The #1 Contrarian Indicator: Tested and True
Here’s the theory behind the magazine cover indicator. By the time a company’s success or failure reaches the cover page of a major publication, the company is so well known that it is reflected fully in the stock price. Once all the good news is out, the stock is destined to underperform. The reverse holds for negative stories.
A recent academic study by three finance professors at the University of Richmond put the magazine cover story indicator to the test — specifically as it focuses on coverage of individual companies.
The professors culled headlines from stories in Business Week, Fortune, and Forbes for a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance. “Superior” and “inferior” were determined in comparison with an index or another company in the same industry and of the same size.
The study confirms that it is better to bet against journalists than alongside them. It would be easy to jump to the self-congratulatory conclusion that journalists are incompetent. But that conclusion misses the point. Journalists aren’t writing cover stories to make investors money. They are writing cover stories to sell magazines. And “hot topics” sell. But it also means that when a company or financial trend is featured on a magazine cover, the chances are that the trend is already widely known, and universally accepted.
Krugman brought up the effect in part because he’s on the cover of the latest issue of Newsweek, in which they profile his role as sharp critic of the Obama economic policies. More interesting than the actual article, though, was Glenn Greenwald’s reaction:
Newsweek’s unintentionally revealed, central truth
In his just-released cover story on Paul Krugman’s status as Obama critic, Newsweek‘s Evan Thomas includes these observations:
By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring.
Thomas then acknowledges what is glaringly obvious not only about himself but also most of his media-star colleagues: “If you are of the establishment persuasion (and I am) . . .”
One day in the near future, Thomas should have a luncheon or perhaps a nice Sunday brunch at his home, invite over all of his journalist friends who work in the media divisions of our largest corporations, and they should spend 15 minutes or so assembling these sentences together, and then examine what these facts mean for the actual role played by establishment journalists, the functions they fulfill, whose interests they serve, and the vast, vast disparities between (a) those answers and (b) the pretenses about their profession and themselves which they continue, ludicrously, to maintain.
While I’m at it, I cannot recommend highly enough Greenwald’s recent, impassioned argument against political cynicism — whether it come from policymakers, opinion-makers, or the average citizens themselves — in reaction to Jim Webb’s call for prison reform:
Webb’s actions here underscore a broader point. Our political class has trained so many citizens not only to tolerate, but to endorse, cowardly behavior on the part of their political leaders. When politicians take bad positions, ones that are opposed by large numbers of their supporters, it is not only the politicians, but also huge numbers of their supporters, who step forward to offer excuses and justifications: well, they have to take that position because it’s too politically risky not to; they have no choice and it’s the smart thing to do. That’s the excuse one heard for years as Democrats meekly acquiesced to or actively supported virtually every extremist Bush policy from the attack on Iraq to torture and warrantless eavesdropping; it’s the excuse which even progressives offer for why their political leaders won’t advocate for marriage equality or defense spending cuts; and it’s the same excuse one hears now to justify virtually every Obama “disappointment.”
Webb’s commitment to this unpopular project demonstrates how false that excuse-making is — just as it was proven false by Russ Feingold’s singular, lonely, October, 2001 vote against the Patriot Act and Feingold’s subsequent, early opposition to the then-popular Bush’s assault on civil liberties, despite his representing the purple state of Wisconsin. Political leaders have the ability to change public opinion by engaging in leadership and persuasive advocacy. Any cowardly politician can take only those positions that reside safely within the majoritiarian consensus. Actual leaders, by definition, confront majoritarian views when they are misguided and seek to change them, and politicians have far more ability to affect and change public opinion than they want the public to believe they have.
We’ve been trained how we talk about our political leaders primarily by a media that worships political cynicism and can only understand the world through political game-playing. Thus, so many Americans have been taught to believe not only that politicians shouldn’t have the obligation of leadership imposed on them — i.e., to persuade the public of what is right — but that it’s actually smart and wise of them to avoid positions they believe in when doing so is politically risky.
People love now to assume the role of super-sophisticated political consultant rather than a citizen demanding actions from their representatives. Due to the prism of gamesmanship through which political pundits understand and discuss politics, many citizens have learned to talk about their political leaders as though they’re political strategists advising their clients as to the politically shrewd steps that should be taken (“this law is awful and unjust and he was being craven by voting for it, but he was absolutely right to vote for it because the public wouldn’t understand if he opposed it”), rather than as citizens demanding that their public servants do the right thing (“this law is awful and unjust and, for that reason alone, he should oppose it and show leadership by making the case to the public as to why it’s awful and unjust”).
It may be unrealistic to expect most politicians in most circumstances to do what Jim Webb is doing here (or what Russ Feingold did during Bush’s first term). My guess is that Webb, having succeeded in numerous other endeavors outside of politics, is not desperate to cling to his political office, and he has thus calculated that he’d rather have six years in the Senate doing things he thinks are meaningful than stay there forever on the condition that he cowardly renounce any actual beliefs. It’s probably true that most career politicians, possessed of few other talents or interests, are highly unlikely to think that way.
But the fact that cowardly actions from political leaders are inevitable is no reason to excuse or, worse, justify and even advocate that cowardice. In fact, the more citizens are willing to excuse and even urge political cowardice in the name of “realism” or “pragmatism” (“he was smart to take this bad, unjust position because Americans are too stupid or primitive for him to do otherwise and he needs to be re-elected”), the more common that behavior will be. Politicians and their various advisers, consultants and enablers will make all the excuses they can for why politicians do what they do and insist that public opinion constrains them to do otherwise. That excuse-making is their role, not the role of citizens. What ought to be demanded of political officials by citizens is precisely the type of leadership Webb is exhibiting here.
In Japan as well, I think it goes without saying that both the average Japanese citizen and outside observers have been screaming for some political courage from their political class, both in the bureaucracy and in the Diet. But the line emphasized above might be equally applied to just about every member of Japan’s policymaking elites.