In Volatile Times, Investors Tune in All and Any Predictions

[groovedaddy]

The news hit Wall Street trading floors on the morning of July 2: Some analyst at Merrill Lynch was saying the General Motors Corporation might go bankrupt.

Skip to next paragraph Within minutes, the share price of G.M., the landmark corporation that once symbolized America’s industrial might, was plunging to its lowest point since 1954.

What the Merrill analyst actually wrote, in a downbeat report on the troubled automotive giant, was that bankruptcy for G.M. was “not impossible” — an equivocal forecast that could be applied to almost any event, from winning the lottery to the odds of rain a week from Wednesday.

But amid a financial crisis where the unthinkable has seemingly become routine, Wall Street forecasters — and even the markets themselves — are struggling to get a handle on what will happen next. The result has been a flood of brash pronouncements, as the Cassandras of the financial set try to outdo themselves with increasingly outlandish predictions.

http://www.nytimes.com/2008/07/28/business/28forecasts.html?th&emc=th

[aspergris]

1. in volatile times you should

stick to your plan, and your discipline.

looking to the talking heads and lord forbid, the analysts, is usually a poor idea.

[Captain Angry]

2. Absolutely.

Too many "analysts" only see big things in their industry. The buggy whip manufacturers are doing fantastically. We don't expect the introduction of this combustion engine to have any effect on the whip industry's sales...

[aspergris]

3. analysts are also famous

for calling stock SSSS a buy at the EXACT top and then only downgrading it to sell AFTER it has dropped 30% or so.

They are almost entirely reactive, not to mention often biased. Read "blood on the streets" for a good description of their bias during the tech bubble -

Blodget, etc.

[Captain Angry]

4. As somebody who was working in the tech industry during the run up...

I know exactly what you mean.

I was the resident investor guy that people came to with questions.

Them: "What do you think of this company?"
Me: "How do they make money?"
Them: "Not sure, but their stock is going up."
Me: "Why?"
Them: "Not sure, but their stock is going up."
Me: "Do you see a problem with that?"
Them: "Not sure, but their stock is going up."

Etc.

I had a business law professor who explained it beautifully.

He had a company come to him looking for a testimonial or something. He read their prospectus.

It said they had no customer. They had an idea that probably had no potential customer. The executives of the firm were each to be paid $250K each, with bonuses. The firm leased their site from another company at 200% prevailing rates. That company that owned the site, was made up of all of the same people. It was a cash funnel.

Yet people invested big. The professor laughed them off campus.

[aspergris]

5. yes`

they weren't analysts at all. they were cheerleaders.

iirc, it was essentially one female reporter for (I forget which mag) that essentially brought down the enron debacle by asking one simple question?

how exactly do they make their MONEY?

it was pretty sad that analyst after analyst who was rec'ing their stock could not answer that question.

i think it was peter lynch (might have been warren buffet though) who said that if you can't explain in one sentence why you own a stock. you shouldn't.

[Captain Angry]

6. I like that quote.

If you don't understand the company you've chosen to invest in, you're just speculating without proper information.

And I think you're talking about Bethany McLean at Fortune: "Is Enron Overpriced?"

http://money.cnn.com/2006/01/13/news/companies/enronoriginal_fortune/index.htm

[aspergris]

7. exactly

she was interviewed extensively for the movie "smartest guys in the room" about enron.

and is quite attractive i might add!

[Captain Angry]

8. It took Enron before my dad would start listening to me about financial stuff.

I told him about them before they hit the iceberg.

The dead giveaway for me was their idea to move network bandwidth around the world at night. I wasn't following them since they were energy, which wasn't my specialty. But when they walked through my door with that one, I knew they were full of shit.

I'll never forget that commercial. If I knew then what I know now about option trading, I would have made a mint on their fall.

[aspergris]

9. ENE is also a good example

of the adage that conservtive investors should have no more than 10% MAX of their portfolio in any one stock.

I don't care how "safe" it seems.

[Captain Angry]

10. I have a friend that will quote Cramer once in a while.

Him: "Diversification is for idiots. It only protects people that don't know what they're doing. Why should you let your portfolio suffer by having crap in it when you could go big and lock in better returns?"

Me: "Really? Take a step back, think about what you just said, and then see if you can say it again."

Him: "Yeah. I guess you're right."

[crazymans economics]

11. You realize that if you replace the word "stocks"...

...with "NFL picks," then it's essentially the same conversation?

Everyone is guessing based on information that most likely is incorrect or insignificant by the time it reached the average investor.

I can make educated NFL picks by studying the injury report, weather conditions and trends. However, at the end of the day it's predicting a non-predictable in a game of chance.

The other posters in this thread know this, but I wonder how many of the 95 million investors know this?