FULL OF BULL

• Ranked in top 100 overall Amazon book sales mid-March 2008
• Ranked #1 Stocks/Investing Amazon book sales mid-March 2008
• In 3rd printing USA
• India edition
• German Translation Borsenmedien AG, mid-2008
• Rights to China

As a retired securities-industry insider, I candidly debunk conventional Wall Street “wisdom” in this book. Individuals need objective, focused guidance. And they won't get it from Wall Street! I urge individuals to steer clear of expensive brokerage-promoted trading strategies and to concentrate instead on making sound, sensible investments. Wall Street discourages real investing-it's trading and transaction oriented. Brokerage recommendations can often be misleading or even counterproductive. Professional investors know better than to take the Street literally; individuals should apply the same approach. This book explains how to avoid Street pitfalls by identifying worthless “research”; how to read between the lines of stock-market commentary; critically evaluate declarations by corporate managements; and make sense out of overheated media reports. Full of Bull arms its readers with a wealth of insight into the ambiguous and convoluted ways of the Street, so they can maneuver around these influences and make more profitable long-term investment decisions.

I spent 32 years on Wall Street as a senior securities analyst. Having a Chartered Financial Analyst (CFA) designation, I was ranked for 19 years as one of the top experts in my sector on the Institutional Investor All-American research team and am enshrined in The Wall Street Journal's Analysts Hall of Fame. After I left the business a few years ago, conversations with friends and associates awakened me to the fact that numerous seemingly sophisticated individuals constantly struggle to generate decent returns in the stock market. Why? Because they simply have no clue as to how the Street actually operates. Despite being savvy folks on their own professional turf, they are babes in the woods when pitted against Lower Manhattan.

Astonishing though it may seem, investment counsel from brokerage firms can frequently be inaccurate and biased. The blame primarily lies with securities analysts. Yet nearly all “how-to” books on investing are produced by outsiders: TV personalities, financial journalists, university professors, newsletter writers and-in a few cases-money managers. Such authors are virtually never brokerage-firm investment analysts. Consequently, they cannot and do not decipher and expose the puzzling, deceptive, conflicted culture of the Street. It's not their forte. Because I was a leading Wall Street analyst, I am uniquely equipped to unveil the embarrassing industry secrets that render the market so perilous and frustrating for individual investors. I have been there and witnessed what transpires. And I “tell it like it is.”

Full of Bull is intended to convert serious individual investors into informed professionals. Thoughtful readers will master the art of placing Wall Street research into its proper perspective. The material that securities analysts grind out can be extremely valuable to those who know how to interpret it. Analysts, intimately familiar with both the “big picture” and the obscure idiosyncrasies of specific companies and entire industrial sectors, often provide constructive commentary in response to changing trends and breaking news; they also publish helpful earnings estimates. But there are fatal flaws in the system. For example, security analysts are notoriously bad at picking stocks! And brokerage emphasis-lists can lead a novice totally astray. Buy? Outperform? Hold? What do these seemingly transparent terms really mean to the cognoscenti? Not what you may think. Those and other traps must be taken into account if an individual is to master the discipline of investing. Astute students of this book will obtain a major leg up on cutting through the clutter and acquiring the tools required to assess companies, appraise managements, select stocks, discern Street subtleties, and ultimately profit by becoming their own competent, confident investment analyst.

Preface

This book is for the individual investor. It is all about investing, not trading, because investing is the way to make money in the stock market. Transaction-oriented Wall Street, unfortunately, tends to discourage and even hinder proper investing. Brokerage advice can be misleading, even contradictory. Professional insiders know better than to take the Street literally. You need to take the same approach. Do what Wall Street does, not what it says. This book will show you how to avoid Street pitfalls, circumvent inappropriate research guidance, correctly interpret Wall Street commentary and opinions, properly assess statements by corporate executives, and put news media reports in their proper context. It will provide you with an understanding of the confusing and conflicted ways of Wall Street, so you can maneuver around these influences and make more profitable long-term investment decisions.

