The Wall Street Hype Machine
To judge by their private and public discourse, Americans are obsessed with Wall Street. At weddings, in cars, on planes, in the kitchen, on the treadmill, in the office, they talk incessantly about what the market is doing. And for good reason. With their 401(k) accounts and mutual funds, people today have more responsibility for their finances and retirement than the previous generation did. Those who have stuck to long-term goals have done extremely well. But Wall Street makes money on trading, and others are being seduced by a siren song of short-term momentum plays (page 112).
Too often, Wall Street portrays investing as a sport, with analysts playing the role of home-team announcers rooting for their stocks and their firms. Rarely is there talk of long-term planning, top-quality companies, or solid earnings. What you do hear about is the "Big Mo." Tune in to financial TV, and it sounds like a basketball game, with stocks moving fast and investors encouraged to take their best shot. The message is to think short-term, and get in and out quick. It's all about momentum investing, catching the wave of a stock's rise and then bailing fast. The average Nasdaq stock is held for five months, compared with two years a decade ago.
For Wall Street insiders, the short-term churn means big profits. But for average investors, it's a sucker's game. Studies show that when amateurs trade often, they lose often. When a stock pushed by analysts on TV starts to rise, the pros have the skill to get in quick, ride it up, and sell for a profit. Average investors get in late, hang on too long, and lose. This is true for both initial public offerings and other stocks.
If America is to become a true investing culture, as opposed to a nation of short-term gamblers, then a series of polite fictions must first be pierced: Most analysts, for example, no longer act as information providers, but as stock promoters. When was the last time anyone from a major Wall Street firm made a sell recommendation on TV? Perhaps it is time to stop referring to these specialists as "analysts."
Pumping up dot-com performance in the guise of New Economy accounting must end, too (page 40). Internet companies, which constitute many of the stocks "in play," should stop pretending they have soaring revenues. (When you have no profits, the revenues count for everything.) Booking bartered ad space as revenues is silly. Claiming the full price of airline or hotel tickets as revenue is deceitful when all you do is connect buyer and seller. It's the commissions that count. Booking long-term revenues upfront undermines credibility. And so does much of Wall Street's pricing of IPOs, which leaves average investors burned while insiders make out like bandits.
One final polite fiction must also disappear soon: People who constantly buy and sell stocks and base their decisions on media chatter are gamblers, not investors. They should admit it. No one forces individual investors to play the Wall Street hype game. The media (including, at times, BUSINESS WEEK) act as an "amplification mechanism" for Wall Street hype, according to Yale University economist Robert J. Shiller, in his new book, Irrational Exuberance (page 20). But serious investors must turn down the sound and take responsibility for their long-term financial well-being. As Securities & Exchange Commission Chairman Arthur Levitt Jr. said recently, "No government agency can protect you from your own foolishness."