Markets And Intuition

On April 15, a reader posted an interesting review of my stock book at Here it is in its entirety:

There is a theme of claims made in this book that makes absolutely zero sense and is a complete contradiction. One of the pillars of the book seems to be that people who work in the stock trading field, and who are experts at analyzing companies and have 10+ years experience in the market and who are referred to as gurus, do not know what they are doing and are often wrong. The book then goes about trying to convince the reader who has little to no experience that through using the same data analysis techniques that “the guru’s” use, you can somehow do better than they have.

I am not talking about the grand-poobahs that are presented in the book as gods, such as Peter Lynch, Warren Buffett, etc. I am talking about the example after example after example the book gives of people who are phenomenally experienced, massively overeducated, and constantly make huge mistakes in telling investors what to do as though they are throwing darts blindfolded at the stock list to provide investors a list of companies to invest in.

It’s like the author has written a book on how to fix your car, then in the same breath trying to convince you that master mechanics are often wrong in diagnosing the problems with your car and you (joe schmow) can do a better job fixing your car than a master mechanic.

The only real difference between yourself and the common expert using the same techniques will be intuition, and sorry folks, but no one can teach intuition.

You can buy this book for light terminology coverage and the simple mechanics of how things work, but I cannot imagine any book by any human that will teach you how to make money in the stock market. If all it took was simple number crunching to pick good companies to invest in, then a mindless computer could make each of us millionaires and pick the companies for us. No more gurus, no more tedious analysis. The ONLY true method to get rich in stocks is intuition or psychic ability, and many to most of us don’t have it.

I’d like to thank all investment book writers for…well…nothing.

The point I make in the book is that the tools used by so-called market gurus are no different than the tools that any investor can use these days. The internet has brought earnings reports, financial statements, shareholder meetings, real-time quotes, and technical analysis to everybody. Most of this information is NOT difficult to understand and therefore does not require input from experts. The overeducation that the reviewer refers to is often exactly that: too much time spent studying concepts that can be grasped in a few moments using only common sense.

For instance, how hard is it to understand that it’s better to buy a company that’s profitable than one that’s not? Do you think it’s a good idea to have a lot of debt or a little debt? My guess is that you correctly chose a profitable company with little debt. You did not require any assistance from an expert.

What’s more, the book makes the point that experts are often jaded by conflicts of interest. I provide a good example of that on page 229 of the 2004 edition:

In November 1999, Sanford Weill, chairman of Salomon parent Citigroup, asked [Salomon telecom analyst Jack] Grubman to “take a fresh look” at AT&T;, a company Grubman suggested avoiding at that time. Coincidentally, the fresh look produced an upgrade to a buy with the stock at $57. A few months later, Salomon helped AT&T; sell shares of its wireless division to investors, earning hefty fees. The crowning moment of this tidy relationship came when Weill used his influence to secure spots for Grubman’s twins in the prestigious Manhattan nursery school run by the 92nd Street Y. Citigroup just happened to have made a $1 million donation to the school. In October 2000, with profits safely banked and his twins safely enrolled, Grubman downgraded AT&T; at a price of $29. Following his advice through this affair would have cost you 49 percent.

Here we have an intelligent, well-educated expert who succumbed to external enticements and delivered bad investment advice. He didn’t misuse his investment resources. He didn’t accidentally miscalculate AT&T;’s earnings. He ignored his true feelings about AT&T;’s future, gave it an upgrade, got the business deal for Salomon, and got his kids into a good school. By providing yourself with your own investment advice, you avoid situations like this.

As for investment success coming only from intuition, it’s simply not true for long-term investors. The studies that I cite in the book including “What Works On Wall Street” demonstrate that certain key measures are useful in determining a company’s chance for long-term success. While good luck never hurts in any endeavor including investing, we cannot count on it nor can we dismiss tried-and-true methods by saying that it all comes down to chance.

Let’s look more closely at the reviewer’s own example of car repair. You probably agree that there are certain facts about cars that anybody working on a car should know. The inside of the carburetor should be free of debris. The fuel line should be unclogged. The air filter should be clean. There should be an ample spark from each spark plug. To diagnose a car’s health, checking each of these points would be wise. It’s quite possible that you could check each point, find it to be OK, then something bizarre could happen. The fuel line was unclogged when you checked it on Thursday, but some sludge dislodged on Friday and clogged the line. Such things happen in life. There is a dice roll involved in everything we do.

Similarly, you can find everything about a company to be perfect and then watch that company’s stock drop. Or, at times like the internet bubble, you can find everything about a company to be completely wrong and then watch that company’s stock rise ten-fold. But guess what? Over time, good companies come out ahead and bad companies disappear. You don’t find them with intuition, you find them with good, unbiased research of basic information that anybody can use. That’s the point of my stock book.

I should say for the record that I too have at times felt frustrated by the willy-nillyness of the stock market. In the short term, there are no rules. There can’t be because there are too many variables manipulated by too many unpredictable and emotional human beings. I write about all of this in the book.

Yet, over time, good research pays off. You can monitor the results of my Dow portfolios here. They work over time. When you have a chance, you can read the book and create your own portfolio. You can succeed in the markets and it doesn’t take luck to do it. What it takes is hard research and the good companies you find at the end of that hard research.

From the book’s foreword:

You want companies like Wal-Mart and Anheuser-Busch working for your money. This book shows you how to find them. Its methods win in flat markets, rising markets, and falling markets because superior companies always come out on top.

Invest in them and you’ll come out on top, too.

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