The purpose of this book is to expose the puzzling, deceptive, conflicted behavior of Wall Street that so disadvantages individual investors, tripping them up in their attempts to invest properly and rationally. The output from securities analysts is highly useful as background research. Analysts are steeped in company and industry expertise, provide helpful commentary in reaction to events and news, and publish handy earnings estimates. But an investor needs to know what to discount and how to put Street research in perspective how to separate the wheat from the chaff. An individual investor must grasp how the system works and be able to factor this aspect into his or her investment approach. Once armed with an insider's understanding of all the Street's subtleties, you can be your own investment analyst. My strategies will equip you to evaluate companies, select stocks, and take advantage of your position, free from the many constraints that inhibit professionals.

Full of Bull, excerpts from chapter 1

Wall Street Analysts Are Bad at Stock Picking

It's a shocking truth, but the way the system is oriented, stock picking is not the analyst's job. Until recently, brokerage firms did not even track the accuracy of their analyst opinions. The skill was neglected for a long time. It was just not an important part of the analyst job description. Wall Street analysts are supposed to pursue information about the companies and industries they cover, evaluate and gain insight on the future prospect of those companies, assess their investment value, and form opinions on the outlook for their stocks. We are required to assign investment ratings such as “Buy” or “Sell” to indicate a net overall evaluation. And that's where the real issues start to surface. Professional qualifications, incentive compensation, and the main audience—institutional investors—do not stress this function of stock picking at all. An Institutional Investor magazine survey in the fall of 2006 asked the buyside institutions—mutual funds, banks, pension funds, and hedge funds that buy and sell stocks through the brokerage firms—to indicate the most important attributes they sought in sellside (brokerage) Street analysts. Of 12 factors ranked in order of priority, stock selection placed 11th. Obviously, this skill is not an analyst job function required by their foremost audience. As a result, stock picking is neglected.

The Entire Stock Market Is Biased in Favor of Buy Ratings

Think of Wall Street as if it were the auto industry. Automobile companies make cars and trucks. Through their dealers, they sell these products aggressively. Given their vested interest, auto dealers recommend “buy.” You've never heard them tell consumers to “sell.” An article by Clifford S. Asness in the Financial Analyst Journal makes this comparison. He accurately states that, “A large part of Wall Street's business is selling new and used stocks and bonds, which strangely they do make recommendations about.” Of course, the Street rarely espouses bearish views on the very products it wants to sell to clients.

Full of Bull, excerpts from chapter 2

Institutional Investor Poll Rankings Warp Research

The stature, influence, impact, reputation, and compensation of Wall Street analysts are heavily determined by their annual ranking on the Institutional Investor magazine All-Star Team poll results each October. Analysts are compelled to amass I.I. votes during the spring each year when the poll is being conducted among the client base of institutional investors. Institutional Investor votes and annual poll position are a primary analyst aim, supplanting objective, quality research, investor service, stock picking, and most other research goals. The power and influence of Institutional Investor rankings transcends virtually all other research objectives. The compensation for analysts landing in the top three positions in their category is essentially akin to professional sports all-stars. Year-end evaluation is skewed to this measure. Gaining a high Institutional Investor standing is a primary goal for analysts, as opposed to it being a byproduct indicator. It corrupts research, taints the process, and skews analyst efforts, as evidenced by the superstar analysts and egomaniac attitudes which manifest in the sorry '90s Bubble Era.

Executives Rarely Think Their Company's Stock Price Is Excessive

Corporate executives corrupt research analyst opinions, exerting extremely heavy coercion on analysts. A negative opinion creates an adverse reaction within the corporate ranks and the natural tendency is to retaliate. Analysts are punished. Our access to executives becomes limited. Phone calls are not returned, or are relegated to a low-level investor relations person. A bearish analyst is shunned when requesting a meeting, a form of being cut off. In conversations with institutional investors, CEOs lambaste analysts, disparaging them in order to discredit their unfavorable stock opinion. The behavior started in earnest during the 1990s euphoria. Executive efforts to drive their stock prices ever higher, like running up a one-sided football score, pushed analyst relations to the limit. Executives not only dangled investment banking business as a carrot for bullish investment ratings, they also used a stick to discourage negative opinions. Any stock rating other than complete exultation ruptured rapport with management, and the cold shoulder treatment ensued, topped off by bad-mouthing. Another subtle penalty meted out by executives for any analyst recommendation lacking total elation is relegation to the end of the line in the Q&A batting order on conference calls. Analysts always want to be early, if not first, to posture their clout to others listening in on the call.

