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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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In the investment world, there are hundreds of stock market letters offering advice on what and when to buy or sellAbbott told me that a second man had actually been recovered a few days later, Master Sergeant Ronald Baake. He had been the medic on the tower and the officer who had sent out the SOS in the hope of being rescued. Baake had been in the Navy before becoming an Air Force airman and in between those services he had been a Marine. When the tower went down, most of the other men were trying to throw off safes with military secrets in them. Everyone was washed overboard except Sergeant Baake; he was strapped to his radio room chair. Other than Williams and Baake, everyone else was lost at sea. In memory of the tragedy, the Texas Tower Association has met every year, and Don Abbott heads that association. That night, the lives of real men with wives and children at home were sent to oblivion. I had forgotten all about it until the exchange with Don Abbott made me realize that these were not just statistics, but people with families, people who had lost their lives because of the advice of experts. In the investment world, there are hundreds of stock market letters offering advice on what and when to buy or sell. Many knowledgeable men and women write the majority of these letters. The successful writers have large followings and make a lot of money selling their advice. It seems logical to me that if you pay someone for advice, that person should be an expert. The problem is, there are no experts who can predict what will happen in the stock market. It is probably a good idea to carefully review what experts have stated in other walks of life as well. Yale economist Irving Fisher said before Black Tuesday in 1929, Stocks are now at what looks like a permanently high plateau, a perfect example of an expert making a classic miscalculation. The British statesman Neville Chamberlain, upon his return from Munich, waved a document and shouted, I bring you peace in our time. Market letter writers try to predict the stock market, but it really is impossible to do this. The best writers are right more than they are wrong (barely), but their predictions are not consistent. There are simply too many variables for the human mind to process. There are too many external eventsover which we have no controlthat affect the stock market. I understand this and now, hopefully, you do as well. The real question is Can you make money following market letter writers consistently over a long period? Once again, I turn to our friend Vilfredo Pareto. It is safe to say that the majority of market advisors do not make money for their clients over the long run. Predicting the stock market is much more difficult than running a traditional business. Assuming only 20 percent of all stock market letter writers will make money for their clients over the long haul while 80 percent will be consistent losers, you have a choice to make. Whom will you follow? In my opinion, it makes a lot more sense to identify what the losers, or majority, are telling their clients, rather than try to find those precious few who really know. Fortunately, monitoring the majority is easy to do. I discuss how to monitor this group, along with my entire strategy, in a later chapter. The media, especially television, is another major obstacle to making money in the stock market. The most popular stock market television station these days is CNBC. It is important to understand why CNBC exists. Is the owner, General Electric, trying to help us make money because they are concerned for our welfare, or are they simply trying to run a successful company? CNBC is a business just like any other enterprise. It has a sales force (reporters), it has revenue (advertising), and it has expenses (salaries). General Electric wants a good return on their investment and the celebrity reporters on CNBC want to keep their jobs. Both groups need viewers, and the best way to get them is to report endlessly about the stock market, constantly looking for provocative issues to discuss. Unfortunately, most of the market analysts they feature are part of Paretos Trivial Many. The Vital Few generally do not need to promote themselves and are too busy to take time to appear on television. It is important to note that I have not advised you to stop reading what experts are saying or to stop watching financial television programs such as CNBC. Quite to the contrary; I want you to pay attention to financial media, but change the way you view them. Instead of looking for investment ideas, I recommend you look for clues or a common theme to what they are advising, and then you can do the opposite. For example, in May 2002, I noticed that insiders were selling small and mid-sized companies at record rates. This was not surprising because while the Dow Jones Average was struggling, these smaller companies were making new highs. I was thinking about when I would advise my institutional clients to sell these stocks. A few minutes later, I saw two money managers on CNBC talking about how well they were doing. I could not help but notice their lack of humility. It seemed they believed they were solely responsible for their success and did not allow for the fact that they were in a favorable trend for their style of investing. Using the clue that I had received from CNBCs interview with these portfolio managers, I sent a letter to my clients advising they sell their smaller and mid-sized stocks. It was perfect; The Trivial Many were advising the public to buy and The Vital Few were selling. Three months later, these stocks were pummeled by the market, many losing more than 50 percent of their value. Another example of how to respond to the media took place in 1984. At that time, I was a stockbroker with Oppenheimer & Company in Fort Lauderdale, Florida. Since 1978, I had hosted a weekly 30-minute television show, The Muzea Insider Report, which aired every Monday afternoon. I usually worked on my text over the weekend, but when I arrived in my office one morning the title of the Wall Street Journals Abreast of the Street column caught my eye: Oil Prices Surge to $40 a BarrelAnalysts See No Negatives. The article went on to state how most oil analysts expected the price of oil to continue to move dramatically higher. Why this article was so interesting to me was not that it made me want to buy energy