June 3, 1998

The financial news media loves to create, what I call Wall Street prophets, gurus, and idols. It seems that these so-called prophets and gurus attract attention from the general public which the financial news media and Wall Street welcomes with open arms. And that's what it's all about, the financial news media wants to attract more viewers and readers and Wall Street wants to attract more customers, one way of doing it is to create some kind of idol that everyone will look up to.

The question you have to ask yourself is, "are these prophets, gurus, and idols true to their name?" When these people talk, should investors listen or should investors take what they say with a grain of salt? From what I have seen, you should take what they say with a grain of salt, they are wrong as much as they are right. To know which prophet or guru to listen to this time is impossible.

Business Week just recently had a story on a "prophet" of Wall Street (June 1, 1998, "The Prophet of Wall Street"). When I read the article, I couldn't believe that a person with such a small amount of experience was being called a prophet. And that someone with such a small amount of experience was "one of the most closely watched forecasters on the planet" (from the Business Week article).

The article starts out, "The Dow Jones industrial average was up 65 points and seemingly headed for another record close when Wall Street was convulsed by a rumor that Abby Joseph Cohen was about to alter her bullish stock market forecast. Actually, Cohen, the chief strategist for Goldman, Sachs & Co., was sequestered along with a few hundred other senior Goldman employees at a conference center an hour's drive from Manhattan. As Cohen listened to a speech by Goldman Chief Executive Jon S. Corzine, someone tapped her on the shoulder. 'There's an emergency,' the woman whispered. 'You must call the office.'"

The article continues, "The Dow had already surrendered 60 points of its gain by the time Cohen reached Steven M. Wagshal, who mans Goldman's research 'hotline' and serves as the firm's official conduit of stock market rumor. Wagshal quickly patched Cohen through to the intercom system that links Goldman offices throughout the world. From his seat on the trading desk in New York, Wagshal watched in awe as the sound of Cohen's voice brought the cavernous room to a standstill. As soon as it became clear that Cohen had not altered her views, hundreds of traders and brokers noisily hit the telephones as one. The market began levitating and ended the day up 35 points. Says Wagshal: 'It was as if the world were falling, and Abby came in and lifted it up again.'" Business Week goes on, "As America's favorite bull, she cannot turn negative now without disrupting the market, perhaps severely."

As I continued to read the article I made some mental notes: here was a person that BW was calling a prophet, and that this prophet's opinion could move mountains (so to speak). To make a claim like this BW would have to back the claim up with one key factor: experience, Cohen would need to be extremely experience with all aspects of financial markets. That is, she would need time in the business, she would of had to experienced several economic market cycles, she would of had to experienced several bull and bear stock markets, and she would of had to of shown that she could reasonably predict when to get out of the market and then, just as important, to know when to get back into the market. To find out if BW would back up their claim about this so-call prophet of Wall Street, I read on.

I learned that Cohen started with T. Rowe Price, a mutual fund company in 1976. This surprised me, some quick math and thus far Cohen had about 22 years of experience at most. Yes, 22 years is a lot for an average Joe, but for a prophet of Wall Street, I personally, would want to see more experience. Right off the top of my head, that's only three recessions (and two of those were less than 1 year apart) and no bull to bear transitions at all accept the one day correction in October of 1987 when the market fell by greater than 20% (Technically a bear market is a correction of at least 20%, it doesn't matter if the correction lasted several months or only a day like in October of 1987).

As I read on my next question would be, did Cohen predict any of these? Did she predict the two recessions in the early 1980s (Technically a recession is two consecutive negative quarters of GDP growth, in the early 1980s, two recessions occurred, one almost right after the other.)? Did she predict the recession in the early 1990s? Did she predict the 1987 one-day bear market within a reasonable amount of time and then inform investors to get back in, again, in a reasonable amount of time? Did she predict the market correction in 1990, what about the correction when the Fed raised interest rates in February of 1994 and in march of 1997, what about the correction in October of 1997? Did she predict any of these?

After doing seven years at T. Rowe Price where she was "... schooled in economic forecasting but also helped build econometric models to help securities analysts forecast demand in the semiconductor and other high-tech industries." (BW article), Cohen went to work for Drexel Burnham Lambert in 1983 (you may not of heard of this company, they went out of business, some of their high ranking employees were involved in the junk bond and insider trading scandal of the late 1980s). So far, since Cohen began her career in 1976, she had been through one major financial event, that being the two recessions in the early 1980s. Did she predict them. No, but at the time she had less than five years of experience, and it most likely, wasn't even her job to make predictions.

From 1983 to 1990, Cohen worked for Drexel. During that period of time another major financial event would occur, the stock market crash of October 1987. About that event BW says, "Cohen and Richard Hoey, Drexel's chief economist, had been consistently bullish throughout the stock market's ascent. But in August, they and the other members of Drexel's investment policy committee began debating whether stocks were overvalued. The consensus view, which Cohen shared, was that the market was indeed a bit frothy but that because there was no threat of recession, any correction would be minor and short-lived. They got the short-lived part right. On Oct. 19, the Dow fell by 508 points, or 22.6%, the biggest one day drop ever." "But if Cohen failed to alert her clients to the downturn, she made it up to them on the upswing. By her analysis, stocks now were 15% undervalued...Early the next morning, Drexel advised its clients to use all available cash to buy stocks and bonds in equal amounts."

