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8 September 2017 Financial Analysts Journal Book Review

Full of Bull: Do What Wall Street Does, Not What It Says, to Make Money in the Market (a review)

  1. Martin S. Fridson, CFA
From his 32 years as a technology stock analyst, Stephen McClellan passes on nuggets of worldly wisdom, recommends qualitative criteria based on experience (i.e., judgment), and calls for upgrading research standards. Although intended for amateur investors, the book is more suited to institutional money managers.

The stocks that Wall Street firms highlight as their best picks do not materially outperform run-of-the-mill buy recommendations. Selling a stock on the day of a major recommendation downgrade is unwise. A perfectly smooth earnings progression is not a reason for confidence but for discomfort. A full tax rate is a favorable, not an unfavorable, indicator of a stock’s attractiveness. Stock repurchase plans usually indicate that a company’s earnings have stagnated. Megamergers never work.

These nuggets of worldly wisdom come from Full of Bull: Do What Wall Street Does, Not What It Says, to Make Money in the Market, a retrospective on author Stephen McClellan’s 32 years as a technology company analyst. In lieu of quantitative formulas for stock selection, McClellan offers canny, qualitative criteria drawn from experience. For example, he champions companies that operate in specialized business segments over less focused, generalist companies. He urges investors to beware of managers who have strings of ex-wives and showy sailboats or who sport fancy designer suits and fingernail polish (dismayingly, McClellan seems to assume that all senior executives are men). In a surprisingly large number of instances, McClellan is able to support his subjective-sounding judgments with empirical evidence. For example, he cites a study that found that the probability of lackluster stock performance rose with the size and price tag of the CEO’s house.

Another main thrust of Full of Bull is a call for upgrading research standards. Fixed-income analysts will be gratified to discover that the author wishes that their level of expertise in financial statement analysis would become the norm for their equity peers. A Chartered Financial Analyst for more than 30 years, McClellan promotes the CFA Program as a remedy for the shortcomings that he perceives within the analytical profession. Many charterholders, however, would oppose his recommendation to make the credential mandatory.

Others might question his disdain for international investing. After all, focusing exclusively on U.S. stocks eliminates two-thirds of global market capitalization from consideration. McClellan partly justifies his financial xenophobia on the grounds that a dollar-based investor’s gain on a foreign stock could be offset by a loss on the currency. He does not explain why investors should be any less concerned about losses incurred by holding a dollar-only portfolio instead of diversifying among currencies. Investors who are worried about dollar weakness, he says, should buy an exchange-traded fund that represents a basket of international stocks. This risk-spreading strategy contrasts with his recommendation that individuals own no more than 5 or 10 stocks.

McClellan’s endorsement of hyperconcentration reflects a breezy confidence that amateur investors, to whom he explicitly aims his book, can outperform the indices over an extended period. Here, his emphasis on empirical verification lapses. The story would be more credible if McClellan could show a precedent for individual investors pulling off a feat achieved by a vanishingly small percentage of professional money managers. He might, for example, produce a single example of a retail customer of the brokerage houses for which he worked who beat the Wilshire 5000 Index on a risk-adjusted basis over a 25-year span, net of commissions, by buying individual stocks. As far as the reviewer is aware, no securities firm has ever documented such a case, even though the commercial value of it would be immense.

Many of McClellan’s nonprofessional readers, however, will be undeterred by the low probability that their expenditure of time and energy will yield a long-run premium over a passive strategy. Instead, they will follow the book’s advice and conclude that they are really onto something when a few of their picks happen to beat the averages over a six-month span. McClellan fans his readers’ hopes by pointing out that they can conduct research without the constraints and conflicts that bedevil Wall Street analysts. Furthermore, they can review earnings models and listen to corporate executives in conference calls. Even McClellan acknowledges, however, that individuals are not on a level playing field with professionals with respect to calling CEOs on the phone or attending institutional investor conferences sponsored by brokerage houses.

In reality, institutional money managers are the more appropriate audience for Full of Bull. For them, McClellan provides invaluable insights into the investment merits of low-multiple, non-dividend-paying, small companies.

It is unfortunate, therefore, that his text was not copyedited more carefully. Billionaire Warren Buffett’s surname is misspelled throughout the book except in the index, where his company’s name, Berkshire Hathaway, is misspelled. The Institutional Investor All-America team, to which McClellan was named for 19 consecutive years, is mislabeled the “All-American team” and elsewhere referred to as the “All-Star” team. Other infelicities include the substitution of “Teutonic” for “tectonic,” of “incredulous” for “incredible,” “exulted” for “exalted,” and “affect” for “effect.” The book also contains assorted homophonic confusions—e.g., “vane” for “vein,” “pour” for “pore”—and the baffling neologism, “ensorselled.” The text also stumbles in some instances over verb–subject agreement and the proper use of apostrophes.

Substantively, McClellan erroneously states, “Wall Street research began in 1934 with the seminal text Security Analysis by Graham and Dodd.” In reality, Benjamin Graham landed his first job as a sell-side analyst almost two decades before he and David Dodd published the renowned textbook.

Notwithstanding these gaffes, Full of Bull is a worthwhile contribution to the securities analysis literature. Countless other books provide stock selection criteria defined in terms of financial ratios, almost invariably with an escape clause to the effect that applying the proposed rules requires judgment. McClellan aids readers immeasurably in acquiring that essential quality.


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