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Analysts Miss Titanic Secular Shifts

Another consequence of a short-term viewpoint and the herd instinct is that analysts miss titanic secular shifts. Broad industry trends last a while. Major movements such as a new technology, a different manufacturing process, or changes in consumer habits that are catalysts for a sweeping industry move are often identified by the Street only after they’re in place and obvious. The theme is then underscored as the key underpinning of ongoing recommendations. The problem is that Wall Street always espouses the view that this overwhelming industry change will endure for the foreseeable future. Inevitably, a critical turning point is reached when the trend begins to subside. But it is subtle. And because analysts are momentum oriented, they rarely see the shift until it is too 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, and reacting to daily events that there is no time for studied, overall macroassessment. They might 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 will render their existing products obsolete. Analysts likewise become fixed in their coverage and views, and are predisposed to defend a favorable ongoing opinion of a recognized industry leader. 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. 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 I’d known since elementary school, then an orthopedic surgeon in Ohio, inquired innocently whether he should pick up a few Microsoft shares when it started trading. I thought that it and myriad other companies—each specializing in spreadsheet, database, operating system, and other PC software—were only a speculative flurry and a risky proposition that investors should avoid. Bill Gates’s company seemed just like the rest of the bunch and not that special. So I dissuaded my school chum. He could have retired earlier were it not for my foolish advice. These new companies were challenging the entrenched, established software for larger computers. 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 had vaulted to the most important and thriving firm of all software and computer services. And Sherlund displaced me as #1 in the vaunted Institutional Investor rankings. I paid the price for my oversight.

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