I was quite happy to hear that I am far from alone in my admiration of the work of former Iraqi Information Minister Mohammed Saeed al-Sahhaf.
Perhaps "admiration" isn't the correct word, but let's be frank -- insisting that invading troops are 100 miles from Baghdad even as tanks roll in the background requires something extraordinary. And his prose! "God is roasting their stomachs in hell?" Fantastic turn of phrase. If it can be believed, his insults and taunts in Arabic are even better than they are in English. One word he used, uluj, is nearly untranslatable, and even had many Arabic scholars consulting their dictionaries.
As overjoyed as I am that the battle to remove Saddam from power is over, I have to admit that I already miss my daily fix of al-Sahhaf. The Iraqis will welcome the "wet dogs" ... "with bullets and shoes?" Wow. Reminds me of Jake Gittes in Chinatown :"That's the story I'm sticking with, yes."
There are, of course, very good reasons why, in the balance, the silencing of al-Sahhaf is a very good thing. While most in the West got little more than a good chuckle out of his routine, described by Jonah Goldberg as the Black Knight from The Holy Grail ("I've had worse!"), it seems that many people in the Arab world believed his account of the war proceedings, making some enthusiastic to go join the fight for Saddam. How many additional lives were lost due to al-Sahhaf's exhortations? Well, the number's not zero.
More importantly for the coalition, military and political leaders in Iraq also believed al-Sahhaf's account, which is perhaps one reason why they put up such a poor defense of Baghdad. They actually thought the U.S. forces were roasting inside their tanks hundreds of miles away. It showed that the masters of agitprop have learned something. During World War II, ordinary Japanese knew the war was going badly because their military kept having "glorious victories" closer and closer to the shores of Japan.
There is a lesson here. In almost all situations, the truth was there for those who wished to see it. The same is true in investing. You may not get to know everything, but you may still make mistakes. But just as the least informed people in the recent war were the ones who took al-Sahhaf's word at face value, so too might investors who take guidance using only a company's information organ -- its press releases, its earnings releases, even the utterances of its Wall Street analysts -- be ill-informed about the company they hold.
And in the stock market, there is no great protector for those who wander ignorantly into harm's way. Face it -- counting on your information and analysis from anyone who has a vested interest in your thinking a certain way is no way to protect yourself.
The truth is a starting point
On Wall Street, there is no worse sin than disappointment. That means lying is OK, obfuscating is OK, badgering facts to within an inch of their lives is OK. Just don't let Wall Street down. The three most popular words on Wall Street are "We beat earnings." The least popular response is "How?"
When you read many company press releases or earnings releases, the first and foremost question on your mind ought to be: "Why is the company presenting this material so prominently?" It is exceedingly rare that a company will headline its PR with "Our sales numbers suck." Instead you'll get something like: "Company presses forward with strategic initiatives to refocus costs," or "Balance sheet strengthened," or some other meaningful statistic.
Unlike most of al-Sahhaf's utterances in the waning days of the war, these facts have the advantage of being, well, generally factual. But you absolutely, positively must ask yourself what the presentation of these facts is trying to hide elsewhere.
Paul Miller and Paul Bahnson's Quality Financial Reporting puts the dilemma facing companies this way:
A. Provide financial statements that are so completely timely, trustworthy, and thoroughly informative that they reduce the uncertainty faced by investors and creditors and get them to give you their money while fully understanding the operating and financial risks that they face by dealing with you.
B. Try to use GAAP and financial reporting policy choices to present financial statements that make your company look more attractive than it really is so that you can tease, cajole, entice, and otherwise trick investors and creditors into giving you their money on an impulse, hoping for the best.
Most pick "B."
(Tom Jacobs wrote an excellent review of this book last November.)
It's all about pushing product
We here at The Motley Fool bang pretty hard on Wall Street analysts. Let me be clear on this one point: there are some smart, honest, hardworking people who work in sell-side analysis.
The system, however, does not value honesty. The system rewards a certain kind of behavior. Highly paid sell-side analysts are compensated not on their analysis skills, but rather their abilities to bring home the big investment-banking relationships with the companies they are covering. New legislation purports to address this conflict, and I suspect that some of the most blatant practices from the late 1990s will be curtailed.
But Wall Street analysts, those who put out the "strong buys" that get distributed to brokers who then call you, have always been shills for their corporate clients, and they always will be. As in all things, it is natural that if people are remunerated for one thing, they should not be expected to comply when you tell them to do another. Analysts know what it takes to reel in the seven- and eight-figure salaries, and the answer for this is not based on accuracy of analysis -- it's making client stocks go up.
University of North Carolina basketball coach Roy Williams said something in a press conference Monday that was apt: "I had a player come over to me one night, and said, 'Coach, don't you want me to shoot that shot? They're leaving me wide open.' I said, 'The guy on the other team is not dumb, son. He's leaving you open for a reason.' We're going to try to do what we want to do, not what the other team wants us to do. I've always been amused somewhat by football coaches that say we took what they gave us. I don't want that, I want to take what I want."
Too many investors are willing to take what is given to them. If the headline says "Beat by a penny" and the analysts raise estimates, that's good enough basis to make a decision, or to feel really good about their stock.
It's not enough. Don't take what's given to you. Take what you want, and have the diversity of information sources needed to make good decisions. That way, you lessen your chance of reacting just as the folks who believed al-Sahhaf did:
"I thought we were winning."
Bill Mann, TMFOtter on the Fool Discussion Boards