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BEING STREET SMART

by Sy Harding

Why Wall Street Will Never Tell You To Sell Anything! (April, 2000)

Wall Street has done a great job of bringing new investors into the 1990s market, to a degree never seen before, except perhaps in the 1920s.

They've done a great job convincing investors to buy every dip, and to look on all market declines as buying opportunities.

After stocks became over-priced to record levels, about the time Fed Chairman Greenspan began warning of the 'irrational exuberance' in the market in 1996, Wall Street even surprised itself with how easy it was to convince investors that it was okay to just keep sending in their money. They had to cook up some stories along the way, and change the stories when the original ones didn't work out. But the money kept pouring in and the market kept rising.

They started out saying all that was required for success was to buy stocks and hold them for the long term as the market always comes back.

And that indeed worked, until 1997. But, you don't hear much about simply buying and holding any more.

Because in 1997, markets where investors were finding the most promising gains, in the emerging high-tech economies of Hong Kong, Korea, Taiwan, Singapore, and the other 'tiger' economies of Asia, and the emerging market in Russia, crashed. The plunges in those markets averaged more than 60%. Wall Street immediately changed its story about simply waiting for markets to come back, when it began to look like Asian markets and Russia, might not recover for many years.

So they advised that it was the U.S. and Europe where investors should actually concentrate their holdings, even though those markets were already at never before seen levels of valuation.

Wall Street said that was not a problem, as we were in a 'new era' where valuations no longer mattered. In particular the place to be was the Internet sector, because in a couple of years shopping malls would be empty as everyone would stay home and shop on-line.

That idea worked for a year and half, until 1999. But then investors noticed that those who were recommending Internet stocks, including the founders who dreamed them up, the venture capitalists who financed them, and the institutions that were favored with the shares in the initial public offerings, were selling them as soon as lock-up periods ended. They were not holding them for the long-term growth that was promised.

And sure enough, the stocks of those Internet retailers crashed in 1999. There's no other word for it, with the average e-tailer stock losing 65% in a matter of months.

Wall Street quickly changed the story again. It was the high-tech stocks that 'enable' the internet, those that provided the software, fibre-optics, switching networks, and the like, that were the place to be. After all, the internet is here to stay. So, no matter whether e-tailers or portals or content providers make a profit or not, the high-tech sector would thrive and grow for decades.

Alas, with the recent mini-crash of the high tech sector, the Nasdaq plunging 34% in a month, that promise has also come under a cloud. As always, whether a company or a sector will grow and thrive does not determine its stock price. That's determined solely by how much investors are willing to pay in advance for that growth in terms of a price to earnings ratio on the stock.

An interesting part of the plunge in the tech sector is that once again, while Wall Street institutions were touting high-tech as the place for investors to have their money, the institutions themselves were apparently not convinced enough to leave their own money at risk in that very over-valued sector any longer.

The statistics show that 81% of the selling in the tech sector over the last 6 weeks, (and it was considerable, with volume on the Nasdaq hitting numerous new daily records of more than two billion shares traded per day), was by Wall Street institutions, while public investors remained confident. Mutual funds have reported very little in the way of selling or redemptions by individual investors. Brokerage firms said they also saw little increase in selling by individual investors. That of course would be except for those many who had bought on margin and were wiped out, or forced to sell by margin calls they could not meet.

What is going on that investors keep getting sucked into these situations where they're told what to buy, and make good paper profits for awhile, but are never told when to sell?

The problem is that Wall Street's business depends on keeping investors confident and buying stocks. There's no profit for them, only problems, if they tell investors when to sell.

Among other problems, a brokerage firm that issues a sell recommendation will reap the wrath of the corporation whose stock they advise selling. They will certainly not get their share of the company's future investment banking business. Mutual funds that own the stock will be angry, and they are far bigger customers of brokerage firms than are individual investors. If the time has come to sell a stock, the mutual funds want to quietly unload it from their portfolios while individual investors are still buying it. Otherwise who could they sell it to?

So, recognize that Wall Street won't ever tell you when to sell. That's a decision you have to make on your own, keeping in mind that stocks, like trees, don't grow to the sky, in spite of all the rosy forecasts that they will.

It usually pays to listen to Wall Street's earliest advice to buy a stock, when they're just beginning to hype interest in it. But it pays to pay attention once good profits have been made, even though Wall Street is continuing its buy advice on some unproven theory like it's a new era, or valuations no longer matter.

Mostly, it just comes down to not being too greedy. As famed investors like J.P. Morgan and Bernard Baruch always said, they made their fortunes by selling on the way up, while there were still plenty of buyers, even though it meant leaving some gains for someone else.

Or as the old saying goes, bulls can make money, bears can make money. Only pigs are assured of winding up in the mud.

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