January 21, 1999

Eyes on the Press

Investus Interruptus

Issue Date: October 1998
Cover Headline: "What Did You Do After the Crash, Daddy?"

Though Esquire itself has exhibited amazing longevity, its October cover stories suggest it's doing a lousy job helping men improve that most potent of manly virtues: staying power. Men who paid attention to Esquire have seen their portfolios go flaccid over the last few months since the magazine did all it could to inspire stock performance anxiety. As the inside headline read: "Rule 1: Don't Panic. Rule 2: Panic First."

The lead story, by Walter Russell Mead, Worth's senior contributing editor and a senior fellow at the Council of Foreign Relations, offered a blistering screed on the perils of laissez-faire capitalism. In recounting events dating back to 1997, Mead railed against the hubris of economic and political leaders who had misconstrued how fragile the global financial system was and so were left unprepared to halt its collapse. While much of his jaunty analysis was appropriate and even insightful, Mead's addiction to ill-conceived historical comparisons between 1998 and 1928 led him to a number of purely sensational conclusions.

Bottom line, he argued that if the economic storm blowing around the world reached the U.S., "stock prices could easily fall by two thirds -- that's 6,000 points on the Dow -- and it could take stocks a decade or more to recover." He predicted that the "long period of American economic expansion is probably over," and that the entire world could plunge into a major depression. Somehow, Mead didn't seem to grasp that America may have more going for it than Thailand did.

Next, Ken Kurson's article (subhead: "The sky is falling. Here's why -- and where to put your money before the maelstrom hits") began with his prediction that "this market will crash hard and stay crashed" and ended with him mocking a 75-year-old man who had moved all of his liquid assets out of individual stocks and into the S&P 500 index. (Kurson would advise this guy to have just 25% of his investments in equities. Similarly, I guess he would tell Warren Buffett to sell most of his Berkshire Hathaway [NYSE: BRK.A] because he was overexposed to stocks.)

Kurson argued that "stock prices are ridiculous," suggesting the need for a return to the historical median P/E ratio of 14.6. He made no mention of what impact low interest rates and low inflation rightfully have on valuation. He underscored the record low dividend yields, but failed to mention why long-term investors might prefer stock buybacks rather than taxable dividends. He highlighted record merger activity as a sign of a market top without noting how it might reflect a strategic response to changing competitive dynamics resulting from globalization.

Most shocking, Kurson admitted that all the same alleged danger signals existed in 1994 and that investors who jumped to the sidelines then would be "poorer today." Why that didn't lead him to reevaluate his argument is beyond me.

Next: Eyes on Fortune