Stenographers and Sycophants

Richard Kramer:  Any time you see the word strong as applied to a company's results, you know that it's effectively a meaningless praise word. The reason the word strong is used is because there's no legal definition of it. Does it mean you smell like Muenster cheese, or can bench press 400 pounds? What does having a strong set of results actually mean?

Will Page:  Welcome to Bubble Trouble, the conversation between the economist and author Will Page, that's myself, and independent analyst Richard Kramer, to learn some inconvenient truths about how the financial markets really work. This time, we talk about financial analysts and why it's sometimes more accurate to call them sycophants and stenographers, and how these analysts become cheerleaders of the companies they're supposed to cover. They praise as opposed to appraise. More on that in a moment.

Welcome along to Bubble Trouble, the podcast which asks, "Why does the stock market, with an unnerving amount of frequency, keep on getting itself into bubble trouble?" It keeps on getting a little bit too pricey, a little bit too frothy, a little bit too toppy, if you wish. And, like the boy who cried wolf, doesn't learn the lessons from past mistakes, and goes from boom to bust.

And what better time could it be to discuss that than now, Richard? [laughs]. Welcome along, Richard Kramer.

Richard Kramer:  Thank you.

Will Page:  This episode, we're gonna be discussing stenographers and sycophants. We'll go into the definition, we'll get into the detail, and we're gonna give you the tools about how to spot them and how to avoid them. Before we get into what stenographers and sycophants means, we need to tease out the setting to which they operate in, a case of too much news, too much analytical theater, too much 24-hour clickbait headlines. You wanna just riff with me for a second?

Richard Kramer:  I think one of the negative consequences of the social media, digital world that we're living in is the notion that we always have to be reacting to and ingesting new pieces of information. And- and clearly, that takes away from the quiet reflection. I often think in the market these days, people aren't missing the wood for the trees, they're examining the lichen on the bark, they're looking so close through a microscope at the news of the hours, not even the news of the day, as things unfold. And they're missing the context in which these things could be happening. It's disturbing to me because it feels like people lose s- sight of what's really important when they're making these judgements, whether it's about the stock market or the political sphere or what have you, because of the jangling intrusions of tech every minute of our day.

Will Page:  So we're talking about a situation where we can't organize all the stuff that's reaching us, that's competing for our scarce attention. It does remind me of something I talk about in my book, which is the invention that Mark Twain brought to the world, which is the scrapbook. When Mark Twain was at his peak, you had an explosion in the amount of media and no way to organize it, and the patent he applied to the scrapbook made him almost as much money as he made from his writings.

When we think about Facebook newsfeeds, and Twitter tweet streams, there is so much news and there's only so much attention. We have a deficit there, and there has to be something in terms of to stand above that news, to stand above that noise, you need a sort of exaggeration quality to it.

Richard Kramer:  I think there is a natural tendency for anyone who's trying to get a marketing message across to end consumers, and by that you can refer to the managements of companies who want investors to buy their stock, to always make the slightly more outrageous statement or claim so that they can attract the- the incremental attention.

Will Page:  And I can think of a really good example, which involves a little bit of statistics, but in economics we have something called a PMI survey, it's the Purchasing Managers Index. Well, what does that mean in a digital world? But you hear it being quoted like it's gospel by macroeconomists around the world. "The PMI is up one, the PMI is down one." It's a sort of measure of sentiment.

And when you look at how it's measured, if there's 100 firms and you ask these 100 firms who's up, who's flat, and who's down? And let's say 95 of them say, "No change, we're broadly doing the same as we were doing in the previous quarter, same level of demand, same amount of headcount," three say up, and two say down, you're officially plus one, three over the two. The 95 are not regarded in the score. So you have a headline of expansion, the market is plus one on the PMI index, even though 97 people disagreed with that statement.

Richard Kramer:  Hmm.

