Editorial: Tales of the bubble

Last week, we examined some proposals to improve the quality and integrity of financial advice available to the public. While it has been suggested that the investing public will pay for good advice, recent experience weighs heavily to the contrary.

The past decade’s flight to do-it-yourself investing proved (among other things) that the individual could be carried along in the current without much idea of where the stream was going. The bull market of the late 1990s, which saw day-traders grow rich no matter what they put their money into, reinforced the hazardous notion that we are all financial geniuses.

All-day news and financial-news television (whose enthusiasm and boosterism earned it the uncomplimentary nickname of “tout TV”) brought analysts and corporate executives into the living room, where promptly they became pitchmen for stock. Investors, or a lot of them, accepted that uncritically.

Most of all, there was the electric charge that buzzed around new issues. It was not a coincidence that the large investment houses hooked into initial offerings as principal moneymakers. Deregulation of brokerage commissions, which started in the United States in 1975, made financing deals the most important source of revenue for the large houses. When, in the mid-nineties, the initial offers started doubling or tripling on the first day of trading, the allocation of new paper became an important reward for good institutional customers. And it was about that time that retail investors began to complain that they were being shut out of lucrative new offers. Instead, it was the retail investor bidding up the price of new listings on their first day of trading. That was not intelligent investing: it was the same impulse that sells lottery tickets.

But investors were right about one thing: in that atmosphere, they quite reasonably looked for signs that new money would be piling in. Although they would have denied they were searching for a greater fool, it was precisely that hope that led them to watch for “buy” calls from star analysts with a perceived following, and it was precisely that practice that built the reputations of the Henry Blodgets, Jack Grubmans and Mary Meekers. Analysts’ usefulness — to both their employers and the retail investors that watched for their picks — came in their talent for trailing more buyers behind them.

Did investors really want solid advice? No doubt they would have said they did, but actions speak louder. Many investors just wanted a seat at the crap table next to the croupier.

As well, retail punters were dedicated followers of Internet services such as Silicon Investor and Raging Bull, where purely self-interested analysis was available from people with no qualifications in the industry on which they commented. The bulletin-board, chat-room, and discussion-group services on the Internet fulfilled that medium’s glowing promise of misinformation for all. Enter Rumour, painted full of tongues: and not a man of them brought other news than they had learn’d of him.

As Ottawa Citizen columnist John Robson correctly observed, “half an hour on the Internet doesn’t make you an expert. It makes you a crank. And the only subject that attracts more cranks than health is money.” (But all that didn’t matter; web posters weren’t using their real names, let alone any real facts, so it was all just good fun and ‘buyer beware’ as long as the market kept heading upward.)

With so much unsound information available for the cost of a cable TV subscription and an Internet dialup, it’s no surprise that there was no great demand for sound information at paying rates. After all, the psychology of a bull market is relentlessly and oppressively positive: only the good news will be spoken, and only the good news heard. Had real life been allowed to intrude, the party would have been over, so thought-policing became standard on the Internet just as cheerleading did on financial TV.

In much the same way, anyone drawing public attention to the emperor’s scanty new wardrobe would immediately be slandered on the Internet boards. (This newspaper, for example, is still waiting for a supposed $1-million cheque to arrive in the mail, the alleged gift of a grateful gold producer, who was trying to run down the price of Bre-X Minerals by planting patently untrue stories about salting.) It was a brave analyst indeed that dared to call down rain on any stock, but most of all on a wildly overvalued one.

Expecting buy-side and independent analysis to supplant the houses’ research may overestimate the investing public’s taste for the truth. But that does not diminish the need to speak it.

What people want and what they deserve are two different things, and if investment advisers are at all anxious to be thought of as professionals, they know the choice they must make. If they do not, they will so damage public confidence that they put themselves out of a job.