By
the time Alex Berenson was 26, he’d already started at a regional paper, made
waves at TheStreet.com, 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 mediabistro.com about his
book, his reporting, and the performance of his portfolio. (Buy The Number at Amazon.com.)
So this “number” in The
Number. What’s the number?
The number is the consensus estimate that Wall Street analysts
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.
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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 TheStreet.com, 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 mediabistro.com.
Photo by Beth Kelly.
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