Bubbles, Manias, and Other Nonsense
Why Fools love Alan Abelson

By Louis Corrigan (TMF Seymor)

"If the past is any guide -- and in Jim's experience it's a very good one -- the tech stocks will, over the next six months or so, have most of this year's fabulous gains entirely wiped out.... And remember, this is a guy who bought a bunch of the techs before they began their moonshot. That's what happens when manias go up in smoke, he remarks, and no question this has been a massive tech-stock mania." -- Alan Abelson

(September 22, 1999) -- The Fool is sometimes accused of harshing on Barron's lead columnist Alan Abelson, to which we must plead guilty as charged. Still, we also love Abelson. We appreciate the silver-tongued pundit as only Fools can since without such Wise men and women, there would be a lot less investment nonsense in circulation for us to dispel.

In fact, we love him so much that David Gardner has built part of the Rule Breaker investment strategy squarely on Alan's able shoulders. I'm not sure any other market pundit has ever before attained such stature, but Abelson is well-deserving. As a contrary indicator, he has few equals. If he describes a stock as "grossly overvalued" (or something equally dismissive), then you know there's a better-than-average chance you're looking at an investment home run.

Abelson's chief claim to fame is that he's managed to remain relentlessly and eloquently bearish throughout the current bull market. Given that it's the longest bull market on record, such persistence is astonishing. Best of all, he's been most consistently bearish on the stocks of the fastest-growing Internet companies. There's just no other writer who's said so many negative things about both America Online (NYSE: AOL) and Amazon.com (Nasdaq: AMZN), two of the best-performing stocks of the past three years and, for that matter, the decade. Of course, Abelson doesn't strike me as the kind of guy who spends a lot of time surfing the Web and sending instant messages (IMs) to his buddies, so it's probably still hard for him to get the Internet.

Most people don't like to be wrong. Being wrong tends to lead to a painful process of re-evaluation that begins with denial, proceeds through self-doubt, but ends in something like acceptance and revision. Admitting that we've been wrong is embarrassing, but most of us walk away from this process feeling a bit smarter. We'll make more mistakes, but hopefully we won't make that same mistake again.

What really distinguishes Abelson as a stock commentator is that he's willing to make the same mistakes over and over again. It's not that he doesn't occasionally notice how wrong he and some of his major sources have been over the years. It's that he really doesn't care. He's like the broken clock that's right twice a day. He's content to simply say the same things until they end up being true. Of course, a 50% correction in a stock means something different after it delivers a 20-bagger than before it does. So being right eventually isn't the same thing as being right.

Still, Abelson is amused by his own stubbornness. In his classic piece on the perils of market forecasting (Barron's, January 4, 1993), Abelson concludes: "Our own expectations for the year just passed, we're sad to relate, have not been met. To begin with, the world did not come to an end; but never fear -- we haven't given up hope on that one." You just have to love a line like that, but it's best appreciated by those who've managed to ignore his Chicken Little routine.

It's almost as if Abelson has adopted the kind of superlong-term view offered by Solomon in Ecclesiastes. Vanity of vanities, all is vanity. One bubble passeth away and another bubble cometh, but punditry abideth forever. As investors, though, we tend to care about our little vanities like, oh, whether we have money to put our kids through college, or whether we can afford a house with running water. And punditry is fun, but it doesn't pay the bills for anyone but Alan. Moreover, what you find in Abelson is not so much a Solomonic sense of life's impermanence but an absolutist's faith that anyone who says "This time is different" must be a simpleton not privy to Wall Street's wisdom.

In January 1996, Abelson shared the views of his buddy Bob Farrell, Merrill Lynch's technical analyst:

"Bob reflects that, in truth, there are no new investment eras, 'only old eras that go to new extremes.' And what history teaches us 'is that all extremes are eventually corrected and that every extreme has been thoroughly justified and rationalized at the time it was being created.' We thoroughly agree: No new eras, just old errors."

For Abelson, then, you just need to find lessons from the past to foretell the future. Trouble is, it just doesn't work very well. Every era is different, at least to some extent, and investors prepared to think through why and how will be rewarded while others won't.

The beauty of Abelson, though, is that you can dig into his work nearly at random and come across the same commentary, much of it spectacularly wrong, even strikingly so given that he writes the lead column in the most widely read business weekly in America. Take the quote I led off with. In light of Abelson's aversion to tech stocks with high price-to-earnings (P/E) multiples, it's hard to guess exactly when the trusted Jim Finucane -- whom Alan described as "a true rarity: A market timer who has been right a lot more often than he has been wrong" -- made this presumably informed call. Last week? Six months ago? A year ago? This kind of market prediction is just so common in Abelson's work that it's hard to say.

But Finucane's rationale offers clues. When it comes to tech stocks, there's an "historic time frame in which such upswings and downturns play out," Jim told Alan, and "major advances take between 150 and 230 days from their beginnings to their ultimate peaks." The one in question was "well past the minimum" at 190 days. So within the next six months or so, the whole year's gains would be wiped out. Supposedly.

Abelson typically quotes experts he agrees with. Unfortunately, their commentary is often so lame -- or Abelson's use of it so reductionistic -- that you've got to wonder about Alan's powers of discrimination. Let's face it, the kind of mumbo jumbo technical analysis provided by Finucane attempts to use history to make sense of the present. But it doesn't deal at all with the fundamentals of that present reality in the form of what's happening at those technology companies being dissed, or what's really up with the economy. People who don't understand financial markets find comfort in such patterns, but that's about all they're good for. Predictions based on stuff so far removed from actual businesses is just likely to be wrong.

In this case, history tells us that Jim and Alan were dead wrong. The discussion in question appeared in the November 13, 1995 Barron's, when the Nasdaq composite index, the major proxy for high-tech stocks, stood at 1,064. While the Nasdaq dipped to 978 two months later, that wasn't much of a pullback considering the Naz had started 1995 at just 752.

Six months after the column appeared, the Nasdaq was supposed to be well on its way to a 29% correction, if you believed Finucane; instead, it was up another 13%. (Jim's seven recommended shorts fell an average of 18% had you covered each at its absolute low during the ensuing six months. Yet, this group of supposed dogs was up 15% by mid-May 1996 -- more than the overall Nasdaq.) And the mighty Naz recently hit a new high of 2,887, up 171% in the four years since this massive tech-stock "mania" was supposed to end!

But hey, Abelson's poor track record doesn't bother him. He jokes about it, all the while maintaining his faith that the market's wrong, not him. In the July 21, 1997 issue of Barron's, he starts off this way:

"How could we have been so wrong? The stock market, we've been saying since time immemorial (read: more years than we like to remember), is too high. The fact is, it now becomes painfully clear, the stock market isn't too high."

Of course, the next paragraphs go on to recount with Abelson's trademark sarcasm, exactly why the market really is too high. "The momentum stocks demonstrate not pervasive animal spirits but something very much different: the presence of investment visionaries able to peer far into the future and discern how much a company will earn decades, even half a century, from today." You're supposed to laugh at such discounting-the-future-all-the-way-to-the-hereafter hubris. If Abelson doesn't understand it, then it's got to be a "bubble" or a "mania." It's no coincidence that these terms appear frequently in his work.

On to Part 2