Dick Davis: "Timeless Wisdom" on How to Win on Wall Street

Widely Known and Highly Regarded Investment Commentator
Dick Davis Offers Readers "Timeless Wisdom" on How to Win on Wall Street

What can you say about successful investing that hasn't been said before? Especially a basic book that's aimed at all 95 million American investors. How many different ways can you say buy good stocks cheap, diversify and control your emotions?
The Dick Davis Dividend: Straight Talk on Making Money from 40 Years on Wall Street (John Wiley & Sons, Inc., (c) 2008, ISBN 978-0-470-09903-2, 454 pgs., $29.95) doesn't avoid these truisms but it adds others not often discussed. Here are just a few of the seldom heard opinions that set this book apart:

The curse of being instantly and totally informed
The seldom cited emotional component - yearnings more important than earnings
The irrelevance of news - the news follows the market, not vice versa
The greatly exaggerated value of homework
The media perpetuates the myth that logic can explain an illogical stock market
The vastly under acknowledged role of pure luck
The tendency of established trends to last longer and go futher than expected
The only honest answer - "I don't know"
After you buy it'll ALWAYS go lower
CEOs know everything about their company but little about their stock
If we all had perfect recall, there would be no such thing as an investment guru
The best investment advice you can ever give or receive is "Stay healthy"

These are just a few of the strongly held, often unconventional views of a savvy 40 year veteran who speaks from a unique vantage point.
Here, courtesy of Dick Davis, is an excerpt from his book, The Dick Davis Dividend: Straight Talk on Making Money from 40 Years on Wall Street.

The Inept Handling of Stock Market News

       A challenge faced by the investor is dealing with misleading information. The financial media's inept handling of news is a constant irritant to me. Perhaps I'm overly sensitive because, unlike most business reporters, my background is in stocks, not news. I give vent to my frustrations in Chapter 3, "The Market Is King - News Is Mostly Irrelevant." However, a telling event occurred a few days before the submission deadline for this book. I'm glad I can share it with you.
        The media's lack of insight in reporting financial news is on display 24/7, but it is most glaring on big move days. On Thursday, July 26, 2007, the Dow Jones industrial average fell 450 points. It had been on a tear most of the prior year, climbing over 3,000 points from mid-July of 2006 to mid-July of 2007. During that steady rise, stocks climbed the typical "wall of worry" - growing weakness in the subprime lending and housing markets, worsening borrowing conditions, slowing economic growth, and so on. The Dow reached an historic high of 14,000 on July 16, 2007 but in the following week, reversed itself with a vengeance. It suffered one day losses of 149,226, and 208 points. But the big hit came on July 26 when it plunged 450 points to its low, closing down 311 on huge volume. It was a scary time.
        Why was it that by 2:40 p.m. on Thursday, July 26, the Dow had lost 450 points - when the news background was exactly the same as it had been a week earlier when the Dow topped 14,000? In fact, the same bad news on the credit and housing markets had been dogging the market, not for days or weeks, but for months. What was there about this particular hot summer day in July that suddenly caused frenzied selling with news that had been ignored for so long?
        The answer, of course, is that no one knows. But since the news that day was "old hat," it's reasonable to assume something else was going on. Based on behavioral studies, if not just plain common sense, it's likely that investor emotions played a role - probably a dominant one. Fear and greed are highly contagious. Both are quickly activated by sudden, extreme price moves. The intensity of the selling and the steepness of the decline make investors believe that their worst fears are about to become a reality. As prices plunge and momentum accelerates, their instinct is to sell to protect profits and limit losses. In other words, a major catalyst for the carnage is the unnerving action of the market itself.

But Why Did It Happen Today?

