Pharma’s Cutting Edge

I read BusinessWeek.  It’s a quick general overview of what’s going on in business, the economy and investing; I can’t imagine that anyone thinks it’s more than that.  I certainly can’t imagine that anyone would use it to make individual stock picks.  Yet, for 10 years Gene Marcial has been providing his “insights” into individual stocks.  I view Marcial’s column the same way I view any investment newsletter–with great skepticism.  How does he select stocks for inclusion?  How does he select the analysts he quotes?  What ties doe does he have to any of these people or their companies (he doesn’t take stock positions in the companies he mentions). 

The reason I’m even discussing Marcial’s column is that he frequently discusses biotech companies.  He makes it pretty clear to anyone who’s been in or around the industry for a while that he knows this industry less than well–that is to say barely or perhaps not at all.  But that’s okay.  If he always chooses his sources like a chop house sommelier chooses the red to match your Kobe, he could still make wise calls and followers of his cobbled together advice might still make out.

But he’s no stock-picking somellier. 

What irks me about the column isn’t even so much that Marcial doesn’t know a thing about biotech but that BusinessWeek sees fit to tout his long-term performance.  Long-term performance?  If he’s a lousy biotech stock-picker, as I claim, why would BusinessWeek tout his long-term performance?  And there’s the rub.  It’s because BusinessWeek lies.  Well…not so much lies as distorts, in a way that inflates Marcials’ picking prowess.  Here’s how:  Marcial’s column is published online on a Thursday afternoon, after the market closes.  By the time anyone can act on the column it’s at least Friday (or Monday if it’s a 3-day weekend).  By the time the market opens on Friday, the “Marcial effect” has occurred and the stock price at open reflects it.  Not surprisingly, when Marcial touts a stock Thurday it frequently bumps Friday.  Not that any individual investor could take advantage of the bump, unless he/she knew that Marcial’s column was about to be published.  Following the bump, the market settles to reflect the stock’s underlying value.  The distortion from BusinessWeek comes from the price they use to reflect Marcial’s total returns.  They use as the basis the stock price at close on Thurday, not the price at open on Friday.  So, the 1-day return is from the close Thursday to the close Friday.

You can see the “Marcial effect” by reviewing Marcial’s 1-day returns compared with broad indices, as BusinessWeek has published in their August 13th issue.  You’ll see that Marcial beats the S&P 500, the DJIA, and the Russell 2000 by 3.8, 3.7, and 3.8%, respectively.  Folks, that’s not a sign of stock-picking prowess, that’s a sign of a direct influence on stock market valuations.  If Marcial really did pick stocks that beat the indices over a 10-year period as BusinessWeek claim, we would expect that his 1-day returns would closely approximate the indices’ 1-day returns.  That’s because a broad selection of stocks will never appreciate measured over any randomly selected 1-day period, because their combined underlying value will never increase significantly over a 1-day period.  So, BusinessWeek’s own published data shows that the “Marcial effect” contributed to nearly a 4% transient bump in the value of his picks.  Read the rest of this entry »