Among hedge-fund managers and trading desks around this country, there is massive contempt for the buying habits of the little guy, the retail investor. The professionals have this image of the do-it-yourself investors as mindless buyers of dips who never take anything off the table and don’t know jack about valuation or earnings or prospects. The professionals await the dip that can’t be bought, the one where the stay-at-home investors get buried alive when the dip doesn’t hold. When you get off the desk with these professionals, they speak of the great comeuppance and how sweet it will be when the pathetic masses finally get slaughtered because of their ridiculous optimism. They blame you for the overvalued market they must outperform. They long for the day when the individual investor’s blind belief in stocks gets replaced with the same natural cynicism that the pros have felt toward the markets for a decade now.
Forget about it. The pros are wrong. Not only are they wrong, but it is the foolish behavior of the professionals themselves that causes the dips, that brings on these once-a-year sales the public salivates over. Individual investors, who learned years ago not to pay retail in clothes and food and tools and housewares, know not to pay retail for stocks, too. At our trading turrets, we call it the Federated Effect, named after that chain of stores that seems to throw a once-a-year blow-out sale every single week. Individuals know to wait for sales, and it is the highly paid, sanctimonious pros who cause them.
Consider the sale the pros threw on April 14, a day that now looks suspiciously like the single best moment to buy stocks in this millennium to date. That was the day the nasdaq completed its worst week ever, with the indices declining 25 percent while individual stocks gave up 50 to 60 percent. We were told by the graybeards at the big firms that inflation, specifically a worse-than-expected consumer-price index, caused this sell-off and that it was basically “unbuyable” because of the havoc that inflation was going to wreak on equities. No professional strategists stepped up to the plate to tell the public to buy this dip. Not one of the dozen or so major firms said that maybe the problems were structural in nature, that someone big blew up or had to sell. It was the fundamentals that caused the downdraft, they said, and they used the sell-off to make still one more prediction that the public, the fools, would rush in where the graybeards fear to tread.
At the conclusion of that fateful day, I wrote a piece for TheStreet.com that suggested the real reason for the decline: “The last hour felt like someone or many people were going out of business. I think we will discover that somebody big blew up and that’s the selling we saw.” But the next day’s papers were filled with dire stories about how professionals felt stocks had become too dangerous to own in light of the new inflationary outlook. Inflation mattered again, and you’d better get out while you could.
The pools of money the professionals run are now too outsized for their own good. When they panic, we all get splashed, if not drenched, by their selling. They create their own personal crashes.
They were wrong.
We now know that the destruction of George Soros’s Quantum fund caused that vicious decline, as the ultimate in professional money managers decided to blow out all of his tech stocks, creating a fabulous opportunity to buy that only the unjaded public took advantage of. Quantum put on a magnificent two-day sale of such gems as Qualcomm, JDSU, and Veritas, stocks that simply wilted under the Soros sell pressure. Five billion dollars’ worth of markdowns translated into a magnificent buying opportunity. We know the public took advantage of it because the inflows to mutual funds that next week were staggering. The market has been off to the races ever since.
This Soros-created decline is just the latest in an incredible series of gaffes by the professionals that have allowed do-it-yourselfers to triumph over Those Who Should Know Better. In 1997, when the Asian conflagration scorched the emerging markets of Thailand, Singapore, Malaysia, and Hong Kong, our markets failed to ignite, despite the predictions of all the pros, and seemed asbestoslike in their health and durability. That is, until Barton Biggs came on CNBC and sprayed lighter fluid all over the place with his patented “Get out now!” alarm. (Keep that guy out of a crowded theater, will you?) The result: a 750-point swoon that was the last great opportunity to purchase the Dow below 7,000 (it’s now closer to 11,000). I remember standing the next morning on the steps of Federal Hall, near the New York Stock Exchange, being interviewed by Charles Gibson for Good Morning America. The speaker before me, Jim Grant, another “acknowledged pro,” had just stated that the United States’ stock market faced a catastrophe and that sales made at that morning’s prices would represent great trades for those who were wise enough to sell. I grabbed my cell phone during the commercial break and instructed my desk to buy everything it could, and then I called the wife and urged her immediately to make our uniform gifts to minors that morning rather than wait until the end of the year. When the camera swung to me, Gibson asked if it was the end of the world. I said I hoped not because I was putting every penny to work to take advantage of the professional-induced selling panic. I think Charlie might have thought I had lost my mind, but we made, over the next 24 hours, the most we have ever made in that short a period, and spent the rest of the year playing foosball and Ping-Pong in the office, sitting on the lead we owed to that sale the professionals threw for us.
In fact, I didn’t get another chance to buy the market that cheap until the bust-up of Long-Term Capital, the geniuses of Greenwich who had convinced everyone that they could make the most money with the least risk. Their King Midas-in-reverse act, when they ran out of credit, created still one more fantastic dip that the professionals, always in awe of John Meriwether and his band of merry mathematicians, refused to touch.
And earlier this year, the demise of Tiger, the giant hedge fund run by Julian Robertson, caused a fantastically buyable dip in the Dow’s Old Economy stocks. The amateurs lapped it up even as the professionals cowered in fear, the way they do whenever one of their own goes under.
Why do the professionals always panic? One reason may be their mistaken faith in valuation methodologies that always place one foot out the door whenever the going gets tough. Unlike the amateurs who genuinely believe in the long-term value of stocks, these professionals always talk about the equity markets as if they were chain letters, pyramid schemes, houses of cards. This lack of faith makes them vulnerable to any particular piece of data that seems to be out of character with the low-inflation, high-growth environment that has pretty much characterized this economy for the past ten years.
A second reason is that the pools of money the professionals run are now way too outsized for their own good or the good of their investors. When the pros panic, we all get splashed, if not drenched, by their selling. They create their own personal crashes.
Finally, the pros constantly misjudge the core competence of the retail investor. Faced with a plethora of stinko investments like gold or real estate or a low-interest-rate CD, indie investors will always park their money in various stock-market instruments, from high-growth to index funds. And they will continue to do so until they need the money back. That, and not an errant consumer-price-index number, a malignant purchasing manager’s report, or a bad quarterly earnings report from a famous tech company, will shake these optimistic investors’ faith in their beloved stocks.
Until then, the public will happily buy every dip the professionals give them until they take every last penny away from those who were supposed to know better.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had positions in JDS Uniphase, Qualcomm, and Veritas. 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 firstname.lastname@example.org .
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