        On the evening of the market's 450-point collapse, the media struggled with explanations. The News Hour with Jim Lehrer on PBS is among the most prestigious, reliable, news sources on the air. I rarely miss it. Jim Lehrer, Gwen Ifill, Ray Suarez, Margaret Warner, Judy Woodruff, and Jeffrey Brown are all consummate professionals. (I miss Robert McNeil, Charlayne Hunter-Gault, and don't get enough of Roger Rosenblatt). On the night of July 26, award-winning 30-year veteran reporter Ray Suarez asked his two guest experts to explain why the stock markets plummeted that day.
        The choice of guests - two economists - negated from the get-go any insightful answers. It reflected the misguided thinking of all media everywhere, that a meltdown in the market must be tied to the news of the day. Interviewed were Thomas Lawler, a housing market consultant, and Diane Swonk, chief economist for a financial services firm. Since the news that day revolved around housing and credit problems, these were logical choices. But the market is illogical. For a full 10 minutes, both guests spoke eloquently about what they know, which is not the stock market (PBS.org/News Hour/Video; go to archives for full interview). Nothing that they said could not have been said the day before, the week before, or the month before. They were never asked, "But why today?"
       This same inadequate explanation was repeated by media outlets throughout the country. Reasons were given by everyone except those who have insight into investor behavior, the complexities and randomness of the stock market, and the futility of trying to reduce explanations for the market's actions to one or two factors. Reporters who didn't know were asking analysts who didn't know. The result was a public that didn't know. But none of the parties knew that they didn't know.
        This is the way the stock market has been covered by the media forever: Tie the event to whatever news makes it plausible. Completely ignored is the independent force that controls everything: the market itself and the emotions of those who respond to it. This media treatment of the stock market is so routine, so accepted, and so entrenched, that its validity is never questioned. Millions ask "What happened in the market today?" and millions respond with what they hear/read in the media, as if it were fact.
        Stock market news is reported by news organizations, not by behavioral scientists, psychologists, or students of the subtleties of the market. The business of news organizations is to report news. They are trained to answer the "why" of things with logical explanations that make for neatly packaged, complete stories. They are well-intentioned, with little awareness their market stories are misguided. There is far less excuse for advisers and brokers in the securities business who often give the same vapid explanations. They should know better, but most don't.

The Media
Wears No Clothes

        I fell very alone in discussing this subject. The emperor has worn no clothes for such a long time, no one seems to care. But this is important. We're talking about people's money. If our net worth suddenly drops sharply, aren't we entitled to an honest, knowledgeable explanation of what is known and, more importantly, what isn't known? Why is truth in advertising more important than truth about our money? It is a myth that what's reported on market behavior in the media is fact. It's a myth that such behavior can be explained by knowable, identifiable reasons (surprises like invasions, tsunamis, and assassinations are exceptions). Correcting such a long-entrenched, widely-held misconception is difficult. It's unlikely to happen. I'm hoping those media sources with the most air-time and print space will try. Here are my suggestions.
        I think Ray Suarez should have had another guest the night of July 26. In response to the question - which should always be asked - "Why today?," the stock-market savvy guest would present the following six points:
        1. The stock market itself is the all-powerful final arbiter. The day, hour, or minute it feels the rubber band has been stretched too far, it'll do something about it, not before.
        2. Human emotions, responding to the markets' gyrations, triggered by fear and greed, likely to play a key role.
        3. Worries over a wide range of overlapping factors, both fundamental and technical, may or may not be additional influences. (Future market historians may well cite long-standing housing and credit worries as major factors in shaping the market's trend. The significance of their role on July 26, however, is unknowable.)
        4. A market that acts randomly and irrationally cannot be explained logically.
        5. Except in cases of surprise, most news is irrelevant in explaining the market's action on a particular day. The stock market leads; the news follows.
        6. The answer to the question, "Why today?," is: "I don't know - nor does anyone else." The markets are complex and perverse. They defy definitive answers.
        In my view, every discussion on TV, radio, newspaper, magazine, or the Internet which gives reasons for a big move in the market is unbalanced, incomplete, and misleading - unless it alludes to the points listed above. Time and space restrictions may make that difficult, but unless some effort is made, the investor is short changed.
        In all likelihood, things will stay as they are. So it is up to you, the informed individual investor, to rise above the misinformed media. If you are looking to the stock market to grow your net worth, you should be aware of the enigmatic nature of the phenomenon you're dealing with - even if your news provider is not. When you're watching or reading the whys of what happened in the market that day, know that the reporter is innocent and well intentioned but clueless. What he presents as facts are guesses which may or may not be pertinent.
        I know this sounds terribly arrogant. I don't mean to be. On the contrary, if there ever was a situation that calls for humility, it's dealing with the stock market. I hope investors develop a respect for the perplexity and primacy of the market itself and remember it is autocratic, not democratic. When it acts as you predicted, it is mostly coincidence.
        The media's daily ineptness is of less concern to the long-term investor. Big market moves may be inexplicable, but a long-term or dollar-cost-averaging approach precludes the need for explanations. What can be said with confidence is that the one thing that is not random and irrational about the market's performance is its basic, underlying, 100-year entrenched uptrend. Focus on the long term and you can ignore the media's distortions."

