I’m not just saying this because I’m an arrogant jerk, but I’m also good at picking stocks. Even when I’m at the pinnacle of my self-hatred, I still acknowledge that I have a talent for finding the right stocks at the right times. What do I know that the other guys don’t? I know how the market really works.
It’s rigged, right? Actually, no. Not as much as it used to be, anyway. Back when I was getting started, I was always jealous of the guys in the business who played golf. On the links is where the CEOs used to leak how the quarter was going, or selectively give a nod to suggestions that the quarter was better than expected.
Spitzer and Enron changed that. Aided by tough new laws involving fair disclosure, regulators have really started to prosecute those who leak not just takeover bait but simple insight to some investors and not all of them. Now everyone gets their information at the same time. That’s a huge playing-field leveler, and it makes the market more honest, because the richest managers know no more than anyone who can access company presentations on the Web. Sure, at any given minute, there will still be some ne’er-do-well funds—usually underperforming funds with desperate managers—who try to profit from dangerous manipulations, but in the end, the big boys run too much money for any of this mini-manipulation to matter much. Those giants have too much money at stake to risk losing it by cheating. This is a relative statement, of course, but today, the market is less crooked and more open than at any time I can remember.
How does the market really work? The truth is, it’s a big fashion show. People mess up because they focus only on the merchandise, the stocks, and not on the audience, the buyers—all the big funds that do most of the transactions on any given day. In the press and in most of the Wall Street research departments, everything is about the companies, their earnings, their products, sometimes their management. I spend plenty of time talking about all of that, too, but always within the context of what the big institutional investors want, what styles they seem to prefer this season. I know how the big institutional money managers think because I was one of them and because I have been predicting their behavior and buying stocks accordingly, for almost as long as I’ve been a professional. The truth is that the people who control most of the money that moves the market tend to think the same way. They were all trained at the same funds or investment banks, they all know each other, they all gobble up the same conventional wisdom, and they all buy the same stocks. The way the market really works is the way these big-time investors operate. Stocks don’t naturally gravitate to a special level where they become “properly valued.” They go where the managers of the institutional funds send them. The market is a plutocracy, not a democracy. The big institutional money managers are the market. Keeping track of their ever-changing tastes is the key to success.
You can see how I anticipate the big institutions’ moves in some of my better picks. I made a company called Allegheny Technologies my stock of the year in 2006 because the company looked like exactly what the big institutional investors wanted that season. Allegheny Tech makes specialty metals, mainly stainless steel but also titanium. Titanium mattered because it was in short supply and high demand—it’s needed to replace old airplane engines made out of heavier and less durable metals to control rising fuel costs. And I knew Allegheny was best of breed because I’d helped take it public at Goldman and remembered that it was the most technologically advanced titanium producer. Put these two facts together, and you’ve got a guaranteed soon-to-be hot stock—the No. 1 name in its field poised to capitalize on a burgeoning and easily understood trend. When a set of perfect conditions comes together like that, you don’t have to be a genius to imagine how the guys at the big funds will behave. They’ll buy a stock like Allegheny so that when their investors call, they can say, “I like titanium. And we have the best titanium. We have Allegheny Tech!” In this case, I was right. The funds didn’t stop buying—they haven’t stopped to this day. I also get plenty wrong. Alas, in this game you’re only as good as your last pick, and even though most of my new stocks of the year for 2007 have outperformed the averages, one of them, the New York Stock Exchange, has so far been a huge disappointment, and I am pretty sure if it stays that way, I’ll be the bum of the month come the end of the year. Bring me the head of Alfredo Garcia Cramer again.