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Analysts Miss Titanic Secular Shifts

This is another consequence of a short-term viewpoint and the herd instinct. Broad industry themes last a while. Major movements like a new technology, a different manufacturing process, or consumer habits that are catalysts for a sweeping industry move are readily identified by the Street once in place and obvious. The trend is underscored as the key underpinning of ongoing recommendations. The problem is that Wall Street always espouses the view that this overwhelming industry effect will endure for the foreseeable future. Inevitably, a critical turning point is eventually reached when the trend begins to subside. But it’s subtle. And because analysts are momentum oriented, they rarely see the shift until it’s way late. They are too narrowly concentrated on details and do not heed the bigger picture. Analysts are so consumed with marketing, telephone calls, meetings, conference calls, publishing short blurbs, traveling, reacting, and scrambling that there is no time for studied, overall macro-assessment. They may be good at evaluating the trees, but they fail to have enough vision to see the forest.

Analysts rarely take seriously the emerging companies that are pioneering a new wave. They are similar to executives who play a defensive game to protect their turf. Established companies rarely create new technologies that make their existing entrenched products obsolete. Analysts also become fixed in their coverage and views, and are predisposed to defend a favorable ongoing opinion of a recognized industry leader. Like the ostrich, they fail to give proper credence to up and coming companies that represent a disruptive market leapfrog. Analysts are uncomfortable with any thinking that might run counter to their long-established point of view. Because the status quo is easier, they often miss the boat when a new force emerges.

The rise of PC software in the late 1980s brought a surge of IPOs, including Microsoft, Lotus Development, and Borland. A friend of mine since elementary school, then an orthopedic surgeon in Ohio, inquired naively whether he should pick up a few Microsoft shares once it started trading. I thought it and a myriad of others—each specializing in spreadsheet, database, operating system, and other PC software—were a speculative flurry and a risky proposition that investors should avoid. Bill Gates’ company seemed just like the rest of the bunch, and not that special. And these new companies were challenging the entrenched, established software for larger computers. So I dissuaded my school chum. He could have retired earlier were it not for my foolish advice. I paid only passing attention to this new PC software age. My counterpart at Goldman Sachs, Rick Sherlund, did the Microsoft initial public offering (IPO) and was the early axe in that stock—that is, the most informed analyst covering the name. Within a few years, Microsoft vaulted to the most important and thriving firm of all software and computer services. Sherlund then displaced me as #1 in the vaunted Institutional Investor rankings. I paid the price for my oversight.

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