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JDS Uniphase
'Follow the Money Trail' 101

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By foolishted
July 25, 2001

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

I enjoy these discussion boards -- lots of people sharing their opinions, rants, and insights. Some are good, some bad.

Much like brokers' advice -- some are good, some are not so good. Like much of life's many travails, the challenge lies in separating the wheat from the chaff.

DISCLOSURE: I am a Wall Street retiree, and a very engaged individual investor. Over the years, I've made every mistake imaginable, some repeatedly, but endeavor to learn from each experience. I worked for a large brokerage house (who shall herein go nameless), so much of the following is based on personal experience; the rest is extrapolating based on what I have witnessed firsthand.

Some of the 'bad broker' posts, while humorous to read, need a bit of clarification. Similar to the value of the JDSU discussion board posts I referred to above, some brokers are hard working, smart, and excellent, while others have generously offered advice that has not panned out in reality. Again, one must separate the wheat from the chaff, but the term 'broker' is, in and of itself, vague, non-informative and useless.

I read a lot of "Who Dunnit" murder mystery novels, and one of the common detective quips is very applicable when it comes to Wall Street/brokers/investment advice. In many novels, the lead detective will make a statement to the effect of, "Follow the money trail, and we'll find our killer."

Let's briefly consider the Wall Street money trail. Soon after a smart, new, starry-eyed broker is hired by a brokerage house, he/she gets a crash course on how the company makes money. That's why these companies exist. Individual investors like you and I can read a brokers upgrades/downgrades, etc, but did you ever pay a cent for this advice?? These brokers do not exist for the individual investors. Period. Full stop. Big Wall Street brokerage companies make the vast majority of their money in the institutional market, floating new debt, managing large company pensions, merger & acquisition, taking a company public (IPOs), etc. Fees from individual investors, while not completely insignificant, are not where the game is won and lost.

So let's follow the 'money trail.' Do brokers get paid by individual investors?? I've never paid them a cent for their advice, have you?? Chances are, if they are not accountable to us, they are not serving us and we are not their masters. Do Wall Street brokerage houses make millions from large, institutional customers?? Indeed they do. Could it be that brokers are more interested in these large, institutional customers that pay their firms scads of $$$$??? Ahhh, maybe we're on to something here.

So what's different between individuals and large institutional investors? Do we both want to make the best use of our $$$$? Yup. Do we each manage the risk/return tradeoff???? I sure try, anyway. So if we both want to use our money to make money, where's the disconnect here??? The most obvious answer is timeframe.

You and I may be investing for a child's education, retirement, summer home, etc. Many of these events are many, many years away, and this gives us a luxury an institutional customer doesn't have. Ever notice companies sell investments, so the proceeds of the transaction float to the bottom line, and they magically hit their quarter's estimates??? Amazing isn't it. However, put in reserve, imagine the poor VP of Finance who comes to the Board of Directors and says, "We lost millions in our investment portfolios, but as we dollar-cost-average down, we believe this will provide us a very respectable return 10 years out."

Yeah, right. Start dusting off the resume; I hear the mailroom is taking apps.

These guys are interested in finding the best investment prospects 2-3 quarters out. They are worried about this quarter/this year, not abstract concepts like '5 year adjusted ROI.'

So, back to the 'money trail' analogy, is it plausible that brokers beat their brains in trying to gain credibility with important institutional customers so their firm gets a new, lucrative client?? Yup. Is it easy to predict the short-term gyrations of the market?? I still think it's just about impossible, but this is what they try to do.

WHAT THE HELL DOES ALL OF THIS MEAN VIS A VIS JDSU?????

1. Brokers are not the agent of individual investors (for the most part, although one may argue this at the fringes).
2. Their travails are focused at maximizing the short-term opportunities of large institutional investors (not the long-term objectives of most individual investors).
3. This is a very difficult business, where luck can be more important than education, brains and diligence.
4. With telecom spending not predicted to return to historic levels until (I have read) Q2 '02, JDSU at this time does not represent a high-quality recommendation, given their customers' quarter-by-quarter mindset. Once that happens, this stock will, in high likelihood, be interesting to a whole gang of 'brokers.'

To summarize, know what you are investing for, understand your timeframe, and come to grips with the fact that it is not aligned with most (just about all) brokers. If you think JDSU is a great company whose industry has taken it in the shorts during the past months, but has the cushion to survive this dip and come out stronger, then it might provide some excellent returns in years to come. Is the industry relevant to the future, or do you think the products/services they provide are inconsequential?? It's your call (called due diligence).

However, there is no 'broker conspiracy.' Just because a senior JDSU manager sells some options it is not a sign that the company is headed for the bankruptcy courts (heck, I exercised options periodically for no other reason than they had matured and I had to). Just because Venus aligns with Mercury does not signal the beginning of a new, rip-roaring bull market. Don't' make it harder than it is -- do your homework, no one will manage your money more vigilantly than YOU will, and when it comes to investing advice, follow the money trail, be a doubting Thomas, and separate the wheat from the chaff.

Good investing, all.

---FoolishTed