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Investors need Wall Street secret decoder ring

Translating the jargon of the stock market might be even more challenging than choosing the right stocks.

©Associated Press
September 8, 2002

NEW YORK -- Sometimes it feels like you need a translator to decipher what happens on the stock market.

Who can make sense of anything when stock ratings sound more like listings in a Weight Watchers brochure than reasons to buy or sell, or when the term "growth stock" is tossed around to describe almost anything with potential to expand?

And how about the upside-down logic the market sometimes embraces? Go figure why some days good news props up the market, while other days it spurs a selloff. The same is true for bad news and even no news.

Nothing is simple and straightforward on Wall Street, and that's sure to make it all the more difficult for individual investors to decide where to put their money.

"Sometimes you wish you had a playbook so you would know how to play the game," said David Caruso, co-author of the recently released book Decoding Wall Street.

Institutional investors understand street speak, but the language lessons haven't trickled down to the masses.

That's what hurt small investors when the market's boom turned to bust over the last two years. They didn't know all the insider lingo, so they couldn't tell when to flee, and many ended up holding on too long as the more educated institutions cashed out.

But don't think the market's gotten any easier to navigate. It's still difficult to determine what to do and when, and listening to stock analysts and market pundits make things seem all the more confusing.

Sometimes following Wall Street is like being stuck in George Orwell's 1984, where love means hate and peace means war.

Take for instance the new three-tiered stock ratings that many of the big investment companies have put in place in the past few months.

Many companies had five-tier ratings that generally included strong buy, buy, hold, reduce and sell. They rarely gave ratings below a hold, but when they said to hold, they really meant to sell. In turn, buy meant hold and strong buy meant buy.

So the new ratings are supposed to make everything much clearer, right? Not really.

Not every brokerage uses the same terminology. While many have shifted to just using buy, hold and sell, companies such as Morgan Stanley and Lehman Brothers use overweight, underweight and equal weight, which sound more like descriptions of body size than stock advice.

And many companies still seem to be shying away from issuing sell ratings. In fact, only 2.6 percent of all ratings in July were sell, according to Thomson First Call.

Confused yet? Well, that's not the only thing that will make your head spin.

How about the term "growth stock"? It's loaded with different meanings. Some say it's tied to companies with fast-expanding businesses, while others define it as companies with high potential profitability. To still others, it's something that doesn't pay dividends.

Same holds true for a "value stock." It often describes a stock that an investor thinks is worth more than its price. But determining if it's valuable hinges on the perception of how a stock stands up to the rest of the market.

"When you talk about growth, are you thinking about growth in revenues or profits, or are you considering some other metric? And the same is true for value," said Tom Murcko, president of the Web dictionary site "Sometimes you don't know what people are using."

Also hard to crack are the drivers that steer the stock market.

There's the "buy the rumor and sell the news" philosophy. That's where trades are made on speculation that something will happen, and selling kicks in once it does. But you have to be lucky enough to hear the rumor to even jump into the market.

"Whisper" numbers may also throw you for a loop. Analysts make estimates on what corporate earnings will be, but then stocks sometimes trade before the earnings are released on expectations, or whispers, that the actual results may be different from the forecasts.

Throw logic out the window, too, when trying to plot the day-to-day moves of the market.

Just look at the past few months. Continued reports of corporate scandals sent investors running, plunging market indexes to their lowest levels in four years.

So you would think no news would be good news for investors, but that's not what has happened in recent weeks. In fact, there have been days that no news triggered a selloff. And on some occasions, bad news has caused stocks to rise because it wasn't as bad as everyone thought it would be.

Difficult to decode? Often. Illogical? Always. That's Wall Street, now and probably forever.

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