Bull!
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16. “Sunbeam’s Al Dunlap Breaks News of Retaining Morgan Stanley to Explore Merger Sale or Acquisition of Company on CNBC,” PR Newswire, 23 October 1997.
17. Herb Greenberg, interview with the author.
18. Greenberg’s comments, made in a column written on June 1, 1998, are quoted by Gerard Monsen in “The Unofficial Herb Greenberg FAQ.”
19. This is only a small sample of some of the first-rate research and commentary available from independent research boutiques and newsletter writers. Others are referenced throughout this book.
20. See Kate Welling’s interview with Hickey in “High Tech Contrarian: Staying Ahead of the Curves Isn’t Popular, Just Profitable,” Barron’s, 26 August 1996; and Alan Abelson, “Up & Down Wall Street: Bear Skinned,” Barron’s, 5 August 1996. For Grant’s analysis of Cisco’s accounting, see Grant’s Interest Rate Observer, 15 September 2000.
21. Richard Stern and Allan Sloan, “The Day the Brokers Picked Their Own Pockets,” Forbes, 16 November 1987.
22. Henry Blodget, interview with the author. See Prologue for the story of Henry Blodget’s late-night caller.
23. Floyd Norris, “The Problem with Analysts: You Get What You Pay For,” The New York Times, 7 September 2001.
24. Herb Greenberg, interview with the author.
25. Bethany McLean, “Retirement Guide Investing: How Your 401(k) Stacks Up,” Fortune, 19 August 1996, 124.
26. Peter Bernstein, interview with the author.
27. Both mutual fund managers and pension fund managers found themselves constantly second-guessed, either by the marketing executives running the mutual fund company or the pension fund consultants hired by many corporations to look over the shoulder of the portfolio managers running their pension plans. See Chapter 13 (“The Mutual Fund Manager: Career Risk vs. Investment Risk”).
28. Mark Hulbert, interview with the author. See also, Mark Hulbert, “Momentum Is Fleeting: So How to Capture It in Funds?” The New York Times, 7 July 2002. In the interview and his column, Hulbert cited research done by Mark M. Carhart, head of quantitative research at Goldman Sachs.
29. Mark Carhart, interview with the author.
30. To track the fund’s performance, Hulbert assumes that an individual investor bought the top-rated funds, and then switched in and out of them as they rose and fell in the ratings, paying fees each time. In the real world, Morningstar director Don Phillips observes, it is unlikely that an investor would do this—and Morningstar does not intend the stars to be taken as buy and sell recommendations.
“‘Louis Rukeyser’s Mutual Funds,’ a popular mutual fund letter that focuses exclusively on three-year returns did even worse,” Hulbert pointed out. “For this period (1/1/96 to 3/31/03), we report that this category of growth funds produced a 3.3% annualized loss, vs. a 5.5% annualized gain for the Wilshire 5000, with 44% more volatility than the Wilshire.
“A portfolio of growth funds on the Louis Rukeyser Honor Roll lagged the Wilshire from the beginning of 1996 through March 31 of 2003 by an average of 8.8 percentage points a year, with 44% more volatility than the Wilshire. These results underline the inadequacy of using three-year periods to separate fund managers with genuine ability from those who are just lucky.”
31. A. Michael Lipper, interview with the author. The remarks that follow were made in a 2003 interview. “Morningstar would also say that they were not trying to cast a judgment,” Lipper noted, but inevitably the stars implied a grade. See Chapters 12 and 13 on mutual funds. As for Lipper’s rankings, it was left to the investor to decide how to use them. “The decision about time period is a critical factor,” said Lipper, “and I always felt it should be made on the basis of the investor’s time horizon. If you’re a 401(k) investor, you may want to use actuarial-type time periods and measures,” he suggested, referring to the analytical tools used by insurance companies when assessing risk. “These are very long time periods,” he added, “and you may want to exclude very good periods and very bad periods.”
32. A. Michael Lipper, interview with the author. Peter Lynch was the manager of Fidelity Magellan in the eighties; John Templeton, who founded the Templeton Funds, sold the funds to the Franklin Group in 1992, while John Neff ran Vanguard’s Windsor and Gemini Funds until his retirement in 1995.
33. Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life (New York: Texere, 2001), 27.
34. Taleb, Fooled by Randomness, 27.
35. Nassim Nicholas Taleb, interview with the author. See also Maggie Mahar, “No Such Thing,” Bloomberg Wealth Manager, June 2003.
36. Thomas Frank, One Market Under God: Extreme Capitalism, Market Populism, and the End of Economic Democracy (New York: Doubleday, 2000), 303, 307.
37. See Chapter 3 (“The Stage Is Set”).
38. See Maggie Mahar, “Three Wall Street Truths You Can’t Trust,” Bloomberg Personal Finance, November 2000, 50.
39. Maggie Mahar, “Could the Trade Deficit Torpedo the Tanker?” Bloomberg News, 8 February 1999. In the column, the author quoted Bloomberg News on “the consensus among economists.”
40. Kathryn Graven quotes this “popular Japanese saying” in “Charging Bulls: Japanese Stock Buyers Follow the Fads, Send Tokyo Prices Soaring,” The Wall Street Journal, 29 May 1987.
41. Richard Russell’s Dow Theory Letter, 4 December 1996.
CHAPTER 11
1. Allan Sloan, “Online’s Bottom: How Creative Accounting Makes AOL Look Good,” Newsweek, 30 October 1995, 66.
2. Robert Seidman, In, Around and Online, Issue 2.15—Week Ending 14 April 1995.
3. Kara Swisher, aol.con (New York: Times Busines$Random House, 1998), 224–26.
4. Interview with the author.
5. See Maggie Mahar, “Caught in the ’Net,” Barron’s, 25 December 1995, 25.
6. Allan Sloan, “Online’s Bottom: How Creative Accounting Makes AOL Look Good.”
7. Maggie Mahar, “Caught in the ’Net.”
8. Linda Sandler and Jared Sandberg, “Heard on the Street: America Online Lures Investors, Dismays Shorts,” The Asian Wall Street Journal, 13 November 1995, 15.
9. Allan Sloan, “America Online’s Numbers Could Add Up to Trouble in Internet Mania,” The Washington Post, 21 May 1996, D03.
10. Allan Sloan, “America Online’s Numbers Could Add Up to Trouble in Internet Mania.”
11. Interview with the author.
12. Times Wire Services, “Technology, No. 2 AOL Exec Quits after 4 Months on the Job,” The Los Angeles Times, 26 June 1996.
13. Kara Swisher, aol.con, 156–57.
14. David Henry, “AOL Faces Crippling Cash Shortage,” USA Today, 15 August 1996.
15. Allan Sloan, “Profits? What Profits? (America Online),” Newsweek, 11 November 1996, 60.
16. Allan Sloan, interview with the author.
17. Allan Sloan, “Profits, What Profits?”
18. Amy P. Hutton, “Four Rules for Taking Your Message to Wall Street,” Harvard Business Review, May 2001, 125.
19. Paul Keegan, “Can Bob Pittman, of MTV Fame, Make AOL Rock?” Upside magazine, 1 November 1998. Pittman seemed to be saying that customers were not too discriminating about quality, but he did give them credit for valuing consistency. “Put New Coke in this can of Coke, they’ll be mad. They’ll make Coke change it. Our members think they own AOL. And they do. When they speak up and say, ‘I want something,’ damn it, we better respond!” Keegan commented: “This argument doesn’t exactly amount to a ringing endorsement of the product. Pittman seems to be saying that customers are too busy to comparison shop.”
20. Amy P. Hutton, “Four Rules for Taking Your Message to Wall Street.”
21. Allan Sloan, “Profits, What Profits?”
22. Allan Sloan, “Profits? What Profits?”
23. Joshua Cooper Ramo, “How AOL Lost the Battles but Won the War: America Online Defied the Techies, Catering to the Chatting Masses; Its Suprising Deal Could Make CEO Steve Cas
e’s Strategy Look Brilliant,” Time, 22 September 1997, 46.
