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Mishedlo
Acme Widgets

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By sonnypage
September 20, 2004

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This is pretty much a true story, or at least as true as the passing of more than twenty years will let it be. It's the early 1980's, and a much younger Sonnypage is just beginning a brand new career as a stockbroker with a major brokerage firm. I'm in one of the bright new shiny highrises on Atlanta's north side, fresh back from training in New York, and ready to go into production.

One of the morning rituals was sitting around one of the squawk boxes in the office and listening to the morning call from New York. It was more or less like a private, in house, radio show. It came complete with a narrator who introduced various speakers...analysts, technicians, economists...whatever, who gave us their take on the investing landscape, with an emphasis on actionable ideas we could take to our clients. One morning very early on in my career the narrator introduced Danny, our new analyst covering the widget industry. Danny was full of excitement and enthusiasm. Widgets were making a major comeback. New technologies were being applied that seemed to offer an incredible future.

At the very forefront, of course, was Acme Widgets. Their new combobulation technology seemed to guarantee them a dominant position in this rapidly expanding market. True, Acme shares had risen from $15 to $30 in less than a year, but Danny was confident that a bright future lay ahead. He was initiating coverage with a "one", strong buy, and a target of $40! Many of us, myself included, were quickly on the phones to our clients urging them to buy. Acme rose to $32...then $34...$35...a pause..then slowly, over a few weeks...back to $30. Danny is back on the morning call...not to worry...only a consolidation...better days are ahead. Acme drifts lower...$28....$26...than a single day plunge from $23 to $20!!!

The morning call next morning...the narrator opens with none other than Danny. The tone of his voice is somber, he is crestfallen. It seems that the new combobulation technology may be flawed...orders have been cancelled...rumors of a product recall. With a heavy heart, Danny has no choice, he says, but to reduce the opinion on Acme from a "one", strong buy, to a "four", o.k. to sell. Perhaps an explanation of 1980's "brokerspeak" is in order. An opinion of "four", o.k. to sell, is pretty much the same as saying that Acme has become toxic waste. We are on the phones...sell...take the tax loss.

Six weeks have passed. It's the early morning call on the squawk box, and the narrator leads off with none other than Danny.All clear on Acme Widgets....the combobulation technology is back on track. Your clients' grandchildren will spit on your grave if you don't get on the phones and get those clients back into Acme Widgets. The story is indeed compelling. We are back on the phones buying Acme Widgets. Months pass...Acme climbs from $20...to $24....now $27...and finally back to $30...which, as my memory serves me, was where this all began less than a year earlier. It's the morning call. The narrator starts out by warmly introducing Danny, who he points out, is one of our finest young analysts. Only three months earlier, he points out, Danny had recommended Acme Widgets at $20. Any brokers who had followed this advice had gained a solid 50% return for their clients. Danny modestly accepted the praise...but quickly pointed out that with this run-up, Acme was overextended. Time to sell!! Take profits, which we did. As I crunched the numbers later, it was clear to me, of course, that after a tax loss, plus a short term gain, plus four brokerage charges, my clients had actually lost. Oh, well. Surely we would do better next time?

Brokerage firms then and now, and the mass media then and now, sell what sells, and what sells is good news, a positive story. If I had called my clients with the story that Acme was in serious trouble, would surely fall, I would have had few takers, certainly fewer than with a positive story. The talking heads on CNBC tell you the good news because that, of course, is what sells. And selling, of course, is what it's all about. I recall a cartoon in a magazine back in my broker days. An obviously successful broker and his friends are gathered around his expensive new yacht down at the harbor. Off to the side, two other less well dressed individuals are watching. One says to the other; "..but where are the customers' yachts?"


sonnypage


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