Full of Bull, excerpts from chapter 3

Strategies in Quest of the Ideal Investment

Whenever I mention my professional background to people for the first time, they almost always react by asking me for investment advice. The expectation is that, as an insider, I can relate a nostrum for their haphazard investment endeavors that will put them on a sure track to stock market riches. After trying to change the subject, my normal response is to first inquire as to their goals, requirements, and financial situation. And the predictable reply I usually hear goes something like, “Well, my broker has put me in a bunch of stocks and mutual funds, and I have lost money in....” Individual investors sure need help, and it is not coming from Wall Street. Casual investors seem to believe that what they obtain from their brokers or Wall Street is reasonable investment advice–a big mistake. And they have no clue what to do on their own. This chapter lays out investment strategies and guidance so that you can do it yourself, which combined with an understanding of how the Street operates, should provide individuals with the tools to make smarter investment decisions.

Hold Only a Modest Number of Stocks and Choose Familiar Companies

I suggest owning no more than five or ten different stocks. Too many breeds ignorance. A casual friend sitting next to me at a black tie dinner who fancied himself an avid investor boasted that he held 300 different equities! After gagging on my salmon, I inquired if he was a portfolio manager of the Magellan Fund, which probably doesn't hold anywhere near as many positions. My argument against broad diversification is that an array of so-called alternative investments, like gold, commodities, and emerging market stocks, offer little protection in a falling market. World financial markets are so interlinked now that diversification isn't what it used to be. On the day of the more than 400-point market drop in February 2007, the China and European markets also plummeted, as did corporate bond prices, oil, and even gold.

Full of Bull, excerpts from chapter 4

Specialists Do It Better

The best companies have a specific forte and a narrow market concentration. In seeking investment candidates, look for companies that create their market, are there first, have a leading edge, and have an entrenched position. If the company is the second or third entrant in the market, it makes me cautious unless it is the leader of a specific narrow segment. The product or service must be differentiated. The company should be focused on a select, definable niche. Uniqueness may be in the customer base, selling approach, manufacturing, timing to market, or any other aspect. But there needs to be some kind of specialization story.

A Dramatic Acquisition During Troubled Times Is a Diversionary Tactic

Sometimes executives, realizing that the company is in trouble, lethargic, losing market share, mature, growth diminished, and earnings outlook murky, embark on a desperate path. They attempt an inappropriate leapfrog�a dramatic, major acquisition to mask the condition. This is a sure warning. Companies running out of gas, realizing it will be impossible to maintain the expected expansion and profitability that underpins the current stock price, have a tendency to go a bridge too far. The purpose of a monster acquisition under these circumstances is to muddy the water, tossing financials and operating income statements into complexity, and obscuring current operating numbers. It sets up a situation where executives conjure up a strategic story for the future. There is the promise of enhanced results stemming from the stunning deal. Profit improvement via synergism and duplicate cost elimination are always a year or more away, but investors are told to be patient. By making a titanic, splashy merger, executives can forestall the need for immediate earnings, covering up an imminent earnings shortfall. Such a measure is overreaching. It's a disguise.

Be Wary of Stock Buybacks and Dilutive Stock Options

Stock repurchase plans, when a company buys back its shares in the open market, are a patently pathetic action to artificially boost earnings and the stock price. Executives rarely announce such deals when business is ripping, the outlook is brilliant, and the stock is running. Buybacks usually occur when profits have stalled or the stock price has languished. This type of financial maneuvering is no substitute for growth, market share, and the more real catalysts to propel a stock. These days companies are even borrowing, issuing debt, and leveraging the balance sheet to repurchase stock. It is shortsighted, and it makes me suspect. Home Depot, its business affected by the nose dive in the housing market, is a case in point. It issued debt and launched a whopping repurchase of 25% of its shares in June 2007. Wal-Mart, its stock price having flat-lined for about a year, commenced a $15 billion buyback at the same time. Be cautious when companies are borrowing, selling assets, and buying back their shares. It only works for a little while.

