Time to Stop Writing About Stocks and Start Buying Them

By Jerry Knight
Monday, May 29, 2006

After years of writing about Washington investing, I'm getting ready to buy my first stock in a local company.

I couldn't do it until now for the simple reason that journalists should not own stock in companies they write about.

Now I'm taking up The Washington Post Co. on a very attractive early retirement offer, so this is my final Washington Investing column.

I've already opened an account at E-Trade, the big online financial services firm whose executive offices are in Ballston. Once I turn off my computer for the last time and turn in my building pass, I'll find out whether I really know what I've been writing about.

I've learned a lot since the last time I looked at Washington stocks as a potential investor rather than as a journalist. That was a time, some years back, when I wasn't writing about local stocks so I went looking for one to put in my individual retirement account. Before I could do it, however, my job changed again and I was locked out of local investing.

Good thing. I had been thinking about buying shares in Hechinger's.

Before Hechinger's went bankrupt seven summers ago, the homegrown home-improvement chain was one of my favorite local companies -- a good business, run by good people. Just as Giant Food used to be, and MCI and US Airways.

But I confess that I didn't understand how rapidly retailing was changing -- and neither did the people running Hechinger's.

It was selling building materials, tools, hardware and housewares under one roof before Home Depot opened its first store, before Lowe's broke out of its base in the North Carolina mountains, before economists figured out that retailing was rapidly becoming an industry dominated by national giants. In less than a decade, Hechinger's went from industry leader to industry left-behind.

Never underestimate how fast things are changing. That may be the most important lesson I've learned covering Washington investing.

The evolution of home-center retailing from prototypes to a dominant duopoly took maybe 30 years. MCI went from being the scourge of the Bell System to a member of the family in only 20 years. The heyday of America Online lasted barely a decade. And in the dot-com craze, Internet and telecommunications companies went public and went bankrupt in as few as five years.

I never would have guessed when I began writing about Washington business 28 years ago that by the time I retired, Washington would be a one-department-store town.

Yet by the end of the summer, Federated Department Stores will dominate local retailing, owning Bloomingdales, Macy's and Lord & Taylor. Instead of competition, we'll have one company allocating designers among its storefronts and managing markdowns to maximize profits.

That's bad news for shoppers and bad news for the newspapers. The advertising that will be lost when Hecht's goes the way of Woodward & Lothrop may have been one of the reasons Post veterans like me were offered a buyout we couldn't resist. Still, pruning the news staff by 50 or so people won't come close to making up the revenue lost in the latest round of retail consolidation.

The fortunes of the region's media companies are being radically altered by the revolutions in retailing and communications. Washington's media companies once were among the bluest of the blue-chip stocks in the mid-Atlantic region. Not today. Post Co. stock is down 4 percent over the past 12 months, Gannett Co. of McLean is off 28 percent, Media General of Richmond is down 37 percent, Radio One Inc. of Lanham is down 38 percent.

One of the lessons I've learned is to look for cyclical stocks and out-of-favor sectors that are ripe for a return to their normal valuations. I may be too close to the media business to objectively evaluate its future, but this doesn't feel like a cyclical situation.

For me the issue is not whether to buy media stocks but whether to sell the Post stock that's accumulated in my 401(k) account. By any objective standard, I own too much of my employer's stock, which is the most common investing mistake most of us make. Post stock is outperforming its local peers primarily because of the company's Kaplan education division, which now generates more revenue -- and growth -- than the newspaper. Analysts rate most of the local media stocks "hold," and in the case of the Post stock, I think they're right.

Analyst ratings, however, are so suspect that ignoring them is probably the best strategy. Read the analysts' explanations of what companies do and how they operate, read the conflict-of-interest disclosures carefully, but forget the actual rating. Way too many stocks are rated "buy."

Independent research on Washington stocks has become harder and harder to find in the past few years. About 40 of the top 200 local stocks don't have any analyst coverage at all. Another 40 or so are followed by only one or two analysts, most often by firms that serve as their investment bankers.

Local investors lost a key source of information when Baltimore-based Legg Mason sold its retail brokerage business, including its research operations. Richmond brokerage firms once specialized in mid-Atlantic stocks, but they've been rolled up into super-regional banks with a different focus.

There are some independent investment firms and a few individual brokers around town who really do know local companies, but Washington investors largely must depend on research from Ferris, Baker Watts Inc. in the District and Friedman, Billings, Ramsey Group in Arlington. Ferris's research is limited but good. FBR covers a lot of companies and industries with which the firm has investment banking relationships and potential conflicts. But FBR analysts are tough-minded -- tough-minded enough to have warned investors away from Fannie Mae and Freddie Mac, which is more than you can say for the big Wall Street firms.

Now the two most discredited companies in town, Fannie and Freddie, are dismal examples of what happens when business and government get into bed together. Greedy management, protected by political connections, has transformed Fannie and Freddie from the first stocks a new Washington investor ought to consider to the last.

However, financial services remains the one of the region's most appealing investment categories. That's unexpected because that business has not developed the way people thought it would. Twenty years ago, predictions were that Washington would become the banking capital of the mid-Atlantic.

Most of the banks have their headquarters elsewhere, but other types of financial services companies flourish around the Beltway. E-Trade in online services, Capital One Financial in credit cards and a raft of specialized business finance firms -- Capital Source, American Capital Strategies, Allied Capital and David Gladstone's two companies -- are on my stock-shopping list. Several of the region's real estate investment trusts are appealing, but this is not the time in the real estate and interest rate cycles to buy REITs. I only wish that I could buy stock in the Carlyle Group, the privately held titan of private buyouts.

Biotech beckons, even though the local industry has yet to deliver its first home run. The choice is between two-bagger firms like United Therapeutics Corp. and all those promising rookies in Rockville. Portfolio theory teaches that buying a batch of biotech stocks is more likely to be successful than trying to pick the winners. But I'll never forget the biotech analyst who told me that the best strategy historically has been to sell them all short because the losers always outnumber the winners.

Losing is one lesson I'm going to have to learn.

Old-time Washington investors like Stan Hinden, who founded this column and left it in my care, caution that retirement age -- even early retirement age -- is not the best time to begin buying stocks. Time horizons are too short. Markets move in long waves; if you hit a trough at age 63, it can take years to recover.

And years of watching the markets and writing about stocks has made me skeptical about whether individual investors can beat the market by picking stocks. Most years most mutual fund managers can't even match the return of the Standard & Poor's 500-stock index, which is why index funds have always been my favorite investment.

But my years of writing about Washington investing have been so much fun that actually doing it is irresistible.

So, so long. Wish me luck.