Stocks and Ideologues

The WSJ is running a series of “where are the now” pieces to celebrate the tenth anniversary of wsj.com. Today’s victim is George Gilder, the editor of the Gilder Technology Report. If you recall, he was the guru who famously ignored things like a stock’s price or its fundamentals, and instead focused on investing “concepts.” Once the crack-up came, Gilder’s portfolio and following shrank dramatically. He even came close to going bankrupt.
So what went wrong? Barry Ritholtz makes an astute observation: Gilder’s problem is that he’s an ideologue. He’s exactly right. The world of investing is the deathbed of ideologies (ideologies and language don’t mix so well, either) Value investing, growth investing, momentum investing, it doesn’t matter. Once you’re wedded to a concept, you’ve thrown in the towel.
Stocks and bonds simply don’t care about concepts. It boils down to running a good business that makes things people need. If that’s a concept, there you go.
I’ll give you a good example of someone’s ideology leading them astray. On June 20, 2003, Paul Krugman wrote in the New York Times that the stock market looked like another bubble. The S&P 500 had raced from a low of 800 three months before to nearly 1,000 by the time Krugman spotted trouble. Dr. Krugman wrote:

Does the collective wisdom of the investor class perceive an imminent, vigorous recovery that is invisible in the data? The market isn’t always right. It wasn’t right when it sent the Nasdaq to 5000; it wasn’t right in the fall of 2001, the summer of 2002 or the late fall of 2002 — three would-be bull markets that fizzled. And selling by corporate insiders hit a two-year high in May.
Meanwhile, the average stock is selling at 31 times earnings, twice the historical norm. And if you take into account pension liabilities and the cost of stock options, that number goes above 40.
A few months ago, some analysts began to argue that because interest rates were so low, even today’s very expensive stocks were a good buy. I don’t agree, but that’s a long discussion. What’s clear, however, is that investors’ big move back into the market has been driven not by careful comparison of returns, but by the fact that stocks are rising — and the fear that if you don’t buy stocks, you’ll miss out on a good thing. The new bull market isn’t forecasting anything; it’s just feeding on itself.

Well, Krugman was wrong and history has said so. At the time, the stock market was just beginning a nice rally. Sure, it’s easy to have a cheap laugh, and point out when someone big makes a lousy call. That’s not my point. The point is to ask, how could someone as knowledgeable as Krugman make such a poor forecast.
From reading Krugman, it’s hard to escape the idea that he let his feelings towards President Bush enter his market analysis. That’s when the trouble begins. While I obviously can’t prove that point, the concern is there. The market simply doesn’t care who the president is, or how you vote. Stocks have their own agenda.
Becoming a good investor involves cutting yourself off from overarching themes. The concepts may offer a convenient explanation of reality for awhile, but stocks become easily bored and before you know it, they’ve moved on. Or as the historian John Lukacs wrote, “the isms have all become wasms.”

Posted by on May 9th, 2006 at 11:43 am


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