How investment sleuths burrow into world news to pick stocks
Ramon T. Smith is the investment world's equivalent of a tailor. He takes information out of newspapers and magazines and, as if it were thread, weaves it into patterns and themes. Then, the informational tapestries put together by Mr. Smith are used to help the Travelers Investment Management Company (Tim-co), a subsidiary of the Travelers Insurance Companies, make investment decisions.
Mr. Smith, a vice-president of Timco, located here, has been reading newspapers and magazines for 12 years now, looking for what he calls ''unintended information'' - information without any investment bias. This would not include information published by securities analysts or reproduced in annual reports, for example.
On a typical day, Mr. Smith, scissors in hand, clips stories from six newspapers, most of the newsmagazines, and about fifty trade journals. He is looking for information that will enable him to ''infer'' that certain trends are going on in the world. From those inferences, he makes investment recommendations.
For example, recently Mr. Smith has been clipping a lot of stories about US-Japanese trade. Not only have there have been front-page stories about the alleged ''Japanscam'' computer scandal and the Mitsui antidumping suits involving steel. There have also been less noticeable stories about how Canada is tightening up its inspection procedure on Japanese cars, and how the US Immigration and Naturalization Service has changed its visa procedures for Japanese engineers.
Putting all these together, he sees a rising tide of protectionism. For some Japanese stocks which have been widely admired in the investment world, the implications of protectionism are not good, since they depend on exports.
Mr. Smith is not the only manager to use such ''inferential reasoning'' in making investment decisions.
According to Andre W. Alkiewicz, a partner at Inferential Focus, a New York City firm, some 80 institutional investors or corporations subscribe to the service, which provides information gleaned from reading newspapers and magazines. One of those clients, Bruce Johnston, a vice-president at the Boston-based Fidelity Management & Research Company, says the information he receives from such services is useful. ''It's very early information,'' he says, ''but it's useful in spotting anomalies. It's like when you're back in school and they are teaching you to be a good analyst. The instructors say you are trying to put as many pieces in a mosaic as you can. Only in this case, you are trying to find the pieces.''
Two companies specialize in providing such information to mutual funds, banks , and corporations. They are the Williams Inference Service, in Suffield, Conn., and Inferential Focus, in New York.
Mr. Smith says the use of inferential reasoning has worked well at the Travelers. The insurance company, which manages $1.7 billion in pension funds, began using inferential reasoning in 1972 when it constructed a paper portfolio consisting of stocks picked through that process. After two years, it found it had significantly outperformed the Standard & Poor's 500 stock index. So it integrated it into the investment process. Mr. Smith says stocks selected this way have outperformed the S&P 500 ever since.
In his daily reading, Mr. Smith reads the Wall Street Journal, New York Times , The Christian Science Monitor, Journal of Commerce, American Metal Markets, and Hartford Courant. He also reads trade journals ranging from Aviation Week to Iron Age, and such news weeklies as Time and Newsweek.
As he pores through the publications, he is constantly looking for information that could affect business or fit into the various themes he is developing. As he sits as his desk, beneath a large sign intoning, ''Think for Yourself,'' he reels off the themes, all of which have acronyms. For example, there is CLIC, or Capitalism Losing Its Complexes; there is SCATBE, or Semi-Conductors Are the Basis for Everything; and START, for Strategic Arms Reduction Talks.
The way he uses these themes is to look for news stories that fit into them. Then he'll infer certain things. For example, with START, he says he has come to the conclusion that President Reagan is arming heavily in order to parlay better arms reduction deals with the Russians.
Thus, the defense industry should look good for some time, he says, but adds, ''It must be watched closely.''
With SCATBE, he has inferred that IBM, the world's largest manufacturer of semiconductors and related products, will continue to grow as it flexes its muscles. And IBM also comes out positively in his CLIC theme. He sees IBM benefiting since the government has dropped its antitrust suit and recent court decisions have allowed predatory pricing when it is useful to the consumer. ''All of which should be right up IBM's alley,'' he concludes.
Even though he is bullish about the long-term prospects for corporate America , he says it's important now that investors buy stocks in companies with a great deal of ''financial integrity.'' Thus most of his stock picks are companies like IBM and Eastman Kodak.
Last week was a bad week for the stock market. Investors were disappointed that the market failed to rally when interest rates came down. The Dow Jones industrial average sank below 800, closing at 784.34, off 24.26 points for the week. Analysts suggested that Wall Street was dissatisfied with the tax bill being debated in Congress, and investors are concerned that third-quarter profits will remain low.