Posted on 03/31/2007 12:19:56 AM PDT by bruinbirdman
As John F. Kennedy once remarked: "The great enemy of the truth is very often not the lie--deliberate, contrived and dishonest--but the myth--persistent, persuasive and unrealistic." This is especially true on Wall Street, where myths are usually packaged as in-depth research reports. The purpose, of course, is not to impart wisdom but to win business.
Much of what passes for research is ignorant of history. In the spring of 2003, as the market was bottoming out, the myth du jour was that the market required capitulation before burying the bear. As with many myths, the logic behind the argument was compelling: Bull markets develop only after investors throw up their hands, sell the last of their stocks and vow to never again own anything riskier than a passbook savings account. That didn't happen in 2003. A market rebirth did.
I remember a long article in the Sunday New York Times in 1982. Then, too, we heard that while the bear market was in its final stages, investors should not buy until we saw "capitulation," when investors simply give up and lose interest in buying. With many stocks declining and hitting new lows, the wise men quoted even suggested that this was not likely to happen until early fall. Alas, the article appeared after the market made its low and never looked back.
Another myth surrounds the weekly poll of bullish and bearish market letters. When they are predominately bullish, it is time to sell; the reverse is a buy indicator. The idea has some foundation in fact, as the most bullish readings in the gauge's 40-year existence occurred in late 1976 and early 1977, when 84% of the writers were bullish. The market had a double-digit decline in 1977. In 1985, by contrast, the indicator was bullish with 60% or more positive in eight of the first ten weeks, and yet the market ended up 27% for the year. The majority were bullish for most of 1999, another 27% year.
Then there's the myth about individual investors, hapless creatures with a poor record as evidenced by one of the oldest of all measures, the odd-lot indicator. This theory holds that small investors, who often buy in quantities of fewer than 100 shares (in other words, an odd lot), have chronically bad timing, so betting against them is smart.
Sometimes that is true. The odd lotter was a net buyer on only 17 days in the 1980s (out of 2,529 trading days), a decade in which the S&P 500 tripled. But maybe their behavior was entirely rational: The public, then remembering how badly stocks got mauled in the 1970s, had a safer, well-paying alternative in government bonds, which averaged a 13.5% return. In the even better late 1990s, however, the small investor was correctly bullish.
Today we are hearing a new myth: Large stocks will finally prevail over smaller ones, which have been on a tear for the past few years. The oft-cited argument behind it is that, when earnings slow, investors seek greater certainty and, hence, large stocks.
In a market study my firm just finished, we were unable to find any factors that explained when large-capitalization stocks were poised to outperform the small ones and when the reverse would happen. Our analysts looked at fundamentals, market conditions, flow of funds, you name it. Ultimately, we figured, it was hard-to-quantify "animal spirits" at work. This was John Maynard Keynes' phrase for the emotions that move markets. Now 2007 might be the year that large names do win out. But it won't necessarily be for entirely rational causes.
A myth to explain the current market decline: One systemic weakness, like trouble among subprime lenders, will kill a bull run. Well, the bull seemed to shrug off higher oil prices last year. Temporary downturns are not unusual (which is how I see the current one). Note, though, that a second pattern, and one too frequent to be a myth, is that declines of 5% to 10% are not quick to recover. Last May and June we dropped 7.7% in 39 days, but recovering from the decline took 104 days. And recoveries are seldom smooth. The October 1987 crash was followed by a January 1988 dive of 7%.
Take a more cautious stance now, opting for good dividend payers.
Birinyi has a very good grasp of economic cycles and is quite interesting (though between his heavy accent and being frequently "cut-off" by Kudlow, one has to listen carefully...)
He should know, his whole life was a myth. I would bet that someone even wrote that quote for him.
I know it's always fun to pick on the NY Times, but I think a better example would have been the Business Week cover story published that same spring (if I recall correctly): "The Death of Equities!" This article made the case that the equity markets were probably doomed for the foreseeable future. And the Ronald Reagan boom began August 17, 1982 starting with the Dow at around 750. Ah, the Mainstream Media!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.