Thursday, June 28, 2007

Psst! Hot Stock Tip! This company is going to be average!

The last two days have been active on the NASDAQ for the old stomping grounds. Prior to the trading day yesterday a stock analyst upgraded the stock, and MLNM gained about 6% on the day with a trading volume significantly (but less than 2X) above average volume. Today, the company announced some positive results in front-line multiple myeloma treatment, and the stock again turned over 5M+ shares but just nudged up a bit.

What is more than a little funny about yesterday is what the analyst actually said: instead of 'underperforming' the market, he expected Millennium to "Mkt Perform" -- that's right, that it would be exactly middling, spectacularly average, impressively ordinary. Indeed, he put a target on the stock -- $10, or a bit less than what it was selling for that day. For that he was credited with sparking the spike.

What's even more striking is that the day before another investment house downgraded Millennium from 'Overweight' to 'Equal weight'. Each company picks its own jargon, but this is really agreeing -- they both predict Millennium to do as well as the market. Oy!

Far more likely a cause in the spike was leakage of the impending good myeloma news. I've never looked systematically, but good news in biotech seems to be preceded by trading spikes as much as it is followed by them. Periodically someone is nailed for it (and not just domestic design goddesses), but there is probably a lot of leakage that can never be pursued.

I'm sure there are a lot of smart people earning money as stock analysts who carefully consider all the facts and give a well-reasoned opinion free of bias, but they ain't easy to find. For a while I listened to the webcasts of Millennium conference calls, but after a while I realized that (a) no new information came out and (b) some of the questions were too dumb to listen to. Analysts would frequently ask questions whose answer restated what had just been presented, or would ask loaded questions which were completely at odds with the prior presentation. How the senior management answered some of those with a straight face is a testament to their discipline; I would have been lucky to get by with a slight grimace. Some analysts were clearly chummy with company X, and others with company Y, and little could change their minds.

If you look at the whole thing scientifically, the answer is pretty clear: listening to stock analysts is a terrible way to invest. If you want average returns, invest in index funds. If you want to soundly beat the averages, start looking for leprechauns -- their pots of gold are far more plentiful than functional stock picking schemes. Buy a copy of 'A Random Walk on Wall Street' and sleep easy at night. Yes, there are a few pickers who have done well, but they are so rare they are household names. Plus, there are other challenges: Warren Buffett has an impressive track record, but if he continues it until my retirement his financial longevity will not be the point of amazement.

Disclosure: somewhere in the bank lock box I have a few shares of Millennium left -- I think totaling to about the same as the blue book value on my 11-year old car (though perhaps closer to the eBay value of my used iPod). The fact they are in a bank protected them from the grand post layoff clean out.

1 comment:

km said...

This is a great post and very accurate. I like your comment regarding analysts.

I spent 15 years of my life on Wall Street and was quite successful. During my 15 years, I worked with some of the so- called "stock picking guru's" on the financial channels and I can tell you that they're not guru's. They are nice people, for the most part, that are great salespeople first. In fact, most analysts are great communicators. Did you ever watch an analyst speak on the financial news channels and conclude that person was a bad communicator. Let me answer for you, "No.". Are all smart people good communicators and are all so-called good stock pickers good communicators. No. The point that I am making is that they are part of the marketing machine on Wall Street.

Let me tell a quick story. At one of my first jobs on Wall Street, an analyst (this is at a major Wall Street firm) was pitching our group aggressively on one of his picks. After listening to the pitch for about 20 minutes, I asked him how much he bought?

Besides the fact that I almost got fired before he answered the question and besides the fact that he was stumbling over his words because he couldn't believe that I asked the question and besides the fact that it was politically incorrect to ask, he answered, "I don't really buy stocks."

Well, at least he told the truth. So the next time you hear a pitch from an analyst, ask yourself, "How much do you think he bought?"

And by the way, that was before the days of Regulation FD so most analysts also played in their stock picks