Investigate, Then Invest - Hogwash

       A popular slogan on Wall Street has been "Investigate, then invest." We're advised by the gurus to do our homework, to study the report, and "see what you think." That's okay for some, but in my opinion it's nonsense for most of us. We have neither the time, the inclination, nor, most of all, the training to read and truly understand financial statements, cash flow analysis, accounting principles, currency translations, corporate governance regulation, book-to-bill rates, and so on. No less an authority than the top accountant for the SEC, Walter P. Schuetze (SEC chief accountant 1992-1995 and 1997-2000), says, Today's financial statements and reports are so complex and arcane as to be incomprehensible...Financial statements are not fit for their intended use" (Barron's, May 31, 2005). Even CPAs can look at the same statistics and come up with different interpretations - not to mention the fact that the final arbiter, the market itself, may not assign the data any significance at all.
        In addition to the financials, there is endless other information to be investigated. Let's assume we checked out all the data, did nothing but study 24 hours a day, and learned everything there was to know about a company and its stock. We learned about the company's product line, its pricing, its markets, its workforce, its management, its culture, its history, its competition, its industry, and so on. Would all of this knowledge help us make the right investment decision? Only if the information that we think matters, also matters to the market. Not only do we have to know, but we also have to know how the market will perceive what we know. None of this is spelled out when we're glibly told to do our homework if we want to be successful investors.
        Harry Newton's technologyinvestor.com featured a letter from an anonymous hedge fund manager to his limited partners (November 3, 2006). In it, the manager described his frustration at reporting a poor month's performance despite a prodigious amount of homework. "Traditional fundamental drivers of stock prices have been largely ignored by the market...At times, I've felt our team has been penalized rather than rewarded for doing deep fundamental research on the names in our universe." He went on to explain how the fund took positions based on expected earnings catalysts. The earnings forecasts proved correct but the market moved in the exact opposite direction of what was anticipated. Reflecting despair and confusion, the fund manager expressed the hope that other funds will start to care about fundamentals.
        There are a few mathematically gifted investors whose reading and studying financials may actually increase their odds of success. If you find yourself in this group, if you have acquired the expertise that most of us don't have to understand the complexities of financial statements and their significance, and if you are prescient enough to know how the market will react to what you know, your homework may pay off. Others who may benefit from doing their own research include retirees who welcome the challenge because its gives them something else interesting to do with their time. There are also those who simply are reluctant to rely on the research of others, especially regarding their own money. They want to be a part of the information-gathering process. And then there are those who, by nature, are aware people. They want to stay as informed as they can in everything they do.

