2008-02-01

Full of Bull: Do What Wall Street Does, Not What It Says, To Make Money in the Market by Stephen T. McClellan (2007)

If, after learning the stories of Henry Blodget, Jack Grubman and the like, you still harbor any illusions on the usefulness of security analysts and their investment advice, this is a book to read to clear your view. The author is an industry insider ("McClellan, are you still writing all that bullshit?" as Michael Bloomberg being quoted to be said in the book), who on one hand seems to be proud of his own qualifications of having an MBA and CFA, his own Institutional Investor Reasearch Team rank and being member of the "club" in general, while on the other, bashing the the investment advice industry overall, where advice to "Hold", means "Sell Yesterday", and also offering a few kind words on mutual funds, their biggest customers. Even if the advice coming would be worthy, it gets very very stale until the "retail" (an being "retail" is a dirty word in this context) participants get their hands on it and has been acted upon by all other market participants. In addition to the usual quantitative approach, the author practiced and advocates gaining investing information by smoozing corporate executives (which this approach might simply be out of reach for most investors), which includes frequent golfing on best known greens preferably on a corporate dime, to learn their character and for the rest of us, as a good substitute, listening to conference call, which would allow learning of the character and trustworthiness of the executives. Lots of worthy observations are also listed like:
  • deletion of stock coverage is a major read flag (this happens in lieu of downgrading)
  • there is a large company bias, and small companies are rarely covered (this also shows that this research is oriented towards institutional investors)
  • executives never think that their stock price is too high
  • executives and hedge funds curry, cajole and muscle favors with analysts (and the companies employing them). Major PGA golfing events definitely come to mind here ...
  • prefer specialized simple businesses (as compared to generalist companies)
  • avoid weird tock structures (voting, non-voting shares), and sweetheart management setups
  • invest in themes and rising industry sectors (maybe using ETFs)
  • prefer NYSE listed stocks to NASDAQ
  • tread lightly with International Companies
  • turnarounds almost never work
  • do not invest in IPOs
  • mutual funds offer safety bundled with mediocrity
  • (for US investors) focus on the one year mark (for reduced capital tax rates)
  • do not sell on downgrade (in particular on the day of a downgrade), the stock price likely has already fallen
  • be aware of the January effect, as January goes, so goes the whole year
  • do not read quarterly press releases, but do listen to the quarterly earnings conference calls
  • investigate hedge fund positions (if they happen to be accidentally revealed), but give little head to mutual fund positions (as they get paid by the size of the fund, not based on their performance)
  • give stocks to your kids
  • dramatic acquisition during troubled times is a diversionary tactic
  • stock buybacks usually do not accomplish much
An excellent list of various executive management styles are also given (smartly characterizing Bill Gates, Larry Ellison, Steve Jobs and others). The book completes with a call for reforming the industry (although one could argue that it is another middle man industry, which outlived its usefulness in the light of improved access to the markets and company information ...). The author had a good sense to choose retirement after the year 2000, when the gravy train stopped (and salaries up-to $1,000,000 per year were no longer given for questionable advice) and now advocates a longer term view to the market. It is unclear, except for mentioning some instances were those investments worked out, what his overall investment results happened to be over the 32 years spent advising clients in the industry. Proceed with some caution.

2 comments:

Stephen T. McClellan said...

Author's Response to “Full of Bull” Feb. 1st Book Review

I found this blog review on my Wall Street investment advice book, “Full of Bull,” apt and illustrative. What I have attempted to accomplish with my book is to decode the long list of confusing and misleading Wall Street practices and directives, so the individual investor can avoid being derailed by taking the Street literally. Street analysts are bad stock pickers, opinion rating systems are misleading, there’s a favorable bias and a big company bias, emphasis lists are specious, price targets meaningless, etc. No other book discusses these negative elements that are so detrimental to sound long-term investing. After this undergraduate course, the other half of the book, the graduate course, provides investors with a sound investment strategy, and my guidelines are in many cases counter to the boring, consensus advice common in other books. Preserve capital, invest in only a modest number of stocks, seek dividends, avoid turnarounds, hold stocks long-term (3-5 years).

To address the reviewer’s question, the first stock I ever purchased after I landed on Wall Street in 1971 was 100 shares of Ramada Inns for $35 a share. It plummeted to $5. I had taken the advice of another analyst at my firm and that was when I learned to not rely on Street analysts’ stock recommendations. I didn’t have much money to invest in the 1970s. During the ‘80s I published a book on the computer industry that concluded the future was software and computer services. My stock coverage shifted in that direction and so did my personal investments. Companies such as ADP and EDS flourished for decades as did my stock holdings in the sector. Now I’m retired, holding conservative stocks with juicy dividends and some decent growth potential. Several of these I’ve held for a few years.

The blogger summed up the review with the admonition to “Proceed with some caution.” I hope that is a characterization of my conservative investment advice for individuals. In terms of the book, my disclosures of all the misleading Street practices certainly are cautionary. Conversely, individual investors should aggressively dive into this book to discover the insider truths that Wall Street doesn’t talk about.

neweclectic said...

I would like to thank Mr. McClellan for taking the time to offer details on his background. Yes, I think this book offers excellent pointers on how to avoid the Wall Street hype machine. As for the "proceed with caution" (while it is certainly applicable to a market approach as advocated), it was referring to the concern on how an individual investor with a limited amount of time and access to industry executives can make the quality judgments as advocated in the book.