Mathew Emmert is the author of our dividend-oriented newsletter, Motley Fool Income Investor . In light of the continuing scandals in the financial arena, he has updated this article, which was originally published on May 2, 2003. In this month's Income Investor introduction letter, he cautions readers against putting Wall Street's advice before their own common sense, and that's really what this article is all about.
The language of the talking heads of the investing world, what I affectionately refer to as "stockspeak," can be tough to follow by even the savviest investors. But how much of their terminology is real value-added lingo, and how much is just noise?
I thought this was a good topic to discuss on the heels of the much-ballyhooed settlement between regulators and 10 of the most influential investment banks on Wall Street, including Citigroup (NYSE:C) and Merrill Lynch (NYSE:MER). (If you're interested in reading about the details of the settlement, check out these articles by my cohorts Jeff Fischer and Tom Jacobs). However, it's perhaps even more relevant now, given the scandals that have surfaced ever since -- from mutual fund day trading at Bank of America (NYSE:BAC) and Janus (NYSE:JNS) to absurd compensation packages at General Electric (NYSE:GE) and Tyco (NYSE:TYC), to top-heavy, management-friendly corporate governance practices at Disney (NYSE:DIS). (It's notable that GE has since rolled out a new management compensation plan that is admirable, and could, or at least should, set an industry standard.)
Avoiding the unavoidable
The thing is, despite the fanfare surrounding last year's settlement and the fresh wave of outrage over the more recent unearthings, nothing will ever save us from our responsibility to be both skeptical and diligent in making our investing decisions. In fact, it's more important than ever to cut through the meaningless drivel, and get to the heart of what these members of the financial community are really telling us, which often isn't very much.
Admittedly, every business genre has its own language, so why should the business of investing be any different? There are obviously volumes of very telling and legitimate terminology pouring from the brightest minds of this profession every day. Financial sites, cable television networks, and glossy magazines regularly use terms like REITs, MLPs, and 403(b)s to educate and enlighten those seeking true financial wisdom, and it's a beautiful thing.
The siren's sweet song
But what about the flip side of the terminology coin? You know, the side that seems to comprise more catchy phrases than anything resembling actual substance. On a daily basis, CNBC and other financial networks paint these phrases on the canvas of our eardrums like works of art.
We've all heard them. Indeed, we hear them so often that we no longer truly identify them as nonsense. It's easy to be lulled to sleep by the siren's song, as, at first listen, the phrases seem lush with insight and financial wisdom.
But are they really? Let's take a few of my favorite quotes from today's boob tube and attempt a brief translation to put us all on the same page:
Pundit X says, "We feel the Market is getting a bit ahead of itself here, Maria, so we don't recommend taking new positions at this point."
Translation: The market has gone up for some period of time -- perhaps a week, or even a month or so. Therefore, I'm going to play it safe, go with the odds, and bet it's going to go down now.
You can't really fault them for this one. After all, the market never just goes straight up. So, after a big run, it's a lot safer to bet on a fall than on another increase. This is, by the way, a big part of the reason that virtually no one consistently called the bull market of the '90s. Everyone played the odds, which said the market just had to go down next week or the next week or the week after, but it didn't. And, of course, by the time the market really did begin its fall, virtually no one was saying it would anymore.
Think they're any better at predicting an upturn? Think again. No one has been able to accurately predict a turnaround for the market either. Ever wonder how it's possible that, according to the pundits, we've been "just around the corner" from the recovery for years now?
Let's be frank: If anyone says they know what the market is going to do from one day to the next, tell them to lay off the sarsaparilla. Because the truth is, they have just as much of an idea about the answer to that question as you or me, and that happens to be absolutely no idea at all.
Pundit Y: "You see, Terry, in the past, we haven't been a believer in this stock because of negative events in the sector. But now that seems to have turned, so we're taking a more positive view of the company."
Translation: Now that most of the company's competitors are bankrupt, this company won't have to make much money to be the best business in its industry. Admittedly, in the grand scheme of things, that still won't be a very good business. But, hey, our firm is big on analyzing things on a comparative basis, especially since this company is a big investment-banking client.
To be fair on this one, I realize there could be some truth to this statement, as it's possible to like a company and not be terribly positive on the immediate outlook for the sector as a whole. But in this particular case, the company was garbage to begin with, and just because it's the last man standing in a horrible industry doesn't change the fact that it's garbage (I won't name the company in this example -- not to "protect the innocent," but because it's simply not the point of this article). And, of course, the fact the company is an investment-banking client of Pundit Y's firm makes me more skeptical than ever.
Pundit Z: "We've downgraded this stock to a 'buy,' from a 'super-duper strong buy,' because we just don't feel as strongly about the company's operating environment."
Translation: Wonk wonk wonk, wonk wonk, wonk wonk wonk (think: teacher from Peanuts).
OK, I've obviously exaggerated this one a bit, but there's still very little explanation required here. The actual "buy, sell, or hold" recommendation is, most often, utterly useless, and don't even get me started on "strong buys," as this is a family website. It's really a shame, too, because the analysis itself can actually be quite good.
Sell-side analysts are often intelligent, well-trained folks who eat, live, and breathe the companies and sectors they cover. Some have covered their stocks, or at least their sectors, for more than 20 years. What a waste of talent to have them schlepping investment-banking hype.
The pressure to talk
Believe it or not, I don't want to be too hard on the people who make these comments. I mean, folks obviously want commentary on the markets, and someone is going to step up and give it to them, whether they know what they're talking about or not.
To be fair, when someone shoves a microphone in your face, you feel compelled to say something, and usually a witty, colorful something. No one wants to look back on their big-screen debut and think they sounded like an imbecile, which can happen quite easily in the financial arena. Why else would some refer to the market as "the great humbler"?
I understand the need for those in the spotlight to play it safe, particularly if they'd like to be there again someday. But that's why it's more important than ever for us to realize the motivation behind their statements. Not realizing why these folks make their recommendations is, after all, what caused a great many investors to get burned by them in the first place.
No one makes money sleepwalking their way through the market. There are no coattails to ride. Mind you, I'm not saying that learning how to manage your finances is hard. That is, after all, a huge part of the myth The Motley Fool is here to dispel. I'm simply saying it will take consistent effort on your part, and perhaps a little help from your Fools.
So, my dear Fools, the next time you hear the financial truth sayers speak their wisdom to the world, may you be equipped with the appropriate translation skills. If not, may your fellow Fools and Merriam-Webster, serve you well.
For more stockspeak -- and to be transported back to CNBC in early 2000 -- check out Bill Barker's CNBC: A Day of Misinformation. And Fools, our Eyes on the Wise discussion board is deserving of a jump- start. Join in with your stories and observations.
Fool on!
Mathew Emmert tries not to use stockspeak, but he can talk while standing on his head and drinking soup. As mentioned, he also writes Motley Fool Income Investor. If you're in the market for dividend-paying, income-producing stocks, consider a no-hasslefree trial. Mathew owns shares of Disney and General Electric. The Motley Fool isinvestors writing for investors.
