Genius sure does seem overrated these days.
By Michael Carroll
December 2001
Institutional Investor Magazine
Just three years ago John Meriwether and his band of Nobel Prize winners and Ph.D.s blew up their high-flying hedge fund, Long-Term Capital Management, and nearly brought down the world’s financial system.
Markets should have learned the lesson, but it’s hard for investors to resist the latest thing, whether it’s the Brave New World euphoria of now-humbled dot-com promoters or the fantastic projections of telecom visionaries. Now two other high-profile outfits have run into trouble, and their stories are reminiscent of LTCM’s. Enron Corp. has declared the U.S.'s biggest-ever bankruptcy, taking with it, perhaps, its dream of lucrative deregulated energy markets. And Providian Financial Corp., which used computing wizardry to revolutionize credit card marketing, is teetering, the victim of a soured economy as well as of its own overreaching. Like LTCM, Enron and Providian had a swagger and arrogance, born from apparent disdain for those lesser mortals who’d bought their stock.
In our II on technology quarterly, we take a close look at how Providian, a market innovator and leader, fell victim to its hubris (“Plastic Meltdown”). We also take a look at another Internet-era innovation, account aggregation, which has so far failed to live up to its promise.
“Call them lessons in hype,” says Assistant Managing Editor Jeffrey Kutler. “Providian’s management put complete faith in their computerized models, so why shouldn’t shareholders have done the same? Aggregation was touted as a killer app, then fizzled with the Internet crash.”
Wall Street analysts have come under withering criticism for buying into, and sometimes fanning, corporate hype, while missing blowups like those of Enron and Providian. But many do their jobs well, and their work wins investor praise. We celebrate their achievements in “The 2001 Global Research Team” and “The Best of the Boutiques and Regionals.”
Analysts are a smart lot, by and large, but they are rightfully under scrutiny. They need to stop passively accepting companies’ spins on reality. They must aggressively question executives about their strategies and investigate thoroughly how well these are being executed. They should never be content with what appear to be brilliant results, especially not from companies that defend their risky strategies by, in effect, questioning the intelligence of their questioners.
Not to take a troglodyte’s view of the universe, but if we don’t understand something, maybe it doesn’t make sense.