Will Page:  And I call this analytical theater. We're not trying to understand the statistics, we're trying to create theater out of the statistics, we're trying to create clickbait. I always remember the expression you gave me, which was, "If it bleeds, it needs." We need conflict-style stories, not consensual-style stories.

Richard Kramer:  And in the market, you see this quite frequently where analysts will change their estimates by a penny here or there, but it gets translated into an upgrade. So if I change my earnings estimates-

Will Page:  [laughs].

Richard Kramer:  ... on a stock from $5.10 to $5.12, it could be because the currency moved.

Will Page:  [laughs].

Richard Kramer:  Or because, uh, there was some small e- event that happened. It gets translated as if the change itself was the only important thing, not the magnitude of the change or, again, putting it into some sort of context.

Will Page:  Let's go into our S&S acronym here, and our first one is sycophants, which you've told me in the past are those who are the smoothers of the numbers.

Richard Kramer:  Well, a sycophant is effectively a flatterer, is someone who is trying to curry favor with the target of their admiration by saying nice things about them. And you kindly sent me a- a book, uh, that was written some years back, but about Eliot Spitzer, who really his- his signature move was to take on, uh, Wall Street analysts and the notion of Wall Street research, and how biased towards the positive it was. And I remember something in that book where he examined it and found that out of 8,000 research reports, there were only 29 that said sell.

Will Page:  [laughs].

Richard Kramer:  And y- you might wonder why people whose job it is to professionally assess company managements get on the conference call in which the company management is supposed to discuss the results of their previous 90-day period, and start off by saying, "Congratulations on a great quarter." It is kind of absurd that the job of an analyst is to congratulate the management of the company for doing their job, or to express admiration or joy that the fact that these companies have done their job correctly.

And that I think is the definition of being a sycophant, of- of- of flattering the companies with really, in this case, the aim. Since most of the analysts are working for integrated investment banks that are likely to have some conflicts of interest trying to get financial services business out of those same companies.

Will Page:  So we've got some, not just a good definition of a sycophant there, but we also have a way of spotting them, that , "Congratulations on your last quarter's results." For you, does that kind of breach the lines of impartiality?

Richard Kramer:  Well, I- I think one has to ask about the notion of impartiality, and there's a terrific quote that, uh, springs to mind, and I think it was from Upton Sinclair, who was a- a muckraking, progressive journalist and- and author in the US in about 100 years ago. And he said, "Never expect a man to understand something when his job depends on not understanding it."

Will Page:  [laughs].

Richard Kramer:  So the point really is that the job of the analyst in this case is not necessarily to criticize the management or to scrutinize their actions, but oftentimes to act as the mouthpiece of the management in expressing an- an opinion on their greatness to the investment community.

Will Page:  Let's move forward a little bit to our second of the two S's, stenographers. Um, again, if I recall when you first introduced me to this term, you had this appraise or praise kind of dividing line. Walk me through a stenographer, what does it mean and how does that apply?

Richard Kramer:  It's interesting when you see a lot of the financial market commentary about the companies reporting their results, and a lot of times it faithfully reproduces the phrases the companies themselves use. So a- as a terrific example, anytime you see the word strong as applied to a company's results, you know that it's effectively a meaningless praise word. The reason the word strong is used is because there's no legal definition of it. Does it mean you smell like Muenster cheese, or can bench press 400 pounds? What does having a strong set of results actually mean?

Indeed, a lot of times analysts will describe results as solid, and I have to wonder, is that opposed to liquid or plasma or gaseous? [laughs]. So, uh, you have all of this sort of faithful reproduction of the marketing messages of the companies themselves by the analysts, because, again, their job is to represent those companies to investors. And of course, it's always preferable or nicer to say something positive about a company as opposed to trying to, uh, pick holes in their story. And what, the- the situation you get into frequently is that you have multiple companies claiming a certain market share, and it might add up to 130 or 140%. But you don't seem to have analysts step back and say, "Well, which company might be exaggerating their numbers?"

