Looking more like a Harvard undergrad who accidentally wandered into Aldrich than a well-respected business journalist at The New York Times, Alex Berenson addressed an audience of 30 people in Aldrich 107 last Monday. He was invited by the HBS Investment Club to give a talk on his new book, The Number* How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America. The 250-page book, released in March, describes the history of the US stock market from the 1920s to present and offers a big picture analysis of what went wrong in corporate America in the 1990s.
Berenson began his talk by professing that if he really knew the market he’d be leading a successful hedge fund, but shared a few of his personal opinions that didn’t make it into the book. After recounting some of the bad news we’ve come to expect in the business pages these days, he explained that in the last century the market operated on cycles of 15-year upswings and 15-year downswings. He stated that we are just entering a downswing, noting that market valuations are still 17-22 times earnings, which are high by historical standards. Technological innovation doesn’t offer a faster way out, he says, because the generation-long cycles seem linked to human behavior patterns.
How will we know when we’ve reached the end of a downturn? His research suggests that two indications that the end of the downturn is in sight when everyone you know is out of the stock market and the “smart money” has just begun investing in equities. We will see companies going private because public markets are no longer a good source of capital, and we’ll see Businessweek covers like one in 1979 proclaiming the “death of equities.”
In his book, Berenson blames the bubble of the late 1990s on, in order of culpability, CEOs who were willing to deceive investors, accountants/auditors who went along with it, the SEC for lax enforcement, institutional investors who resisted bad news, and less-than-impartial research analysts. He expressed disappointment with some of the business leaders he’d interviewed since 1999, and believes there is still a lot of undiscovered fraud out there. Some of the deception is deliberate (probably Tyco and HealthSouth) and some he feels is due to the pressure public companies feel to make their numbers. Each case represents a lack of stewardship at top levels, and an abuse of public trust.
What issues should we worry about next? Berenson feels although they are risky gambles, the hedge fund issue is overblown. Most funds aren’t that good at it, he says, and the funds represent the same percentage of the market in 2003 as they did in 1993. He does see investment opportunities in small-cap companies, mostly because they receive so little analyst attention and fly under the radar.
Berenson shared his personal story as well. After graduating from Yale University in 1994 with degrees in history and economics, he began his career through an internship in the business section of The Denver Post.
A desire to return to the east coast, as well as the promise of lucrative stock options, lured him to TheStreet.com, where he achieved notoriety as a tenacious business reporter. He joined the Times in1999, and his bio states that he has been named one of the top thirty business reporters under the age of thirty three times. If book sales in Aldrich were any indication, he has a lucrative career ahead of him.