[Starting next week, the Rule Breaker column will run every Tuesday in this space. Come on back for more then!]
Anthrax is everywhere. It's on the cover of Time and Newsweek. It makes up half of National Public Radio's daily coverage. It has spawned dozens of online polls, Gallup polls, and White House approval polls: How is the administration doing in the war against bioterrorism? How likely do you think it is that your mail contains anthrax spores?
Statistically, the answer is as close to zero as makes no odds. If as many as five pieces of mail per day contain anthrax -- and that is much higher than we actually have -- the odds of any given piece containing it are one in 111 million. You've got a much better chance of winning the lottery than receiving an anthrax-infected piece of mail (unless, of course, you work in the White House mailroom). Nevertheless, the town of Turlock, Cal. has set up drop-boxes for incinerating suspicious mail. So far, three people have died from anthrax, or about 0.000001% of the U.S. population. Meanwhile, in the past week, over 800 people have died in automobile accidents.
What is the administration doing about safety on the nation's highways?
Now, I don't want to diminish the importance of these attacks. They do represent a threat that we can and should do something about. But the obsession that has gripped the nation is unwarranted. The issue has received far more attention than it deserves. It seems that everyone wants a story to follow, a soap opera, something that engages the imagination. Nobody wants to hear about traffic safety -- that's boring.
And media mouths will not disappoint them. Everyone with a soapbox (like me -- don't think I don't know it) wants to be the first to say something really important or prescient about the story. They want to make calls one way or the other, so that, if things go that way, they can say, "I told you so!" and leap to guru status. Then they never have to be right again. Come to think of it, in the final analysis, they don't even have to be right the first time, so long as they made a big enough splash when they made the initial call.
What has this got to do with investing?
Investors are simply a subset of the general populace. They want good stories, too. They will spend way more time paying attention to a dicey stock, one that might blow through the roof or flame out in a blaze of glory, than the steady, predictable, decent companies that don't make headlines. And analysts and commentators are more than happy to oblige them.
This was, of course, one of the drivers behind the bubble of 1999. People with money heard stories and chased them with dollars. B2C, B2B, P2P, 3G -- you name it -- attracted attention from the would-be gurus at Gartner Group and Forrester Research and Jupiter Communications and anyone else willing to slap outlandish predictions on a dream. AMR Research actually told us that B2B transactions would reach $5.7 trillion in 2004 -- about equal to the U.S. gross domestic product in 1984, adjusted for inflation. Not if capital spending at businesses shuts off like a television thrown into a lake, it won't. Yet these companies made millions of dollars selling these guesses to people who wanted to believe them.
Then there are the analysts. Henry Blodget, then languishing at CIBC Oppenheimer, set the tone in late 1998 when he said that Amazon.com (Nasdaq: AMZN), then at $275, would go to $400. It did, and Blodget got a sweet job at Merrill Lynch, one of Wall Street's most premier firms, along with a huge raise. Many followed suit, culminating in Walter Piecyk's $1000 price target on Qualcomm (Nasdaq: QCOM), then at $500. That one didn't work out, and Piecyk stayed at PaineWebber.
Don't think that it's over now that the bubble is deflating, either. The madness continues. Just last quarter, an up-and-coming research firm called Compete tried to put itself on the map by asserting that Amazon would bring in $700 million in revenue in the third quarter, significantly above expectations of about $650 million. In a low-gross-margin business like Amazon's, that's a big difference in results.
The call caused quite a stir, coming shortly after September 11th, which was widely believed to have put the big hurt on retail. It also came shortly after the infamous bull Blodget lowered his sales target to $638 million from $660 million. Compete, however, swore that its data was strong. Amazon's stock shot up from $7.26 to $7.90, and proceeded up to $9.50 before earnings came out. "We are crossing our fingers on this one," a Compete spokesman said at the time.
Yeah, it sure would have been nice if it had been right. As it turned out, everything was as it seemed: Amazon reported $639 million in revenue, as Jeff Fischer reported on Wednesday. Blodget, now chastened into making below-average estimates, got it right. The stock plummeted back down to pre-Compete levels.
My question is not why Compete would do it. That's obvious; if they had been right, they could have started charging big bucks for their research. Most people will probably forget that they got it wrong. My question is: Why do investors play this game? Why do more shares of Amazon trade every day than, say, Linear Technologies (Nasdaq: LLTC), a company that doesn't do acquisitions or one-time charges or fancy convertible bond offerings or the like, but just does its job and earns incredible returns? Why do people want to read about and trade on Enron's (NYSE: ENE) fiscal shenanigans rather than DTE Energy's (NYSE: DTE) innovative growth strategy and 5% dividend yield?
It all comes down to what we find interesting and boring. Anthrax is explosive; traffic fatalities are diurnal. Amazon and Enron throw up smoke and mirrors like magicians; Linear and DTE focus on their core operations and open their businesses to inspection. There's no drama in it. And who would prefer reading a instruction manual to a drama?
I like to read drama too, but I try not to let it dictate my reality. Fears and dreams are real, and they can come true, but facts are facts. It seems like the latter should take precedence over the former.
Brian Lund is planning on buying a hand-held irradiation machine. Of the companies named, he owns Linear Technologies. To see all his holdings, check out his profile. The Motley Fool is investors writing for investors.