24. Allan Sloan, interview with the author.
25. Allan Sloan, “America Online’s Numbers Could Add Up to Trouble in Internet Mania.”
26. Lise Buyer, interview with the author. After working at T. Rowe Price, Buyer went to Wall Street, where she became an Internet analyst. At the end of 2000, she decided to leave Wall Street.
27. David S. Hilzenrath, “AOL Fined Over Old Accounting Practices: Company to Pay SEC $3.5 Million,” The Washington Post, 16 May 2000, E01.
28. See Martin Peers and Julia Angwin, “AOL Time Warner to Restate Eight Quarters of Its Results,” The Wall Street Journal, 24 October 2002.
29. David A. Vise, “AOL Probe Widened to ‘Abetting’ of Other Firms,” The Washington Post, 12 March 2003, A01.
CHAPTER 12
1. James J. Cramer, “How the Mutual Funds Run America,” New York, 2 October 1996, 34.
2. Ken Brown, “The Best and Worst Mutual Funds,” Smart Money, 1 February 1999, 93; Suzanne Woolley, “Our Love Affair with Stocks,” Business Week, 3 June 1996.
3. Investment Company Institute, 1996 Mutual Fund Factbook, Chapter 10.
4. James J. Cramer, “How the Mutual Funds Run America,” 35, 36.
5. By 2001, investors began to ask questions about some of Van Wagoner’s holdings. It turned out that between 10 and 14 percent of Van Wagoner’s portfolios consisted of “private placements”—shares in companies that were not publicly traded, giving Van Wagoner and his fund managers unusual leeway when totting up the value of the shares in their funds. The question was whether they overvalued these holdings in order to make their losses seem less catastrophic. See Tom Lauricella, “Some Van Wagoner Stakes Lost $0 in 2000—as Private Placements Their Value Was Set by Fund Firm Itself,” The Wall Street Journal, 11 December 2001, C1; Jason Zweig, “Invest/Fund File/ Contrafund on Sale—Janus Managing Risk—Vanguard Guru Retires Momentum Mori,” Money, 1 May 2003, 63.
6. Roger Lowenstein, “Common Market—The Public’s Zeal to Invest,” The Wall Street Journal, 9 September 1996.
7. John Wyatt, “A Simple Test for Growth Stocks,” Fortune, 16 January 1995, 125; Reed Abelson, “A Fund Family’s Credo: Growth, Growth, Growth,” The New York Times, 23 June 1996. Over the next five and a half years (from July 1, 1996, through December 30, 2002), Bed Bath & Beyond would trump both prison and greenway, rising some 400 percent. (An investor who bought BBBY in 1995, when Pilgrim first mentioned the stock, would have fared even better.) Meanwhile, Callaway Golf fell 60 percent, while Corrections Corp., which was taken over by PZN, fell 49 percent.
8. James J. Cramer, “How the Mutual Funds Run America.”
9. On the effect of II’s ratings, see prologue in Michael Santoli, “Stop It, Both of You: Fund Managers Deserve Their Share of Blame for the Stock-Ratings Debacle,” Barron’s, 1 January 2002.
10. Some observers praised CEOs, such as General Electric’s Jack Welch, for being able to produce smooth earnings growth, quarter after quarter, with no surprises. But as early as 1994, The Wall Street Journal raised sharp questions about how GE engineered its results: Randall Smith, Steven Lipin, and Amal Kumar Naj, “Managing Profits: How General Electric Damps Fluctuations in Its Annual Earnings: It Offsets One-Time Gains with Write-Offs Times Asset Purchases and Sales,” The Wall Street Journal, 2 November 1994, A1. At the end of the story, Howard Schilit, an accounting professor at American University in Washington, summed up the argument: “Earnings management can be very dangerous for the investor because you are creating something artificial. The numbers should reflect how the company is actually doing.”
11. Michael Santoli, “Stop It, Both of You: Fund Managers Deserve Their Share of Blame for the Stock-Ratings Debacle.”
12. George Kelly, interview with the author.
13. See Chapter 8 (“Behind the Scenes, in Washington”), on how the use of options allowed companies to avoid subtracting the cost of employee compensation from their profits. For a full analysis of Cisco’s accounting, see Grant’s Interest Rate Observer, 15 September 2000.
