Sunday, December 20, 2009

The Market Machine

Must read today from the Brett Arends in the Wall Street Journal (hat tip Abnormal Returns)  titled "Hot Stocks For a New Decade."   Arends talks about the well known theme of consensus "top picks" resulting in sub par performance, but hits on a few other key points:

"Much of the stock-market community is still just a marketing machine that happens to sell investments, the way, say, a drugstore like CVS sells pills."

This is a key, key realization that I feel most people don't understand  All the talking heads you see on tv are constantly telling you the market is going higher, because simply, if you pull your money from the market they are out of a job.  Their JOB is to manage, trade, and trade against the money you have in the market.

Arends then touches on a topic I have discussed previously - how it's ok to be wrong as part of the consensus and lose money, but it's not ok to go against the consensus and make 10% if the herd makes 25%

"It's easy and safe for most "investment professionals" to stick together and recommend the same things, no matter how foolish. It's better -- for them, though perhaps not for the clients -- to be wrong in a crowd than risk standing alone. Few things are more dangerous to investors than a consensus.
And there is, of course, generally a strong bullish bias on Wall Street. Even today, as usual, most stock recommendations are positive. Never mind that the market is already nine months into a recovery that has seen the S&P 500 rise more than 63% and the Nasdaq jump over 70%. (And all the while, 17% of the country is unemployed, underemployed or has stopped looking for work.)"

I think we will see another example of the market machine spin job when the retail sales data comes out for next month.  While the data would have likely been weak anyway, due to the tepid economic situation, you can bet that this batch of bad data will be written off to the blizzard that blanketed the East Coast on the last weekend before Christmas.  The snow will be spun into another market excuse to write off the poor results!  Keep the machine churning...


1 comment:

Onlooker said...

Keep in mind that this is the same Brett Arends that scoffed at bears in Spring of 2008 and recommended buying because pessimism was so high. How'd that work out?

He tries to be a contrarian but those who don't understand the big picture of deflationary forces and a huge reversion to the mean are going to get creamed trying to be contrarian. Just as they did if following his scoffing, derisive (to the bears) advice in '08.

With that said, I agree with this thesis and wouldn't trust those shysters as far as I could throw them.

And maybe Arends has seen the light and realizes just how bad things are going to get. I doubt it though, but maybe I'll try to read his latest stuff to see if that's the case.