Will Rogers once said that “good judgment comes from bad experience, and a lot of that comes from bad judgment.” If he only knew.
Then again, as one of America’s famous humorists and social commentators, I suspect he “knew” all too well that history rarely works out the way people think.
Take the late 1990s, for instance.
As capital markets liberalized and the Internet Age began in earnest it was a time of great hope.
Companies that had very little other than a “.com” after their name suddenly became worth hundreds of millions of dollars. Boo.com, Pets.com, and Kozmo.com are a few that come to mind. But were any of them worthy of all the hype?
I was one of the few who didn’t think so. Many people considered me a Luddite because of it.
I wasn’t trying to be difficult. I just reasoned that when everybody “knew something” that the end was near. How did I know?
Well I didn’t…exactly. But, I had a good idea thanks to something my grandmother, Mimi, used to call the “country club” test. After being widowed at a young age Mimi was a seasoned, successful global investor in her own right. She reasoned that when an investment or a trend began making the rounds over drinks, it was time to move on.
And if she heard something around the poker table, she’d actually bet in the other direction.
One day, I asked what her secret was.
In no uncertain terms she told me to look carefully at the world around me and, in particular, at magazine covers.
According to Mimi, they were the next best thing to a crystal ball. Because whatever is all over the covers is what’s on top of the mind on the cocktail circuit — not to mention fodder for the masses…who are usually wrong. Frankly, I thought Mimi had consumed one too many martinis. She loved them. Then, as my own career progressed, I began putting two and two together.
It turns out it wasn’t the gin talking. Mimi was right.
Magazine Covers and the Stock Market
I’ve never forgotten Mimi’s advice and still study magazine covers intently to this day because they help me latch on to important market shifts and trends that others either miss or simply don’t see coming.
I am not so much interested in the stories themselves as I am in reading into the implications of headline copy. Many times I find out that what’s being said in the headline isn’t as important as what’s being left unsaid. For example, do you remember this magazine cover touting the “death of equities” from Business Week‘s August 13, 1979 edition? It missed the mark by a wide margin. It turns out the markets weren’t down for the count after all.
The Dow shot up 1,153.76% over the next 20 years. The S&P 500 tacked on 1,135.97% and the tech-heavy Nasdaq rose 1,705.9% over the same time period. The investors who went to the sidelines got left behind.
Or how about this one from Time Magazine that crowned Amazon’s (NASDAQ:AMZN) CEO, Jeff Bezos, as Man of The Year in 1999?
New economy or not, that one seemed over the top to me. Within 24 months, the Internet bubble had burst and shares of Amazon closed below $6 shedding 94.32% from its high of $105.06.
Many people were also convinced that oil was dead money in 2003 when the price of a barrel had fallen to between $20 and $30 a barrel. Then I saw this from The Economist in October of that year and had a hunch otherwise.
Sure enough, oil took off on a triple-digit run, finally topping out in 2008 at $141.71 a barrel.
One of my more recent favorites is this little gem from New York magazine last February. The cover touts the emasculation of Wall Street.
Ostensibly it is a bearish story. But I don’t know if I’ve ever seen a more bullish contrarian indicator.
That’s why I wasn’t the least bit surprised to see the S&P 500 rise another 5.5% through April 2012 before rolling over to 1,390, where it stands today.
Obviously no magazine cover is infallible – nor am I – but the truth is a lot closer than many of us care to admit.
Mimi said this is because we all love a good story even if it quite literally isn’t in our best interests.
Hardly. Three finance professors from the University of Richmond proved it in 2007.
Examining stories over a 20-year period in Business Week, Forbes and Fortune, Professors Tom Arnold, John Earl and David North found that companies that had received positive coverage but did not make the cover outperformed their benchmarks by 42.7% while companies receiving negative coverage underperformed by 34.6%.
Once a company hit the cover, though, the professors found that out performance fell to a mere 4.2% suggesting that any company making the cover may have topped out. They also found that negative cover stories tended to be published near bottoms or turnarounds.
The moral of the story is if a company makes a popular magazine but not the cover, there’s upside. But if it hits the cover as a media darling, odds are good that it’s tapped out.
Conversely, if a company is negatively portrayed inside a magazine, it’s likely to be treated negatively by the markets. But if it’s negatively handled on the cover of a popular magazine, you may have a great turnaround candidate.