Will Page:  So let's remind ourselves, a sycophant is?

Richard Kramer:  A sycophant is an analyst who thinks it's their job to congratulate a company on how they've performed.

Will Page:  The cheerleader essentially?

Richard Kramer:  Entirely, that's a terrific word for it. They are cheerleading the company along and telling them in glowing terms what a great job they've done.

Will Page:  And a stenographer is a?

Richard Kramer:  Is someone who writes down what the company says as if it's gospel. Has no critical distance to or, and that was a terrific phrase you used, they're not appraising their praising.

Will Page:  [laughs].

Richard Kramer:  They're not there to s... Uh, when the company themselves says, "We had a strong quarter," the analyst isn't saying, "What does strong actually mean?" When the company says, "We beat expectations," those were expectations they set themselves, and were they the realistic expectations to begin with?

I wanna add one really great example of stenographers that springs to mind. There's a particular phrase analysts use on company conference calls, which I think is just emblematic of this relationship. Analysts will frequently ask a company, "How should we think about," and then fill in the blank, your product, your service, your development, your guidance, what have you. They are basically saying, "I'm an empty vessel, fill me with what I should say."

Will Page:  [laughs].

Richard Kramer:  And that, to me, is the definition of an analyst acting as a stenographer. The funny thing is that some of the analysts who ask those questions are seen as the oracles, possibly because they are just simply transmitting what the company wanted you to hear.

Will Page:  Coming up, more signals to spot the sycophants and stenographers at work, and how they manifest themselves in quarterly earnings calls. With Richard Kramer, I'm Will Page, and you're with Bubble Trouble.

Back again with Bubble Trouble. Myself, Will Page, and Richard Kramer giving you the tools to spot stenographers and sycophants at work in the market. Uh, Richard, let's just go back to what we were saying before the break. You gave one clue as to how to spot the stenographers and sycophants at work is when somebody says, "How should I th- think about this trend? How should I think about these quarterly numbers?"

Let's just build on that a second. When you have an earnings call, how much time do you have to get your head around the numbers that you then have to ask on the actual call? Can you just walk me through the mechanics of earnings call happens tomorrow, you're an investor today, what's your preparation time before you get your head around this very complex set of numbers?

Richard Kramer:  So it's funny you should ask that, Will, because it's changed tremendously in the time I've been an analyst. It used to be that a company would report results and it would whir through the fax machine. You're tear it off, have some time to read it over, and then later in the afternoon you'd give a call to the company. You didn't have this instant reaction.

Now, typically, companies release their results, which could be 40 or 50 pages of complicated financial tables and shareholder letter documentation and so forth, maybe 30 minutes before they hold their earnings call. Now, some of what they write into the headlines is designed to catch the algorithms that are watching for words in the headlines to trade the stocks immediately when the numbers hit the tape. It could be that they, "We beat expectations," in our headline, or refer again to the word strong in relation to their earnings. They'll know very well that the market is looking for 37 cents of earnings per share, and they may have some tax rebate or FX movement, which allowed them to report 38 cents of earnings. And they know that the algorithms will be looking to see if 38 is greater than 37, and therefore say that the stock should be a buy.

So oftentimes, the minute those numbers come out, you get an instant reaction in the share price rather violently one way or the other. And then, any decent analyst has all of 30 minutes to plug in the balance sheet, cashflow, profit and loss statement, comprehensive income statement, and try to pick out numbers that actually show some sort of change in trend in any direction from those complicated statements.

And so, you really aren't given the time to make a considered judgment of what's in the numbers before the company's conference call begins, and they do a- a brief recitation of those numbers again. It's really not designed to allow for the kind of considered reflection that you'd imagine the companies want for investors to have about their results.

