FOOL ON THE HILL
BusinessWeek Gets It Wrong

For several years now, the year-end issue of BusinessWeek features a "Where to Invest" article. Bill Mann thought this year's advice and predictions were pretty weak, so he went back and looked at the past few years' predictions. His conclusion? "Consistently wrong."

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By Bill Mann (TMF Otter)
December 27, 2002

As far as I'm concerned, 2002 represents the aftermath of a slow-motion train wreck. The quadruple whammy of dirty accounting, dirty executives, dirty analysts, and hoodwinked investors came tumbling together in a frightening crescendo of grinding, twisting metal.

Many knew it was coming, and we had plenty of chances to avoid it. And yet people were too busy getting rich to worry about little things like executive greed, stock options, pro forma reporting, revenueless IPOs, and uneven access to information about the health of the underlying system. It is an unfortunate human tendency to avoid dealing with a danger until after it has struck. And yet 2002 was filled with images of executives doing the perp walk and investors wondering where their retirement money went. It was a sad year in that much of the worst was avoidable.

Welcome, 2003. I am hopeful that 2002 was the calamitous event that will increase the level of sobriety and caution with which individuals treat the market. Perhaps in 2003, we can build anew the concept that individual investors are part owners of the companies they hold, not lottery tickets that need to be rooted each day. It would make me happier than all get-out for market levels to be exactly the same at the end of 2003 as they are now -- just a few months without mania.

I'm not holding my breath. Human nature is what it is. It is optimistic, which is good. It is decidedly confident in its own abilities to predict and control, which is bad. I say this because we're at the time of year when the big question put to the talking heads is, "What happens in 2003?" I'd pay money to hear just one of these yahoos say, "Dunno. Didn't know last year, and won't know next year."

Each year, I get a wee bit more contemptuous of the annual prognosticators. With this in mind, I'd like to give out a "Foreshortened Lifetime Achievement Award" to the folks at BusinessWeek for their consistently awful annual "Where to Invest" feature. Please know that I enjoy BusinessWeek; I just think this feature is nearly uniformly terrible, year after year.

I just got my hands on this year's version. Here's a choice piece: "[Associate Editor Marcia] Vickers predicts that the Standard & Poor's 500-stock index will end 2003 with a percentage increase in the mid to high single digits."

She's an editor at a renowned business publication, so she must have some insight, right? Well, on a lark, I went back a few years to see what BusinessWeek said in past issues.

December 1999:
"... the 51 analysts we polled this year expect limited gains in 2000. The average prediction: an 8.3% gain, to 12,154, for the Dow; a 10% rise, to 1559, for the Standard & Poor's 500-stock index; a 5.1% increase, to 3805, for the Nasdaq;"

My review: The Dow closed 2000 at 10,788; the S&P 500 at 1320; the Nasdaq at 2470 -- losses of 6%, 10%, and 40%, respectively.

December 2000:
"According to BusinessWeek's survey of 40 investment strategists, 2001 will be a year of controlled growth. The average prediction: a 12% rise, to 12,015, for the Dow Jones industrial average; a 14% rise, to 1,558, for the Standard & Poor's 500-stock index, and a 23% jump for the Nasdaq Composite Index."

My Review: The Dow closed 2001 at 10,021; the S&P 500 at 1148; the Nasdaq at 1950 -- losses of 7%, 13%, and 21%, respectively.

December 2001:
"Indeed, the seers' predictions for 2002 are downright moderate. They are, on average, looking for a 13% rise, to 11,090, for the Dow Jones industrial average; a 15% increase, to 1292, for the Standard & Poor's 500-stock index; and a 14.5% jump, to 2236, for the Nasdaq Composite Index."

My review: As of the close on Dec. 26, 2002, the Dow closed at 8432; the S&P 500 at 889; the Nasdaq at 1367 -- losses of 15%, 22%, and 30%, respectively.

There's no reason to take the assumptions of BusinessWeek's experts as anything but wild guesses, and not particularly good ones. I won't fault BW for being optimistic -- to a point. The long-term trend of the stock market is up, and at some point, the market will get better. It's the fact that they still have the temerity to think they can predict when this will happen that I find galling.

The most interesting thing about last year's and this year's version is that they came in the midst of violent rallies in the stock market. Last year's word? "The stock resurgence is here to stay." And this year's? It was a little more restrained, though the feature did contain some garbage about "January Bounce" stocks, "seven badly beaten-down tech stocks, plus one health-related issue."

Chortle. This reads: "Well, these companies stink, but they're all poised for short-term moves!"

A reason given for buying one company is that Microsoft (Nasdaq: MSFT) co-founder Paul Allen is an investor. Need we remind anyone of the scores of millions Allen plowed into failed companies such as Metricom? Mercata? RCN? Drugstore.com? Value America? Fatbrain? Geez, if good logic were an intimate setting, listening to Barry White, this would be sitting in Row QQ behind a smelly, chain-smoking kid at a Tool concert.

Face it: 2002 was bad

It was a rough, rough year. Those who believed bear markets tend to be short and sharp (remember when people predicted the first Fed cuts in early 2001 would ignite the economy nine months later?) due to historical precedent got proof that history is relevant, but not prophetic. In 2002, people who thought the market always went up got the last of their ennui shaken from them -- yes, it generally goes up, but it can, for prolonged periods, do anything but. This shouldn't have been a surprise to anyone investing in common stocks, but apparently it was. In 2002, people finally recognized that for as many hours as Maria Bartiromo is on television, she says nothing. (There's been a 42% drop in viewership of Market Wrap since August.)

But... 2002 also saw one of the best stock-ownership ad campaigns, ever. Ameritrade's (Nasdaq: AMTD) celebration of share ownership, with the "owner of Motorola (NYSE: MOT)" and other clips, is brilliant. It's something to think about. The Rule Breaker Portfolio doesn't own 940 shares of Starbucks (Nasdaq: SBUX); it owns .000002425% of the company.

As you enter 2003, take a look at the companies you hold. Figure out the percentage you own. No, they won't be very large, but they are real. Shares are company ownership. Then look at the products and policies of the company. Ask yourself this: "Would I be comfortable with what I see if I owned 100% of this company?" If the answer is no, get out. You don't need some stabbing-at-the-wind projections like BusinessWeek's to help you make good decisions. In fact, I'd say the opposite is true.

Foolish best in 2003!

Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann owns none of the companies mentioned in this article. He is managing editor of The Motley Fool Select, where you can find his best Foolish stock ideas you won't find anywhere else. The Motley Fool has a disclosure policy.