree the stock market loans itself to rational analysis. Whether or not a particular security seems likely to provide a healthy return, given that company's earnings history, history of dividend payouts, the soundness of its management and its share of the market, and compensating for fiduciary risk, risk from debt, risk to capital, risk of diminished market share, global political risk, and given, as a backdrop, a certain overall forecast for the industry and for the economy in general, including interest rates, money supply, money supply rates, M2, M3, and M5, is surely a rational inquiry worthy to be taken up by the man of sense.

But such a qualified answer, I'm afraid, would inevitably disappoint my readers of the stock-picking type. For they see that the intelligent investor, cautiously analyzing his investment, can only anticipate earning modest, boring returns for himself. On the other hand, even the most pea-brained idiot can make a grandiose fortune just by stumbling into the early stages of the investment world's next fit of madness, where money pours in against all reason. Seeing this, the stock-picker wonders: Where can I get in? What will be the next mania? What bit of seeming junk today will tomorrow be an object of frenzied desire for the great mob of moronic investors? In short, what the stock-picker craves is not wisdom but a sort of barometric reading of the sentiment of the crowd.

But are the crowd's periodic fits of madness predictable? Are the dark secrets of collective madness things that can be revealed by the light of intelligence? It is my contention that they are not. Although many men have tried, none have ever succeeded in solving the riddle of the crowd, and many have ruined themselves in the search. Let the following anecdote be a word of caution to my readers.

Theory of a Random Wall Street: Its Rise and Fall
Years ago, an economics professor, name of Smiley, became a sort of minor celebrity by arguing that the thousands of dollars paid to brokers and stock analysts in commissions were so much money wasted. None of them, he argued, had ever shown that they could consistently forecast the movement of the market or particular stocks. To prove his point, he began his own fund, choosing stocks at random. Pasting a copy of the stock listing on the wall, he threw darts at it to determine his portfolio. At the end of the year, his collection of random picks outperformed more than half of the high-priced managed funds, a feat he duplicated the next year and all the years his fund operated. These results at first startled the investment world. But, year after year, as his random picks were seen to do just as well as the experts, his theory gained more and more converts.

In fact, the professor's success began to dampen the whole spirit of rampant speculation that had made Wall Street its home. Crowd chasing was given up as futile. The market was seen as less important. Interest in it lagged. As a result, its luster began to fade. The romance of the Street began to wane.

The Sparky McEnters Fund
The professor's downfall came, however, when another fund, also using dart throws to pick stocks, burst onto the scene. It had a healthy year, in fact outstanding year, results that, we might expect, should have helped further sober the public, but for one difference. Heading this fund was no stuff-shirted, ax-grinding academic, but the three-time Great Lakes dart champ, Jim "Sparky" McEnters.

Something Else Entirely
Now here was something else entirely. No two fund managers could have differed more. Professor Smiley was a thin, slightly frail man; whereas Sparky McEnters was a 200-pound, barrel-chested, striped-shirted, dart-throwing machine. Professor Smiley sheepishly lofted his darts at the board in a way that, even his supporters had to admit, frankly betrayed his amateurishness. McEnters, in contrast, was, in the realm of darts, the consummate professional. He glared at the board like an eagle. He stood in classic North Enfield style, knees bent, arms akimbo, looking like a young Zeus about to dispatch a thunderbolt. As he stood, dart in hand, the crowd around him buzzed with anticipation, and when the dart exploded from his hand like a crack of thunder, dissecting the board like a surgeon's scalpel, well, there wasn't a single man in the room who could say he wasn't impressed. Although the professor argued that the similarity of their picking methods should have been all that mattered, the public laughed at him. He was driven back to academia in disgrace, as a new chapter of speculation was begun.

Public Goes Crazy
Let me admit here, that in spite of all my philosophy, having myself witnessed McEnters display of investing prowess, I fell under his spell. I immediately sunk everything I had into his fund, a decision at the time that was regarded without objection as the very essence of wisdom. He beat the Dow by 18 points in his first year, then again by 25 the next, and 36 the next. Throwing off the shackles of forbearance, and made giddy by my growing portfolio, I was able to marry the first Mrs. Knowledge and commit other imprudent acts now painful to recall. Yet I wasn't the only one seemingly out of his mind. Thousands were pouring cash into these dart-throwing funds, which were growing exponentially and threatening to make the traditionally managed fund extinct.

These were the heady days of the dart-throwing wunderkinds on Wall Street that so captured the public's imagination. Amongst the giants of that era were men like Mike "The Hammer" Woscinski, the five-time Southern New England champ, who leapfrogged men 40 years his senior to take over the reigns at Smith Barney, and Eddie "Money" Mallroney, who scored record returns at Lehman Brothers before striking out on his own. Let us also remember Brian "The Beef" Burmeister, who had in his former life scored that perfect 9-dart 501 game at the Tulsa Open before becoming the scourge of the corporate world. At the height of this madness, the era of the dart-throwers seemed like it would never end. At the great brokerage house, the troupes of old, loyal, respected stock analysts could not be kicked out the door fast enough to make room for the new breed. Things were at a fever pitch.

The Fall
But the fall was inevitable, and when it hit it hit hard. A series of throws had placed Sparky knee deep in the carry trade for Brazilian bonds which, when the market took an expected turn, unwound, caught Sparky in the lurch, and ruined him in an instant. When the final tally was added up, McEnters found himself in debt to the tune of what would be a respectable GNP for a decent-sized country. The McEnters Fund was crushed. The others met similar fates.

I too had to pay a steep price for this lesson in humility. I suffered gravely, financially and emotionally. But since this is an advice-dispensing blog and not a heart-on-the-sleeve type, I will spare my readers such details. Those interested, though, may want to visit my new blog, "The Sorrows of Young Dr Knowledge." You know, if they want.