Will Page:  You're making me think really clearly here, so let's just put a few things together. So if there's a wealth of information and a poverty of attention, with 24-hour news and clickbait headlines, we don't necessarily have the time to soak it all in. That hands power to those people who can soak it in for us. And when it comes down to Joe Blow on the street trying to follow financial press, I get it, but what you're now saying in the second half of this podcast is it's not just Joe Blow in the street, it's the investment analysts themselves have a wealth of information and a poverty of attention, which inside the financial community creates the same problem and hands even more power to those sycophants and stenographers as to what our beat expectations headline, that was two words, beat expectations, would mean for the performance of the stock. Is that correct?

Richard Kramer:  Indeed, and I- I- I cannot stress enough how much this whole process has come down to, as I said before, examining the lichen on the bark as opposed to missing the wood for the trees. There's one very large, half a trillion dollar or more market cap company that frequently reports its earnings maybe eight to 10 minutes before the conference call begins. Their statement will typically run to about 50 pages, and there's no humanly possible way for you to delve through all of the detail that you're given and pluck out areas that you think really are worthy of focusing in on in terms of, uh, quizzing the management about their intentions.

Will Page:  I wanna push you again, because I loved what you taught me there about, you know, wh- when an analyst asks a company on an investor call, "How should I think about," or when an analyst begins a question with, "Congratulations." And I- I'm tied to impartiality, I'm tied to objectivity. You know, when I was a government economist, Gordon Brown would train us on evidence-based policymaking and avoid the temptation for policy-based evidence making, and you can see right there there's a difference between those two expressions.

What other things, what other clues can you give us where you know the sycophants and stenographers at work? "What, how should I think about it?" is a great question for an expert to ask a company, say- for some of the experts to say, "I'm not an expert, please tell me how I should think about this so I can pretend to be an expert." Can you give me a couple more examples?

Richard Kramer:  Yeah, uh, two spring to mind. One is to watch out for analysts fetishizing the minute details of something that may be far-flung in the future. So I'd ask, "Will, what are you going to do on your summer holidays in 2024?" And you'd say, "Hang on a second, there's a long period of time between now and 2024." And they're asking the companies something far enough in the future that they know the companies can expound upon it without ever really being held accountable for it, and it's much easier to talk about something far in the future than it is to zero in on something very immediate and near term that might be looming in front of the company, like a competitor entering their market or a difficult period w- with customers, or something that you might have spotted in the results in the 30 minutes you had to look at it.

Will Page:  It reminds me here of sport, and then in terms of sport you have tactics, how do I get through the next 90 minutes of soccer, 80 minutes of rugby? I know you have strategy, which is how do I win the English Premier League, or the Guinness Premiership in the case of rugby. And the obsession here is to talk about strategy, the long-term version, as opposed to dealing with the short-term tactics of how do you manage cashflow.

And a great lesson that was taught to me by a CFO once is companies rarely go bankrupt through lack of demand, they more often go bankrupt through a lack of cash, and cash is tactics. But I guess you're saying to me the tendency is avoid all that stuff, let's just talk about blue sky thinking strategy instead, is that correct?

Richard Kramer:  I think there's that. There's also the fact that 90 days is an absurdly short period of time to judge any company. It's ridiculous. Quarterly earnings themselves are a bit of a charade for most companies because, uh, it would be wildly irresponsible for a company to manage itself on- on a 90-day basis. I- I- I suppose it's- it's, it would be the case that you might think that way if the company was a Death Star, but most companies should have some three- to five-year strategic plan, they should have some near-term strategic plan of one to three years, and those 90-day increments are really just staging posts along the way.

But of course, the tendency of analysts, since they're being fed information in 90-day increments, is to fetishize them and make them seem like these quarters are- are turning points or inflection points one way or another, as if very small changes in margins in a particular quarter are going to mean the world and can be extrapolated out for many quarters to come.

Will Page:  Got it. Is there anything is behavioral economics, in- in that sort of nudge-type theory, that we can draw upon when it comes to spotting, identifying, and avoiding the mistakes of sycophants and stenographers?

