Of Bobbleheads and the Beast

It pains me to have to take up the whip and lash the media, since flogging the messenger has become such a curmudgeonly cliche. Unfortunately, listening to the financial news over the past week gives me the impression that the writers and editors out there are no more than a platoon of brainless bobblehead dolls, nodding in unison.

Consider the frenetic hand-wringing that followed Wal-Mart's (NYSE: WMT  ) disappointing comps for November, a situation I touched on earlier this week. As I suggested, I find it dangerous, if not ridiculous, to try and measure an entire country's consumer sentiment based on the weekend results at a single retailer, no matter how huge.

But that's exactly what happened. Journalists -- who like to refer to themselves as "pack" animals, though "herd" is a better fit -- invoked an identical mantra ad nauseum, until I was left foaming and in a frantic fumble for the knob on the car stereo. When public radio joined the sheep, I simply couldn't bear to hear it anymore.

In case you missed it (lucky stiff), it went something like this:

Dateline: Monday, USA

"Sales at U.S retailers including Wal-Mart Stores Inc. probably slowed in November, the start of the holiday shopping season, as rising energy prices curbed consumer spending."

Though the emphasis is mine, the verbiage above represents the "nut graph" from a recent Bloomberg story. It offers a glimpse of the latest bit of common Wisdom to afflict Wall Street.

This just in: Consumers aren't spending any money!

Earlier this week, this "news" sent investors running for the hills, shedding their retail stubs like so many losing tickets at the pony track. Shares of Chico's FAS (NYSE: CHS  ) and Aeropostale (NYSE: ARO  ) -- two companies that have thrived despite many tough times over the past two years -- dropped as much as 5% on the day.

Just how much truth is there in the contention? You can get some clues by parsing the language in that offending paragraph. Any time a reporter uses the word probably, you can bet he's not feeling too sure of his thesis. That second bit about rising energy prices? Even worse, a conjecture passed off as a cause. First of all, gas prices have actually been dropping over the past few weeks, and, as anyone in statistics 101 can tell you, coincidence does not guarantee causation. (Of course, that's precisely why our writer -- or editor -- hedged, using the subordinating conjunction as and not because. As allows our dear correspondent to merely suggest causation, whereas because would set the opinion in stone.)

I know it's annoying to click an investing link only to have to put up with a lesson from Mr. Grammar, but there's good reason for Foolish investors to pick nits like this, at least as a periodic exercise. If you're the type to get out your calculator when the earnings report hits the wires, you should be no less vigilant when reading the other news that can influence your investing decisions.

I strongly suspect that our writer hedged his opinion because the so-called bad news was provided by an organization called the International Council of Shopping Centers. Turns out, Wal-Mart comprises a third of its retail index, meaning that a single-company's slip had an inordinate impact on what looks, to the casual observer, like an entire industry. This information -- though not our more critical analysis -- was even included in the story, but hey, who reads that far down? Well, nobody, really. Not even, I suspect, other business reporters. And that's only part of the problem.

Facts, but little truth
Just so you think I'm not cherry picking, consider the AP headline this morning that said, "Retailers Report Disappointing November Sales." In an effort to try and make this bit of pessimism seem meatier, the reporter not only cited Wal-Mart's failure, but those of a couple other stores: Limited Brands (NYSE: LTD  ) and Bombay Company (NYSE: BBA  ) .

But if you know anything about the recent history at either of those two companies, you know they're wholly unsuitable as data points to support a hypothesis concerning the entire retail sector. It's like traveling to the hospital, emerging with a trio of patients -- one mortally ill, and two that are coming down with some funky creeping crud -- then pronouncing the entire city to be on the brink of death.

Not unlike the real locale, Bombay's sales have exuded a foul stench for months. We've pointed this out several times. Limited? Well, it's no Bombay, but its sales have been hit or miss for a while as well, buoyed mostly by its non-core brands. To get back to our gloomy Gloria's story: Do you think it's a mere coincidence that healthy gains at places likeTarget (NYSE: TGT  ) , Chico's, and a little place called Costco (Nasdaq: COST  ) didn't make it into the story? Tsk tsk. You have a lot to learn, grasshopper.

Feeding the beast
So why is there so much misleading news out there? If you've never pulled oars below decks at the media galleys, you may be surprised at just how ugly things can get. The reason we see so much repetition of the pessimism -- hang on, folks, we're about to switch metaphors again -- is that daily news is a beast. And the beast loves blood.

"If it bleeds, it leads." You may be familiar with that old newsroom chestnut. Unfortunately, it's true. Even more unfortunately, like Jude Law's creepy, stab-happy photographer in Road to Perdition, reporters, editors, and headline writers are quite willing to stick a few knives in a subject in order to get their blood. Forget about Tuesday's Commerce Department numbers that show that gas prices haven't inhibited spending. Forget about the fact that Wal-Mart surprised us after pulling a similar gas-pain trick last summer. Forget about evidence that certain types of retailers have been ringing up record sales all year.

One more thing about the beast: It needs to eat a lot, and it prefers a predictable diet. That's why all the stories tend to be the same. The beast's handlers -- sometimes called editors -- check with the AP or New York TimesCompany's (NYSE: NYT  ) namesake paper in the morning, and have their reporters follow the leaders -- even if that means following them off a cliff. In such an environment, it's darn tough to come out with a contrary story.

Just try telling the beast master that consumer spending really isn't so bad.

"Why, we'd have every mug in the city calling up to ask us if we're soft between the ears!" yells the cigar-chomping editor. The cub business reporter retreats to her cube and writes what she knows she's supposed to write, even if she has to cherry-pick -- only rotten fruit this time -- to make her case.

Banishing beasts and bobbleheads
I can't in good conscience suggest that you stop reading the news, but I encourage you to read past the headlines and engage in a little Foolish skepticism. For starters, assume that what you're being told is wrong. If you're thinking, "then why should I listen to you?," congrats! You're on your way. I think there are great reasons you should consider what we Fools have to say, but disagreement is a great way to learn. At least take a look at the raw numbers, and see if the cloudy generalizations in this week's headlines are supported by the facts.

Next, realize that successful investing is about picking the winners in any environment. Even when the mood is grim, it's possible to hitch your wagon to under-appreciated successes. They are out there. We dig up several every month in our market-beating newsletters and in our annual stock guide, which went 11 for 11 last year. (But I'm convinced that you can find them on your own, too.)

When the beast and the bobbleheads weave their Gothic tales of horror, be ready to strike back. Keep a list of strong companies on your watchlist and some cash at the ready. Had you grabbed some shares of Chico's on Monday, when everyone freaked out, you could have bagged a quick 15% by yesterday afternoon. If you'd gotten in during the late-summer panic sale, as I did, you'd be looking at a 30% gain over a few weeks.

The bottom line is this: The beast and the bobbleheads are going to keep doing their thing, so do yours and forget about the story du jour. Learn from their mistakes. Benefit from their folly. That way, while they're moving on to the next big disaster, you can get down to making some money.

For related Foolishness:

Seth Jayson is glad he's no longer ordered to tell the beast stories about jogging cats and car wrecks. At the time of publication, he held shares of Chico's FAS, but had positions in no other firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.

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