Best Use of Homework Time

        Unless you're in one of those groups, it's likely you'll end up spinning your wheels when advised to study company-specific statistics like inventory turnover, gross margins, or cash flow ratios. You may be able to dig out the numbers but the market's likely response, if any, will remain an enigma. Homework of this type will make you more informed and may help marginally but, as practical matter, the direct benefits are limited.
        Company-specific research may help the most when it uncovers negatives. As I have stated, when recommending stocks, Wall Street is stingy about sharing the potential downside. Awareness of the bearish scenario fosters more informed decisions and avoids surprises.
        I feel that the time used to research a company or stock would be far better spent in other ways. First would be reading the best books on overall investment/stock market strategy. Over the years there have been outstanding thinkers who have said some very wise things that have stood the test of time. It behooves all investors to seek out that wisdom. Everyone has their favorite all-time list but certain classics appear on almost all of them. In my book, I have included a comprehensive list of the most widely acclaimed, must-read investment books.
        A second way to spend homework time is checking out the track records of index and mutual funds and professional advisers. Once chosen, let them do the research for you. It's true that you may have just as good a chance of being right as the pro when it comes to one or a few decisions. But over the long term, the professional with a proven track record is likely to do better. A number of such outstanding money managers are highlighted in the pages ahead.
        Another way to spend homework time productively is to check out the negatives (column B) if you're buying and the positives (column A) if you're selling. You want to know the reasons motivating the other side of your trade. One way to do this is to ask your adviser, "What are the things that could happen that would make this a bad move for me?" and "What would have to happen to make you (the adviser) change your mind?" If your contact doesn't know the answers, ask him to check with someone who does and get back to you. The most important part of acquiring good information is asking good questions. The whole idea is to avoid future surprises.
        My bottom line is that using a combination of index funds for most of your money plus elite mutual funds managers and, sparingly, individual stocks is the way to go for most investors. It's a theme developed in detail in Part Two.
        I recognize that "Do your homework" is a universally embraced doctrine. Jim Cramer may be criticized, but never for strongly advocating that his viewers do their homework. David Winters, Wintergreen Fund portfolio manager, sums up the broad consensus view: "Do the homework. You really increase your odds of success as an investor if you're willing to dig at things, poke at them and kick the tires. For me it's exciting to read the next footnote." (Barrons.com, "Old Hand Has A New Fund," Lawrence Strauss, October 24, 2005). Sounds like unassailable logic - until you break it down.
       About the Book: The Dick Davis Dividend posits that investors need to abide by certain basic truths if they are to succeed. These underlying truths, though powerful influences on investment success or failure, are seldom brought to the investor's attention - much less discussed with clarity and candor. They are the eternal "hot tips" waiting to be discovered and utilized.
       The book focuses on the big picture. In an affable and engaging style that immediately connects with the individual reader.
       The first half of the book is titled, "Deepest Convictions About Successful Investing After 40 Years On Wall Street". A few chapter headings include "Absolutely Nobody Knows The Answers", "There's Always An Exact Opposite Opinion", "The Market Is Always King & Final Arbiter" and "After You Buy It'll Always Go Lower".
       The second half of the book is titled, "OK, So What Do I Do With My Money?" Davis makes a compelling case for combining both passive investing via index funds, and active investing via stocks and mutual funds. He focuses on 28 model, buy-and-hold, index fund portfolios, each one recommended by a leading authority in the world of indexing. Included are the favorite index portfolios of Burton Malkiel, John Bogle, Ben Stein, Jonathan Clements, Andrew Tobias and 23 others.
       With advice described as "timeless wisdom" by best-selling author Andrew Tobias, "The Dick Davis Dividend" details what the investor is up against and how he can deal with it successfully. It's both easy to read and profound - a bluntly honest, heartfelt message written with clarity, directness and empathy that resonates with readers.
       Knight Kiplinger, editor in Chief, The Kiplinger Letter and Kiplinger's Personal Finance magazine calls the book "a gem...packed with wise, down-to-earth advice for the long-term investor."
       Larry King call Dick Davis, "The best stock commentator I have ever heard.
       The Dick Davis Dividend: Straight Talk on Making Money from 40 Years on Wall Street is available in bookstores nationwide and from all major online booksellers. The book is also available at Bull & Bear's book store. Click on the book store banner at www.TheBullandBear.com.
       For more excerpts and information on the book and Dick Davis, visit the website www.TheDickDavisDividend.com.
       About the author: Dick Davis is one of the most widely known and highly respected market commentators of his time. He founded the Dick Davis Digest in 1982, one of the nation's largest investment newsletters, (he no longer has an affiliation) and pioneered stock market reporting via television and radio. Davis also wrote a stock market column for the Miami Herald - which was syndicated to over 100 newspapers - for over ten years. Based in South Florida, Davis was the nation's only non-salesman employee of a member of the NYSE (Merrill Lynch, Walston, Drexel Burnham), to work full-time as a broadcaster.