Richard Kramer:  I think that's a great question, and when someone is advertising to you, they're trying to get you to buy something. And people don't sit back and- and assume that there's no underlying message in the ads, they ought to be looking at them critically and appraising the claims and counterclaims, and is this new and improved product really new and improved or is it going to change my life? So I- I think people need to approach the markets in the same way, and regard what companies are saying with that same skepticism that you have with the kind of claims you routinely see in advertising.

Will Page:  I find that really illuminating. I mean, I don't quite know how I can bridge onto that point, but if I try it this way, which is sometimes you hear people say, "One man's terrorist is another man's freedom fighter." And when I think about that kind of adage, and I look at the success of Richard Thaler's book Nudge and how everybody welcomed the idea of nudge, just put healthy food at eye level and you'll nudge consumer behavior. And nudge is always seen as a force for good, the fact that we can nudge consumer behavior is a good thing.

Then, somebody stood up and said, "Isn't that manipulation?" "No, of course not! Of course it can't be manipulation, we're nudging for the good, not for the bad." But then there's a fine line between nudging for positive outcomes and manipulating behavior for negative outcomes, and they're the same sides of a different coin. It's just very interesting to see how that applies here in terms of the behavioral aspect of the sycophants and the stenographers.

Richard Kramer:  I- I- I think there's a very important point to draw out with respect to the markets. There's simply no company in the world that can live without marketing any more than it can live without finance and accounting and control systems and so forth. Companies are always trying to misdirect you from looking at the areas where they might have performed poorly or be a little weak or vulnerable to competitors, and nudge you to look at stuff that is promising or exciting or...

They're trying to sell you on their equity story in the same way that any other product company is trying to sell you to buy their wares. And yet, people don't r- read the communications from companies regularly with that hat on, if you will, or with, through that lens.

Will Page:  Okay, let's tie it up right there with two good, two bad. So we've told the listeners what the sycophants and stenographers are, and we now understand how we can spot them, and we now understand how we can avoid them. So what about the unavoidable dilemma that we're dealing with here with too much information, not enough attention, too much short termism? What things are, you know, no matter how good we get at spotting sycophants and stenographers, what points will we never be able to rid ourselves of?

Richard Kramer:  So the first thing I have to say, and it's distressing for me to see, but this whole market communications leaves us, to a degree, divorced from reality. We have the epistemological crisis that has been spoken about in so many other areas or fields. Too much of our intelligence is now mediated. Investors used to get out and travel and kick the tires and visit companies, and now it's all at a distance, especially so in the pandemic.

We just don't have the value accorded to digging into and understanding the culture of a company, interviewing the management, trying the products, seeing h- what goes into their creation and how come companies are positioning themselves. Instead, what you have is this sycophant and stenographer tendency, which is to say, "Congratulations on a great quarter, and tell us how we should think about your future."

And so, that's kind of left us a little bit at a remove or a divorce from the reality of what's going on in these companies. And I think a second thing that- that is disturbing is the bubbles give you a- a- a false sense of security. I think for a lot of time in the past year, people have just thought that stocks only go up, and without wanting to get into some of the craziness of the last year in the market, we've gotten accustomed to some degree of risk taking that maybe isn't wholly justified. And everyone may believe and know that things can't last, but I think they're, they know the game is rigged and they're gonna get out of the crowded exit before everyone else will.

And so, I'm concerned about the blasé attitude people have to how well things should turn out, and not understanding Warren Buffett's, uh, early rule of investing, which is r- rule number one, "Don't lose money."

Will Page:  [laughs]. And rule number two?

Richard Kramer:  Then you can move on to trying to make it, but it's hard to make it if you don't follow rule number one.

Will Page:  Bubble Trouble is produced by Eric Nuzum and Jesse Baker at Magnificent Noise. You can learn more at bubbletroublepodcast.com. See you next time. [silence].