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6/8/2005
Hot Stories, by Victor Niederhoffer

"A Taxonomy of Barnacles," by Galt Niederhoffer, due out in January 2006, leads me to consider the interview of Bryan Gindoff in the book Bulls, Bears and Millionaires by Robert Koppell. Gindoff is a screenwriter who had been a floor trader and hedgefundist.  He wrote Hard Times and produced Losin' It. He believes good screenwriters and good stock pickers (and market pickers) are cut from the same cloth. You have to have a big story that overrides everything else

"In both writing and in the stock market, the great success comes from identifying a strong story or a strong theme. If your story is strong enough ( in Hollywood), it will tend to transcend poor execution." He uses the stories of Tom Clancy as an example where the characters are poorly developed. I would use Louis L'Amour, who has sold more Westerns than all other Western writers of all time combined, whose characters are lame with automatic and shallow emotions, and whose women are single-dimensional objects of virtue and worship. But his stories are gripping, and the settings are thrilling.

I ask, what are the stories of today's markets and stocks that will override poor executions? Which are the stocks with innovations that will withstand competition and poor execution, with niches that have been carved out where no one else will be able to whittle away at them?

James Tar comments:

Health care is a good place to start.

  1. Health-care firms have balance sheets that are superior to all other industry groups. They are loaded with dry powder and are debtors to none.
  2. They have outstanding innovation, and a free market system will always reward those who continuously aid its advancement.
  3. We are am ever-growing and ever-aging population, and health care naturally will improve the life expectancy and the size of its market.

Laurel Kenner adds:

This ties in with the study of earth's hot spots -- part of the revolution in knowledge about the earth since the ''70s -- specifically concerning tectonic plates, volcanoes and earthquakes.

In Hawaii, the Pacific plate is slowly sliding over a giant hot spot of magma. As the plate passes over the hot spot, a volcano emerges and builds an island. Every few hundred thousand years, the plate moves on enough to create a new volcano and a new island is born. The newest island in the chain is Hawaii.

The plate's direction has been determined, and predictions can be made. And it turns out there's another volcano/island ready to emerge under the surface of the waves, called Loihi.

In the market, investments move but the heat lasts. The best story would be what people's desires are moving the market toward.

Story stocks:

1993: Biotech was the story. Then it got killed, and came back again in 1999 and got killed again.

Mid-1990s: Consumer stocks were the story, because growth in international markets was going to make everybody rich. The Chinese would buy U.S. brands: Coke, Gillette. The first Internet stocks emerged: Iomega and Netscape astonished everybody with mega-bagger gains. Semiconductors and computers ramped up. Home Depot was huge. Gold stock frauds were big.

Late 1990s: Tech was the story, as this Y2K column by the Spec Duo records. Look at the "Down 35" list of stocks at end. Everybody loved stocks, if they were internet/telecom/fiberoptics. Conversations in Manhattan cafes all included "I am making so much money in JDS Uniphase!" In 1999, Y2K angst made Internet security stocks like Verisign a story.

Early Millennium: Value was the story.

Post 9/11: Defense was the story. Lockheed. Northrop. General Dynamics.

2002: There was no story. Practically everybody wanted out of stocks. Real estate and REITs were the story. 

2003: Disaster was imminent. People hated stocks. Naturally, the market recovered starting in March 2003, the month Practical Speculation came out. Prechter's latest "Crash" book outsold it by several orders of magnitude.

Russell Sears adds:

Every stock has a story; life and death decisions, battles and victories are everyday occurrences. I would suggest, however, that not every stock has the audience's ear. Like a forest where many juvenile trees await their turn in the sun. Many will grow too fast too quickly without getting a chance at the sun. Further, not every plant that grows after the canopy is opened will grow to be a tree.

But I would suggest that the audience has grown tired of the "character" novels of the 90's. The celebrity CEOs of Microsoft, Cisco, GE et al. Further, the audience no longer accepts the autobiographies or ghostwritten biographies of the Enron, the dotcom, or the stock analyst. The canopy has opened.

However, due to innumeracy, many are turning to other storytellers with an even more obvious bias: investors telling why they are taking a position. The Sage, the World Traveler, the syndicate and other hypetheinvestors.coms, all seem to be getting their voices reflected on the tape. These plants will have their day, without reaching the canopy.

I agree that healthcare will be a tree. But other players will also be critical for the demographic shifts. Wealth managers appear to be well positioned. Which companies' strategies will capture the hearts and minds of the baby boomers long-term is hard to tell. Currently it appears they are rushing to every door that promises a sure way to get rich quick.

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