The Ignorant Investor

I admit that I can be cynical. I don't want to be cynical because most people consider cynicism an unattractive quality in a man. For example, it's rare to hear a beautiful woman describe her new boyfriend by saying, "He's not handsome or rich, but he is just so cynical I couldn't resist him." So being cynical has its downside, and it's not something I generally recommend to anyone. Yet if a person is going to invest in individual companies and a new earnings season is just around the corner, cynicism is the place to be.

We know, for example, that when some companies get closer to announcing earnings they get a little nervous. Poorly managed companies or companies in industries with bad long term prospects (think about a manufacturer of whale oil soon after petroleum started gushing up from the ground) know that if they come out with a report showing weak earnings, Wall Street is going to punish them if it thinks those weak earnings weren't an aberration. The price of any stock, after all, largely depends on what people think the company will earn in the future. So a company that can show that a single bad quarter or year will be followed by years of robust growth in earnings won't see its stock price plummet. Everyone else? They're going to be in the doghouse.

Enter Katrina. Now this is an excuse of the kind that executives love. It's a freak event, horribly destructive, and everyone on the planet has heard of it. We associate Katrina with destroyed cities and the disruption of our oil supply. If a company's managers tell us that it had a bad quarter because of the effects of Katrina, our natural inclination is to believe them. We all get blindsided by forces we could not predict occasionally, and there's no question that some companies are going to see losses from this hurricane (think about the insurance companies that will be paying out all those claims). But the excuse is too useful for some executives- let's call them the "evil" ones- to resist.

Remember the Krispy Kreme Donut saga? Krispy Kreme was a regional donut maker with profitable operations in the south. As they began a massive expansion into other areas of the country, they became a darling of Wall Street. The stock shot up, and glowing news stories about them were splashed all over CNBC and newspaper. But the expansion wasn't run properly, and the company later ended up suffering some serious losses as a result. Instead of owning up to these losses, the company's management blamed the populatity of low carbohydrate diets for the poor performance of many of their stores. Keep in mind, this was in America, a country that was built on donuts. Making people fat is the one industry in which we are the world's undisputed leaders. But Krispy Kreme - selling donuts smothered in so much sugar that I almost choked the one time I tried one- they suddenly couldn't make a profit because too many Americans were on Atkins. Amazing. Meanwhile, competitor Dunkin Donuts was still selling about a gazillion donuts a week. Need I add that Krispy Kreme stock was soon in freefall?

So I'm making a note to myself here to treat the upcoming Katrina claims with a grain of salt. If a company invokes Katrina, take a look at its nearest competitors to see if they got hit, too. Ask if the explanation for why Katrina hurt the company is overly complex or sounds a little too convenient. This is the one time where cynicism is a virtue, even if the women don't often fancy it.