One thing you need to know about investing in the stock market is timing is everything. There is no way that Cohen "made up for it" (it being not calling the 22.6% downturn). If you were an investor in 1987 you most likely would of had 80-90% of your money in stocks and bonds or 10-20% in cash. When Drexel and Cohen said to take all available cash and buy stocks and bonds you would not of had much available cash to buy more stocks and bonds (in equal amounts as Drexel recommended) and thus make up for the 22% loss your stock portfolio just suffered. You were not about to make up for that heavy of a loss in a few short months. Another problem I have with this statement is that at the time of the 1987 crash Cohen had 11 years of experience. If I was a customer of hers back then I can't imagine losing 22% in the stock market and then turning right around on the word of someone that inexperienced and buying more stocks and bonds.

In 1990 Drexel went out of business and Cohen did a short time (a few months) with Barclays de Zoete Wedd, before she moved on to Goldman Sachs in the fall of 1990. During 1990 another major financial event occurred in August, a market correction of 14% (soon to be followed by a recession in the last quarter of 1990 and the first quarter of 1991). BW states, "When Cohen joined Goldman in October [1990] both she and Einhorn were bearish. But the Dow bottomed out during Cohen's first week on the job and had climbed 13% by the time Goldman moved into the bull camp in early February [note: it is usually several months if not years after a recession occurs that the government or anybody else knows it even happened, GDP numbers are constantly revised month after month and are not set in stone for several quarters]. Einhjorn and Cohen recall that they were in agreement on the shift. But, according to one well-placed Goldman source, Cohen went along reluctantly: 'Abby was still so bearish she couldn't see straight.'"

It seems that from the time Cohen entered the work force in 1976 to February of 1991 the only correct call that she made was a buy signal after the 22.6% drop in October 1987. During that time there were three recessions, one bear market, and one market correction of greater than -14%.

In a nutshell, Cohen's only real claim to fame is the fact that she has basically been bullish since early 1991 to the present. I don't think that simply being a bull since 1991 makes you a stock market prophet or guru. BW even said, "To secure her reputation as Wall Street's finest prognosticator, Cohen is going to have to call the end of the bull market that has made her famous." This is my point, Cohen has never went through a "cycle" where she sent out a sell signal before a market downturn and then sent out a buy signal before the market started to recover significantly. This fact should have occurred at least a couple of times (Cohen should have went through a couple of "cycles".) before she became this so-called prophet of Wall Street. Before she was inducted into Wall Street Week's (PBS) Hall of Fame. Before she gained the ability to severely disrupt the market if she turned bearish.

I analyzed mutual funds in a story If You Own Stock Mutual Funds Read This and I analyzed brokers and analysts in a story The Truth About Broker Recommendations and Consensus Earnings Estimates. In both these cases my conclusion was the same as with this story: Wall Street has this pseudo image of itself. When it comes to the mutual fund and pension fund managers that image being they are expertly skilled in setting up a portfolio of stocks. When it comes to the brokers and analysts that image being they are expertly skilled in individual stock selection and earnings forecasts. When it comes to the prophets and gurus that image being they are expertly skilled in predicting recessions, inflation, bear and bull markets, and market corrections. However, in actuality, when you will put all these individuals to the test, 80% of them do no better than non-professional individual investors, investment clubs, and indexes.

One thing that I'm not doing with this story is challenging the character of Abby Joseph Cohen. When I told a friend of mine about the story in BW about Cohen and I remarked to him about the fact that I thought Wall Street and the financial news just made these people up to draw more business to themselves, he remarked, "What's wrong with having roll models?" There is absolutely nothing wrong with having Abby Joseph Cohen as a roll model, but I don't think that's what they are doing with Cohen. What they are doing with Cohen is trying to make her look like she is some sort or genius, and I feel this is not in the best interest to small individual stock investors.

What I am trying to do with this story is to give investors a different way to look at what comes out of Wall Street. Many people don't like to make investment decisions on their own, they want somebody else to do, and that's fine. Just realize that the people on Wall Street don't always have your best interests at hand. Wall Street is very good at hiding their failures. Have you ever notice how the financial news always talks about how investors got burned by such and such a company. The vast majority of times it was not "investors" that got burned, but institutional investors that got burned. On May 22, a news story came out, "Investors Burned, Manugistics (MANU) Slides 40% Because of Threat from New Rivals." This is one way Wall Street hides its own mistakes with the illusive term "investors." Investors didn't get burned as much as the institutional investors got burned, institutional investors owned 57% of Manugistics' stock. Just today Vesta Ins. Group lost 47% of its value because of an investigation about accounting irregularities. Was it the average investor that got burned on this which is what the financial news makes it look like? No, it was not the average investor, but the institutional investor, 91% of Vesta's stock is owned by institutions.

