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Q&A with Alex Berenson

The New York Times reporter on the markets, quaterly earnings, and his new book.

By Jesse Oxfeld - March 14, 2003

By the time Alex Berenson was 26, he'd already started at a regional paper, made waves at, Jim Cramer's feisty webzine about the markets, and arrived in the business section of The New York Times. Now only 30, he just published his first book. The Number: How the Quest for Quarterly Earnings Corrupted Wall Street and Corporate America is part history, part analysis, part explanation. It looks at how companies' ongoing efforts to beat analysts' expectations for their quarterly earnings have skewed the stock market over the last decade or two, and it aims to help unsophisticated individual investors understand why their portfolios have fallen apart. Berenson spoke with about his book, his reporting, and the performance of his portfolio. (Buy The Number at

So this "number" in The Number. What's the number?
The number is the consensus estimate that Wall Street analyst
s predict for companies' quarterly and annual earnings. Analysts have been estimating earnings for a long time, but in the early seventies people realized they could aggregate these estimates and figure out what the average was. Then in the eighties the computer technology became available to do that a lot more quickly and to get the information out a lot more quickly. And so by the mid-eighties it had become something that Wall Street was familiar with and over the next few years it became more pervasive and important.

Why is it important to me as an individual investor—or as a reader?
The market always, in theory at least, looks ahead. And it's always trying to take in every bit of information that it can, as quickly as it can. You don't really care so much if the company made a dollar last year, you want to know what it's going to make this year. If it makes a $1.10 you might consider that good, but if people were expecting it to make a $1.20, then you wouldn't consider it to be good. If people were expecting it to make a $1.05, then you would consider it to be good. So the number became important in and of it itself. But it also became a symbol for something much larger: Wall Street's obsession with growth and profits. You see it gradually over time: At first institutional investors looked at the number and whether the company makes the number. And then individual investors started to understand that it's important. And then companies start to understand that it's important. And they start to understand, "You know what, even though we had a good year by our own standards, if we didn't do what the analysts thought we were going to do, our stock could go down. We could be punished for this." So they start to work a lot more closely with analysts to help create estimates.

And that's why the number can be corrupting?
The number is corrupting for a lot of reasons. That's one reason. It's also corrupting in a broader way. The number is a symbol for Wall Street's obsession with growth at the expense of stability. What happens is once you set a number in the market, once you set expectations—again this is something companies and analysts do together by the late eighties or early nineties—there's this game that goes on where companies guide analysts to a number they think they can beat. Then all of a sudden you've made an implicit promise to Wall Street. So you start pushing harder and harder to meet those expectations even if the reality of the business isn't working. And in any given quarter, because there is flexibility in corporate accounting, and there's flexibility in the way companies run, you can do that. But in doing that, you've dug yourself a little hole, on two levels. One is, you've lied to Wall Street about what you've actually done that quarter. You're growing more slowly than Wall Street thinks. You have to start cheating more and more, unless the business just picks up for you fantastically.

What role did the financial press play, or the press as a whole play, in the huge bubble of the last x years?
People have asked me that, and I guess this is where I m supposed to give a mea culpa. But the fact is I don't feel like the press was a major player in it. I think we were a player in it; I think there were people out there on television and in print who worsened it. There were stories I wrote in the nineties that I'm not proud of. But there were also serious journalists, very good journalists, people at The New York Times like Floyd Norris and Gretchen Morgenson and people at, where I used to work, like Jesse Eisinger and Herb Greenberg, people at the Journal, who did try to sound the alarm and say there's a lot of bad accounting out there, a lot of bad companies out there, and those people were largely ignored. I don't think the press did a great job, but on my personal list of what went wrong, I don't think the press is in the top five. Maybe that's self-justifying, but I'd like to think that I've thought about this a fair amount. People who blame the press—you know, the press is to blame for a lot of things, but I don't think that we are to blame for this.

But what about, not that the press actively did something wrong, but rather that the job of the press, the reason the press is enshrined in the Constitution, is that it's supposed to be a watchdog on institutional powers, and that didn't seem to happen here?
Well, that's certainly true. But when you did have people pointing out that the foundations of the bull market might be weak, those people were largely ignored. And in fact, they were mocked. And in 1999, it was pretty hard to be wrong publicly. I have great respect now, much greater respect than I ever did at the time, for the people who had the guts to say that and say that again and again. But, yes, institutionally, should The New York Times in 1998 have written a series of stories about problems in the funding of the SEC instead of worrying about Monica Lewinsky? Probably. Should the Journal have written a series about how bad accounting had become? Yeah, probably. Would it have made any difference? I have to think that it actually would not have made much difference.

A bit about how you did the book. Is this largely drawn from reporting you did from the course of this period? Or is this a lot of new, original stuff you did, going back and examining what had happened?
I thought it was going to be based on a lot of reporting I had done. But I didn't feel by the time I started writing it, which was the middle of last year, that I needed to spend a lot time talking about what specifically had happened at Tyco, or what specifically had happened at Enron. The book morphed on me a little bit, and became a little bit more of a history. The first section of is a history, which is mainly secondary source—I tried to find interesting anecdotes from 50 or 75 books that have been written about the history of the market in the last hundred years. Then the last two-thirds is some reporting that I did, and lot of reporting that other people did. I wanted this book to be an overview. It's fairly short, only about 250 pages, and I wanted it to be a book where if you were in the market but you're not a professional, if you don't really understand what happened, this will be the one book that will tell you, fairly quickly and concisely, and hopefully in an interesting way, what happened. So it really is more stuff put together in a new way. I didn't really intend to break a lot of new ground in terms of reporting. What I wanted to do is break ground in terms of analysis.

So with all your expertise, how's your portfolio done over the last couple of years?
Badly. But I don't give any investment advice in the book.

Jesse Oxfeld is the editor-in-chief of Photo by Beth Kelly.

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