Four years ago, when I departed this column for cyber pastures, the mutual funds of America were ascendant. The kingpins at Fidelity and Janus and Alliance served as agents of triage, deciding which industries would grow and which would die. They liked consistent growth, no surprises, and management that knew the game: underpromise and overdeliver. They built portfolios of health care, pharmaceuticals, consumer staples, high-growth retail, and, of course, technology. They bought giant blocks of all these stocks in their daily battles to stay with the S&P 500, the benchmark their bosses told them to beat or risk losing their assets or their jobs. As long as the companies “beat expectations” – even though they’d put out intentionally lowball numbers to begin with – they all made out like bandits.
My, how things have changed. The kingpins are no longer at the mutual funds. Sure, those funds still get billions over the transom, but they aren’t the marginal buyers setting the prices for securities anymore. The kingpins are ourselves. Individuals – trading through online brokers at a fraction of what they used to pay – now determine which companies grow to the sky and which ones are worthless and despised and sold with abandon. The individual Do-It-Yourselfer’s benchmark is no longer the S&P, that arcane collection of bowwows crafted by the green eyeshades over at McGraw-Hill. Indie investors don’t care for companies with consistent but staid growth. They like their growth to be organic and viral, and the new performance standard is Yahoo! or JDSUniphase or Brocade, to name three companies that barely existed the last time I was in these pages but are now valued in the multiple billions. The individual doesn’t want to make 8 percent per year, the goal when I sold stocks at Goldman Sachs in the eighties, or 20 percent, as has been the case since I started my hedge fund a dozen years ago, but 1,000 percent, because that’s what you would have made if you just owned Cisco or Qualcomm or Intel, and everybody seems to own those kinds of stocks.
In the “old” days, the public wanted to entrust its money to the sage graybeards who toiled studiously over the numbers and decided that Procter & Gamble might be good to own for the next ten years. Now people want to be … me! They want to swing back and forth on stocks, trade for ten points a day, and outdraw the hedge funds at their own game. They want to be swashbuckling masters of their own trading universe.
Who can blame them? Those who “believe” have done so much better than those who have doubts or are cautious or express the need for a rigorous model of earnings before plunging in. The notions of dear and cheap now yield the wrong conclusions. Only the most expensive stocks go up, and the cheapest wallow in the portfolios of the dreaded value managers who seem defrocked by the whole Net experience. Only the most reckless in their pursuit of growth at any price boast phenomenal returns. Prudence and discipline have become the two most dangerous words in the financial lexicon.
And I love it that way. It strips the whole process of capital formation to its most naked and high-speed essence, giving market capitalizations of billions of dollars not to the most conservative and buttoned-up companies – the ones that worry about missing earnings by a milli-cent – but to those that are pursuing massive growth and dominance. Only a people’s army of individual investors would allow Jeff Bezos to spend billions of dollars developing a worldwide department store. Institutions would never be so generous, or so patient. Only individuals would see the long-term potential for wireless or the Net. The institutions would be too worried it might not come through in the next quarter and could blow them out of the Morningstar rankings. Their cautious and narrow approach put them in “predictable” growth stocks, like Coke and Philip Morris, which turned out to be anything but.
Sure, the DIYers get carried away. The desire to find a penny stock that can go to $80 because Cisco once traded at 6 cents blinds them. (It never really traded at 6 cents; that was split-adjusted. It came public at $18.) Often, the need to find the next Microsoft has people cashiering their Microsoft for something on the come that might never deliver as much as Messrs. Gates and Ballmer have put on the table. Nevertheless, the excesses have been washed away by the successes.
The Old Guard guys are aghast at the changes. They curse the individual as they stare at their screens jam-packed with the Gillettes and the Dials and the Bristol-Myerses, the stocks that now go nowhere. They can’t believe they have to sell their Coke or their Pepsi for Extreme Networks or DoubleClick. Who can value those contraptions?
But as a paid-up minister of the church of what’s happening now, I couldn’t be happier. I never thought this business had much rigor to it. Strip away all of the price-to-book and price-to-earnings and return-on-investment mumbo jumbo, and what you get is supply and demand. Right now there aren’t enough tech stocks, despite the phenomenal speed with which the Goldmans and Morgans create them, and there are too many stocks that represent claims on the old economy. Until there are too many techs, we will keep creating overnight fortunes for all of those swift enough to get in (and maybe get out).
I relish the individual’s ascendancy and enjoy the competition and the camaraderie of a stock-crazed public. I’ve been crazy about the stock market since second grade! In fact, one of the reasons I came back to New York is that this trend of individual over institution is still in its infancy. I fully expect more of you will be reading this column with each passing milestone in the market. Sure, we will still have our cultural and political and sports heroes. But how much money have they put in your pockets? I’ll take Cisco’s John Chambers over New York’s Rudy Giuliani any day. My daily sport has become your avocation, and that makes my day.
Can it come to an end? Will there come a dip that can’t be bought? Will there be a moment when the amateurs get their comeuppance? Sure. But we’ve heard that siren for a dozen years. My goal is not to pass judgment on the wacky valuations and strange price swings; it’s to generate gains and minimize losses. In this column, I will try to make sense of my day job so you can have a more visceral and, I hope, more profitable time enjoying our new American pastime.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had positions in Brocade, Cisco, Goldman Sachs, Intel, JDS Uniphase, Microsoft, Procter & Gamble, Qualcomm, and Yahoo! His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer’s writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites comments at E-mail: firstname.lastname@example.org.
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