It's one thing when the general news media wants to gain your attention so they sensationalize the news to attract you. You watch it, and you buy the advertisers products and everybody is happy. Just remember when it comes to the financial news and Wall Street's BS you have a lot more to lose. The first of the baby boomers went to work in 1963 and have been paying into the Social Security system for 35 years. Now the government tells them that they might not get all the benefits they were promised. Don't make the same mistake with Wall Street that you did with the government. Unlike Social Security taxes, you have a choice on what to do with your IRA, 401k, and 403B money. If you do give it to Wall Street, demand performance, performance that at least matches the return of the S&P 500 (or a corresponding index). Don't fall for their lame excuses on why their portfolio, asset allocation model, or mutual fund isn't performing well.

ADDENDUM (July 3, 2001)

Yesterday on FOX's Your World with Neil Cavuto, Cavuto interviewed Cohen, Cohen basically said she was bullish and that they (Goldman) told you in March 2000 to reduce your stock exposure and that they told you to increase your stock exposure in March of 2001. If someone had reduce their stock exposure in tech by a "significant" amount in March of 2000 and stayed out of tech for the next twelve months, they would have been very happy with their decision. However, is that what Cohen said: reduce your tech exposure by a significant amount in March of 2000 and then increase your tech exposure by a significant amount in March of 2001?

Judge for yourself:

News Brief for March 7, 2001:

Here's a News Brief of mine from last March:

On March 28th (remember this is last year), Goldman Sachs' strategist Cohen cut her stock allocation model. What's that mean? It means whatever the financial news media wants it to mean. If the news media wants to make Cohen look good, it won't matter what the market does in the next six months, if the market is flat or down, the news media will simply tell you Cohen warned you six months ago by cutting her stock allocation, if on the other hand, the market is up, the news media will simply tell you Cohen was still a bull because she still had a 65% stock allocation. My point is the news media has vested interests and what's in their best interest may not be what's best for you.

Just to show you how predictable the financial news media is, on April 14, 2000, NASDAQ was down over 1,000 points for the week, Maria Bartiromo on CNBC said, "Cohen, was right on." Here's what Cohen said on March 28:

"NEW YORK, March 28 (Reuters) - Stock market bulls paused on Tuesday after news that a closely watched Wall Street guru had reduced the equity exposure in her model portfolio to 65 percent from 70 percent... Cohen also forecast the Standard & Poor's 500 to be at 1,625 one year from now, a new outlook."

In my opinion, being "right on" would have been to of reduced your equity position at the very least to less than 25%. But, to simply reduce your position by 5% means nothing and in no way suggests you're "right on." Also, when Reuters put the story out on Cohen's allocation change, the S&P 500 was at 1518, now it's 1357 (April 14, 2000), slightly down from Cohen's prediction of 1,625. I realize it has not been a year yet, but my point is for Cohen to get such praise from Bartiromo and since Cohen is such a guru, I think Cohen should have said that the S&P would fall a couple hundred points in the next two weeks before it moved up to 1,625. Now if Cohen had reduced her stock allocation to 25% and said the S&P would be down 200 points in the next two weeks, that's a different story, and all the praise the financial news wanted to give Cohen would be well deserved. But, she didn't do that. She simply reduced her stock allocation by 5% and made a year from now call of 1,625 for the S&P 500. Reducing your stock allocation by only 5% would not have saved you much over the last two weeks and as far as Cohen's prediction of 1,625 for the S&P 500 in a year, we still have twelve months to go to find out how accurate Cohen's prediction is going to be.

Well, it's March of 2001 and it looks like Cohen is off by almost 400 points in regard to her prediction of the S&P 500 Index. Guru? Not!

More on the subject of gurus. Last August 19th, Ralph Acampora was on Money Week (CNN) and he said, "Next June [01] NASDAQ 6,000." Well if NASDAQ triples in the next couple of months, Acampora will be "right on."

(Insert: Well, it's June of 2001 and NASDAQ is in the low 2,000s. Acampora was 4,000 points off.)

What's my beef with gurus: they make $millions off individual investors and by their track records they clearly don't deserve it.

ADDENDUM (October 9, 2002)

Here's part of a CNN/Money story titled, "Where have all the gurus gone?"

"Stock strategists like Abby Joseph Cohen don't get much respect these days. October 9, 2002: 6:00 PM EDT By Justin Lahart, CNN/Money Staff Writer

NEW YORK (CNN/Money) - There was a time when Abby Joseph Cohen could move markets. Investors could be deep in the grips of fear, but one reassuring word from the Goldman Sachs market strategist to her firm's sales force and, like magic, stocks would lift.

After three years of bullish calls in a bear market, those days are gone. Wednesday, Cohen cut her 12 to 18 month target on the S&P 500 to 1,150 from 1,300 and said that she still thinks stocks are undervalued. Now the market needs to rise only a scant 47 percent to hit her target, rather than the 67 percent implied by the old mark.

Wall Street traders weren't exactly hanging on Cohen's every word."

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