San Francisco Financial Planner, San Francisco Financial Advisor

An old adage on Wall Street is - "sell when Business Week's cover says buy."

The most famous example of this is the 1979 Business Week cover "The Death of Equities."  Some facts from the article: Baby boomers won't save. Gold is a safe long term bet.  In retrospect, equities were as inexpensive as they were during the Great Depression…and were on the verge of a historic bull market lasting until 1999. 

How could Business Week have been so wrong?  We would suggest that it is because the publication's staff does a wonderful job of merely reflecting the conventional wisdom.  The editors and staff cannot take the career risk, go out on a limb and highlight truly revolutionary ideas or un-heralded companies -- they might be wrong and look foolish.  They are not paid to be visionaries or speculators, they are paid to report.  
 
This is not to say that articles in the financial press are not worth reading; quite the contrary. They often provide insightful reporting and in-depth analysis.  But by the time the articles have been researched, written and published, they are no longer news — the market prices already reflects the future prospects.  Actually, for the savvy patient investor, mainstream publications covers can be a contrarian gold mine.
 
As the few examples below show, mainstream publications often jump on the bandwagon just as it goes off the cliff.  Bold declarations on the cover are a good sign that the opposite may soon happen.  Call it the "curse of the magazine cover indicator."  Whenever a company, asset class or investment theme makes the cover of a general business publication, its bull run is over.  As Princeton economist Paul Krugman noted, "Whom the Gods would destroy, they first put on the cover of Business Week."

In late 1974, near the end of the 1973-1974 bear market (the worst since the Depression), NewsWeek ran a cover story entitled "The Big Bad Bear."   The cover illustrated an angry bear with the NYSE pillars crumbling, and a sign showing Wall Street as a one-way street heading down.  What happened next; stocks rose approximately 50% over the next two years.

How about this TIME magazine cover from last year entitled “Home Sweet Home”…this appears to have been the peak in prices and optimism in residential housing.  Since that time, we have seen the acute stress in the mortgage market, record foreclosures (and still rising) along with the median home price fall for the first time nationwide since the 1930’s.  In fact, in previous boom markets like Nevada, Arizona and Florida, prices are down 25%+ (so far) and a flood of homes for sale languish, waiting for scarce buyers.  (With most of our clients living in the San Francisco Bay Area, these realities seem completely foreign.  But many parts of the country are genuinely suffering from the tremendous stress.)

In February 2000, within weeks of the climactic high in the stock market, BusinessWeek published a "Special Report: After 107 months, the American economic juggernaut is still going strong. What went right?"  Recent investors remember too well what happened next; over the next 18 months, the broad market as measured by the S&P 500 lost half of its value and the NASDAQ - laden with technology, telecom and internet stocks - lost 78% from its peak.

A recent academic study by three finance professors at the University of Richmond put the magazine cover story indicator to the test -- specifically they focused on the coverage of individual companies.  They looked at how a company’s stock responded to a cover story in BusinessWeek, Fortune and Forbes. It is no surprise that they found that positive stories follow periods of positive performance and negative stories follow periods of negative performance. More interesting, they also find that the appearance of a cover story tends to signal the end of the abnormal performance. Individuals who react to such “news” are not likely to do well.

The professors reviewed headlines from stories in Business Week, Fortune, and Forbes for a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance. "Superior" and "inferior" were determined in comparison with an index or another company in the same industry and of the same size.

Here's what the professors found. First, there were more positive stories than negative; one can assume for the same reasons that brokers issue more buy than sell recommendations. Second, positive cover stories tended to appear following periods of strongly positive performance, while negative stories followed very poor returns. The companies that received the most positive coverage had, on average, outperformed the index by 42.7%. Those companies suffering negative coverage, by comparison, had underperformed by 34.6%.

The more important question is:  How did stock prices perform after the cover stories appeared. Here, the research supported the use of magazine cover stories as a contrarian indicator. The most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%. The conclusion:  Positive stories generally indicate that the stock's price performance has topped out. Negative stories often come at the time of a turnaround.
 
Cover stories about the stock market (and most recently the real estate market) tend to occur at points near maximum euphoria on the upside or gloom in the depths of a selloff.  When you see all the talk about making money in stocks on the mainstream magazine covers, it may be time to sell.  And when you see pictures of bears and other horror stories about the stock market on mainstream press, it may be a good time to buy.  The bottom line is, when a major trend in the market or in an individual stock has hit the mainstream publications, the move in that investment is likely over…history demonstrates that its momentum has peaked and is about to reverse.