I know you have an interest in the market, because you’re reading this article. But are you bullish or bearish at the moment? Do you think the meltdown of around $4 trillion over the last year has put in a bottom, and that it’s now time to “back up the truck” to buy stocks? That’s what analysts at all the big brokerage firms think; their consensus is that the market will end the year 30-40 percent higher than current levels.
I think that’s complete nonsense. The stock mania has gone on far too long, and drove prices up far too high for it to end this soon, and only at these levels. What you’ve seen so far is just an overture.
That’s not to say we won’t see a prolonged rally about now, enough to lull investors who still own stocks (which is to say 50 percent of all Americans) into complacency, and continuing to hold them “for the long term.” There are lots of reasons why I believe this bear market is still in its early stages. One of them is the orientation of most people in the market, the way they invest.
This article appeared in International Speculator in September 2000. Regrettably, the distinctions it makes are as true today as they were seven months ago.
Value vs. Momentum
There are basically two types of stock market player: Value and Momentum.
The Value player reads Benjamin Graham and admires Warren Buffet (I hasten to add, we’re talking about his investment skills, not his political opinions); he doesn’t really care what the stock is doing, only how the company is doing. The Momentum player reads Money Magazine and admires the talking heads on TV; he doesn’t really care what the company does, only what the stock is doing. Value people like to buy during bear markets, when there are values; momentum people like to buy during bull markets, when there’s … momentum.
You might think these two styles were equally valid. They both sound reasonable. But they’re not.
Value people were buying during the ’70s and early ’80s, when dividend yields of 5-10 percent were common. They have been selling for most of the ’90s, since things like yield, price/earnings ratios and book value have become considered archaic, or even meaningless. And they’ve been largely getting out of the market for the past several years. You might ask yourself, in light of the fact that mutual funds are still getting scores of billions of new capital from the public every quarter, why the market indices have gone nowhere but down this year. The reason, of course, is that there’s been at least as much selling as buying. The selling is coming from the value people, who can no longer see the point in owning stocks.
The blind leading the doubly dismembered
Who’s been buying over the last seven years and who’s taken the market to today’s manic levels? Momentum buyers. Don’t get me wrong. I’m a great believer in going with the flow and treating the trend as your friend — but only when I’m confident it’s a real trend and that it’s likely to persist. Momentum buyers don’t know anything about the market other than its direction, and nothing about companies except the “buzz” on what business they’re in. And most of that buzz comes off Internet chat rooms in today’s world, where it’s impossible to tell true from false. Not that any of that is relevant as long as the stock is going up.
The fact is that the average person in the stock market knows next to nothing about either investing or business. A survey of 400 investors was taken recently by a corporate ad outfit called Doremus (undoubtedly with the intent of gaining PR accounts from public companies — but that’s beside the point) to quantify the proposition. The figures were pretty astounding, since the respondents were actual investors, not high-school kids, who are supposed to leave us aghast at how ignorant they are.
A full 50 percent of respondents didn’t know what Alcoa was, and 10 percent of them thought Caterpillar was in the pet business; 50 percent thought that North America’s largest provider of food to the food-service industry, Sysco Corp., was a technology company (obviously confusing it with Cisco). Only 10 percent knew that Corning Inc. was a fiber optics manufacturer; most thought it made glass cookware for a living. Only 10 percent knew Halliburton is in oil-field services, but 9 percent thought it was in the fish business (perhaps because its name sounds like halibut — who knows?).
This wouldn’t be an important revelation except that absolutely everyone’s in the market, and everyone has an opinion on it. And the opinion is based, in almost all cases, on nothing but what they read in the papers or see on TV.
3 types of stocks
This perhaps explains why the market is so segmented, it seems to me, into three parts: Giant Household Name companies; Tech, Net, and Telecom companies (TNT companies, if you will); and Everything Else.
Since we’re in a mania where everyone has to own stocks, that explains the popularity of the Giant Household Names. Everyone thinks because they’re good companies that it’s safe to own their stocks — they haven’t a clue about Value. Plus, there are something like 7,000 mutual funds receiving tens of billions of the public’s money every month. Because they’re so big, they’re almost necessarily restricted to investing in big stocks. So Giant Household Names, the kind that compose the DJ averages and the S&P, get a lot of buying regardless of price — as long as the mania lasts.
The epicenter of the mania is the TNT stocks. The public is heavily involved in them partly because they actually know as much about some aspects of the technology (i.e., practical applications of the Internet) as the pros, which gives them something resembling a level playing field. And these stocks are where the action has been, so they best stimulate greed. And draw a disproportionate amount of interest.
Last, and least, is the rest of the market, Everything Else. With no name recognition, and no glamour, there’s no buying. And with no buying, there’s no Momentum — which ensures the vicious circle stays intact, until some outside event changes the psychology of the markets. In my opinion that event will be a huge bear market and probably something even worse in the economy generally. At that point, people won’t want to know about stocks, and they’ll sell everything they have. The things they own most of (and, coincidentally, those offering no current yields) will suffer the most selling and will be hurt worst in price.
Some companies that are turfed will be extraordinary growth propositions. But that will make no difference, because the sellers will need the cash, and won’t know the difference between a real growth company and a total dog, because all they understand is Momentum.
I don’t know when that time will come. My guess is that the bear market actually started two years ago, and what’s been going on of late is just a big sucker rally. We’ll see. I’m in no hurry to buy the TNT stocks that have been hurt so badly since March. But I do hope to do so in the future, when they — unbelievably — get as cheap as resource stocks are today.
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