stocks, but it was an important clue that we were nearing a top in oil and gas issues. Before reading the article, I had heard about several dentists in Fort Lauderdale who had sold their practices to move to Houston to search for oil and gas. I also noticed that many of the stockbrokers who had made a lot of money the previous four years in energy stocks were boasting. Since I was following insiders for a living, I could not help but notice that they were selling rather aggressively. That afternoon on my television show, I pointed out that insiders were selling energy stocks at the same time the public was being advised to buy them. I quoted from the article in the Wall Street Journal, which mentioned no negatives. I told my viewers a story about a businessman who looked out of his office window and asked his accountant if he had ever seen business this good. The accountant acknowledged that business was better than ever. With that, the man turned to his accountant and said, Good, call my broker and sell all of my stocks. If there truly were no negatives to a further rise in oil prices, then everyone who believed that must already have acted, and that would mean prices of energy stocks would go down because no one would be left to buy them. This is called the Law of Reciprocal Expectations. The next morning, I called my clients and advised them to sell energy stocks. Most of them did because they knew my theories of contrary or divergent behavior and had profited from them in the past. Unfortunately, some of my newer clients were still ingrained in their old waysaccepting what they saw on televisionand did not yet know how to correctly use the media and market experts who made their living advising the public. They learned the hard way. Oil never went higher than on the afternoon of that Wall Street Journal article. The news became published at the very top, just prior to a long descent over the next few years. Of the best examples of The Vital Few and The Trivial Many occurred during the passage of a New Jersey referendum in 1976, which approved gaming in Atlantic City. A year earlier, I had played in a tennis tournament in Hollywood, Florida. My opponent was Mark Cohen, an operating manager for Resorts International, a casino company based in the Bahamas. After our match, Mark and I had a drink in the clubhouse. We exchanged backgrounds and he seemed quite interested in the fact that I was a stockbroker. Mark said, We need to talk privately. So we drove to the hotel where he was staying and Mark took a stack of currency from his suitcase. Its hard getting money out of the islands, he said. I want you to take this and buy 2,000 shares of Resorts International stock on margin. I believe its trading at 91/ 2. He handed me $10,000. When you buy on margin you are betting that the money you are borrowing will bring in more than the interest you will pay the brokerage firm that is lending you the money. For every dollar you invest, the broker will lend you a dollar. This doubles your investment, but also increases your risk. On margin? I asked. You want to invest two dollars for every dollar you put up? Absolutely, he said. Why? We think the State of New Jersey is going to legalize casino gambling in Atlantic City. Nothing has been approved yet, but were betting its going to happen and that we will be the first casino to get a license. He then asked, By the way, whats a short sale? Thats when you sell stock you dont own, planning to buy it back later, I explained. I have been told that a hedge fund money manager named Bob Wilson is short 350,000 shares of Resorts stock. I heard he was stubborn, and many of our top managers are planning to hold until Wilson buys back. Very interesting, I said. I bought the stock for him and started getting calls from dealers, croupiers, and pit bosses at the Resorts Casino in Paradise Island. Many of them watched my weekly television program. Resorts got the license they needed to open a casino in Atlantic City, and people started lining up for blocks to gamble. Over the next two years, Resorts stock went from $91/ 2 to more than $300 a share! Almost two years to the day from when Mark and the other employees of Resorts bought, Walter Cronkite put the spotlight on instant millionaires who had made a fortune by investing in Resorts International stock. The week his story ran, the stock hit $300, up $100 during that week alone. I saw elderly couples walking across the street from the Galt Ocean Mile condominiums toward my office carrying their utility stock certificates and asking to trade them in for shares in Resorts International. They were selling conservative stock for a speculative gaming issue based on a spike in price triggered by a national news story. Bob Wilson could not take the pain of seeing his hedge fund lose millions of dollars, so he took off for London. He bought back (covered) his 350,000-share short position the same week of Cronkites show, the main reason Resorts went from $200 to $300. Mark and the other Resorts International employees sold into that weeks rally. I told the other brokers in the office not to let their clients buy Resorts stock and instead to recommend electric utilities because my insider analysis indicated I should buy utilities and sell gaming stocks. Most of them ignored me. The people who bought Resorts International and other gaming stocks that week were selling their utilities stock at the lowest prices in 10 years to buy the very top of gaming stocks. By the end of 1981, the market had gone down 25 percent. Electric utilities was the only group up. Two years later, Resorts International stock was back to $10. It was the Pareto Principle, the 80:20 Rule, at work again. The Trivial Many had bought the gaming stocks right at the top and had sold their electric utilities at the bottom while The Vital Few had sold into the gaming buys and had bought at the bottom in utilities. There are countless other examples of how the media can lead you to disaster but also how the more astute use of the media can help you make excellent choices. The key is to analyze what you are reading or seeing in the media and compare it to what you observe yourself. It is also essential that you know what insiders, the most informed investors, are doing. In this way, the media and market letter writers are a true asset. Frankly, I am thrilled that CNBC and their competitors are so popular. They are among the greatest mediums in the world for observing The Trivial Many. |
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