Full of Bull, excerpts from chapter 5

Executive Traits Are a Revealing Investment Gauge

A critical part of the investment appraisal and company evaluation process is gauging management effectiveness, quality, character, and values. Surprisingly, this essential aspect is often disregarded by the Street, unconcerned with character differences among the companies it covers. In crucial moments when events panic investors and stocks nose dive, executives are usually temporarily incommunicado. The ultimate basis of a judgment call in those circumstances is whether management can be trusted. It also holds true over the longterm. Who would you rather invest in, trustworthy or cagey executives? You need to get a handle on executive values in companies where you have an investment.

The Classic Operator, Realist, and No-Nonsense Driver

This is another favorable executive style. These are typically chief operating officers. Sometimes they are chairman who succeed founders but still manage their company as operators rather than as magnetic, imaginative leaders. They are tough, organized, detailed, quick studies, decision makers, serious, hard-working, and unafraid to confront any senior executive. Steve Ballmer of Microsoft, and in the past Lou Gerstner of IBM, Ray Lane of Oracle, and Josh Westin of Automatic Data Processing are cases in point that I am familiar with. When Josh was head of ADP, he ran a tight ship. I remember when I was meeting with other executives at the headquarters, he requested to see me for five minutes. As I marched into his office, he stated his question would take one minute, that I'd have two minutes to respond, leaving two minutes for me to have one counter question and a reply. As I exited, a glimpse at my watch indicated I'd been there for exactly five minutes. Josh and his executives had computer mainframe print-out paper sliced into smaller pieces and stapled as scratch pads, and would write responses in long hand directly onto incoming letters and memos and send them back to save time and paper. That's how he ran the business.

Candor, Access

Executives gain credibility by being forthright, freely discussing negative cross currents and challenges. Access is critical, management must be open, available, and responsive to Wall Street and investors as opposed to being evasive or secretive.

Humble, Genuine

Company leaders should not be arrogant, no attitude or egos, minimal hype, and modest PR baloney. Firms in the Midwest, for example, seem to be more genuine. Executives should willingly admit mistakes and be willing to alter the course. No one's perfect or invincible.

Dictator Surrounded by Yes-Men

CEOs or chairmen who are tyrannical dictators, sticking their noses in every detail, encircled by weak, wimpy yes-men, are likely to hit a brick wall. They can't be perfect, know everything, and always make correct decisions. They chase away real talent and effective leaders. The company outgrows them. Overly domineering autocrats create a vacuum in the management ranks.

Hype, Marketing, All Show

I am cautious when I see executives prominently featured in their own company advertising campaigns. Full-page ads and splashy airport billboards bother me. EDS ran a massive promotion and Super Bowl commercials, justifying the blitz as “air cover for the sales force.” That chairman was later replaced when things swooned. Guess the aerial attack wasn't enough. Carly Fiorina featured herself in Hewlett-Packard ads and was later dismissed by the board. Beware of over-the-top hype and executive-centered publicity.

Afterword

Overhaul your approach to investing. Invest the right way. Revamp your practices. Realign your investing strategies. By digesting the observations and exhortations in this book, conscientious investors will be able to understand how Wall Street really operates, how it plays the game, and how they can improve their investment performance. Separate babble from substance, regardless of whether the source of that blather is Wall Street, the media, or companies. Don't rely on the Street. Warren Buffet's attitude is, “Never ask the barber if you need a haircut.” When you ask a brokerage which stock to buy, the firm invariably advocates what it wants to sell, not what might be the best investment for you.

Exploit Your Status as an Individual Investor

Conduct your own research. Observe. Read. Listen. Overhear. Ponder. Anticipate. Predict. Analyze. Question. Judge. Be skeptical. When evaluating companies as potential investments, seek out specialty firms - they do it better than generalists. The business should be relatively simple to understand. Financial strength is paramount. Assess the value of its assets. The five- or ten-year earnings record is important. But nothing is perfect. Some variation in earnings performance is natural and inevitable. Assessing corporate management requires scrutinizing quality, character, values, and attitude. An important trait in a company's executives is humility. Steer clear of arrogant executives. Be wary of spin and self-promotion. Ray DeVoe, the market observer, contends “Good judgment comes from experience, and experience comes from bad judgment. But bad judgment is just a polite term for stupidity.” I hope this book helps you avoid the latter.