14. Robert Frank and Robin Sidel, “Firms That Lived by the Deal in the ’90s Now Sink by the Dozens,” The Wall Street Journal, 6 June 2002. See also Chapter 16 (“Fully Deluded Earnings”).
15. Robert Frank and Robin Sidel, “Firms That Lived by the Deal.” The Wall Street Journal did the study of the 50 biggest acquirers with Thompson Financial.
16. Roger Lowenstein, “Common Market—The Public’s Zeal to Invest”; Louise Witt, “Small Circle of Pain” Bloomberg Personal Finance, January/February 1998, 80.
17. See Louise Witt, “Small Circle of Pain”; and Jeffrey Laderman, “The Stampede to Index Funds,” Business Week, 1 April 1996.
18. Eric J. Savitz, “Dangerous Curves: In This Market the Tortoises Are Leaving the Hares in the Dust,” Barron’s, 10 March 1997.
19. See Sandra Ward, “After the Deluge,” Barron’s, 6 August 2001; Thomas Eason, “The Funds: ‘It’s Loony,’” Forbes, 17 May 1999, 340.
20. Leuthold isolated the 99 stocks where U.S. institutions (including mutual funds) have the most dollars invested, and then examined their price/earnings ratios. He published the list of institutional favorites as of August 1996 in Perception for the Professional, April 1997, vol. 17, no. 4.
21. Susan E. Kuhn, “Market Mania? How Crazy Is This Market?” Fortune, 15 April 1996, 78. See Chapter 3 (“The Stage Is Set”) on the Nifty Fifty of the late sixties and early seventies; see Chapter 17 (“Following the Herd”) on parallels to the Nifty Fifty of the nineties.
22. Susan E. Kuhn, “Market Mania?”
23. Kenneth Labich, “Gambling’s Kings on a Roll and Raising Their Bets Last Year: Americans Visited Casinos More Often Than Theme Parks,” Business 2.0, July 1996.
24. Sharon Cassidy, interview with the author. The market would crash before Cassidy retired—see Chapter 2. (“The People’s Market”). Cassidy and Malone both appeared in a 1996 Barron’s story focusing on how individual investors of the mid-nineties felt compelled to invest, ignoring all risks. See Maggie Mahar, “You Must Buy Stocks,” Barron’s, 20 May 1996, A12.
25. Interview with the author.
26. The poll of 10,114 mutual fund investors was conducted by Louis Harris Associates for the Liberty Financial Investor Reality Check, Business Wire, 16 October 1996.
27. Lipper Analytical Services’ index of funds with the highest earnings growth rates and valuations was up some 40 percent for the year, while the index of portfolios with the lowest prices relative to book and earnings had gained just 22.4 percent. “With the Dow preparing to punch through 5000, opportunities to buy cheap stocks seem few and far between,” noted Leslie P. Norton in “Fund of Information: Food for Thought—What’s a Value Investor to Do? Catching Up with Tweedy Browne,” Barron’s, 20 November 1995, 31.
28. Mark Hulbert, interview with the author.
29. Jean-Marie Eveillard, interview with the author. Eveillard’s SoGen funds were later renamed “First Eagle Funds.”
30. See Maggie Mahar, “Is ‘New Value’ Value Added?”
31. Maggie Mahar, “Is Europe Ripe for Recovery? No, Says One Veteran,” Bloomberg News, 12 November 1998. The risk adjustment was made using the formula devised by Franco & Leah Modigliani.
32. Jean-Marie Eveillard, interview with the author.
33. Earnings often lag not just GDP, but GDP per capita, Peter Bernstein has observed: “Between 1900 and 2001, for instance, U.S. GDP growth averaged 3.3% in real terms, vs. 1.9% growth in GDP per capita, while earnings grew by 1.5% and dividends by 1.1%. And, the U.S. economy was the most successful on the planet over that stretch,” Kate Welling quoted Bernstein on this point in welling@weeden, 11 April 2003.