The Politics of Market Research

Back in 2006, I was working fairly closely with my mother’s company, Market Research Dallas and that included attending Market Research conventions. The Southwest Market Research Association (SWMRA) always meet in Las Vegas around March or so, and, being a gambler at heart, I was always more than happy to attend this conference. Melissa Pepper of Tammadge Market Research in Austin recommended that we have a round table discussion of the book, Applebee’s America. So I read it.

The basic thesis of the book is that American’s tend to organize themselves into groups that hold a similar lifestyle and “gut values” (a term which the authors return to ad nauseam through every aggravating chapter) and that 90% of the people in these groups are sheep which will look to the leaders of these lifestyle oriented cliques to learn (according to the book):

  • Where they should live
  • What products they should use
  • And who they should vote for

The book reeks of the typical business book whereby most traditional business processes like customer relations are suddenly reinvented in the author’s particular paradigm to become never before seen concepts that sound amazing, but, upon reflection, are really just a slick repackaging of the same ideas. The book comes back to the term “Gut Values Connection” over and over again as the way to build customer relations, and by that it means that what you do is not as important to people as what you stand for. The book goes into explicit detail of George W. Bush’s 2004 re-election strategy and boils it down to the idea that the majority of Americans disagreed with Bush’s decisions, but that he was able to win American’s over by what he stood for in their minds.

The book recounts a number of conversations between people who seem to have voted for Bush despite not agreeing with the War on Terror or his fiscal policies because his campaign presented him as a straight-forward and simple man of principle as opposed to Kerry who was a elitist flip-flopper. The also recount a number of other conversations about people who voted for Bush simply because they wanted to belong with the group their neighbors belonged to (i.e. The Republicans) and voting for Bush allowed them to do that in their minds.

Of course, I hated Bush then and I hate him now. I had a difficult time reading accounts of Americans who voted for him either just because everyone else was or because his marketing presented him as a trustworthy guy when any close scrutiny of his administration’s policies as compared to his campaign pledges or his willingness to simply lie to get the country behind him made me want to pull my hair out. The book confirmed for me again and again that Americans were sheep who were being lead to the slaughter, but I’m now recounting this book, not as someone who is disgusted with American politics, but someone who is interested in marketing.

In essence, this book says to that how you appear to people is far more important than how you actually are; a truism that’s nothing new to marketing. But it gives different reasons than the traditional marketing textbook. According to them, it’s not your advertising or your product that determines whether you win or lose but how you relate to the community you’re trying to serve and how the image you project intersects with their core values. Their other primary example is Applebee’s restaurant which grew to dominate the casual dining business despite the fact that their food continually rated behind their competitors. They did this by building relationships with their surrounding community by doing things such as:

  • Putting plaques and trophies of the local little league sports team in the restaurant
  • Putting up pictures of their regular customers by the tables they liked to sit at
  • And endeavoring to learn the quirky preferences of their customers and make them feel at home by having their quirky preferences on hand when they arrived. (The example from the book was the Coronatini, a Corona beer served with olives, that a customer always ordered and how hard the Applebees worked to ensure that it always had olives ready, to the point of driving to the local grocery when they saw him arrive).

The disconnectedness of modern Americans is what the book keeps coming back to. Applebee’s was able to grow is restaurant business despite having worse food than its competitors by giving them a place to feel connected to their community. Similarly, megachurchs (which the book also spends a good deal of time on) allow for small groups to form which engender a sense of belonging and shared values. If one can appeal to these communities and their shared values, then one can win over the consumers despite having a less than stellar offering.

Furthermore, the book argues that roughly one in ten members of these communities tell the other nine how to think, what to buy, and who to vote for and that Bush’s 2004 re-election was made possible only by reaching out the these “navigators” and turning them onto George Bush. Finding and communicating with these navigators then (according to them anyway) is the key to controlling the members of a given community and, thereby, the key to controlling the nation. Therefore, according to the book, to gain ultimate control of the nations populace all one has to do is monitor the consumptive trends of certain demographic groups, use market research to find out what these demographics “gut values” are, and maintain a dialogue with the various group’s navigators. Given that this is an extremely market research intensive process, it’s little wonder we were reading it as part of a market research conference.

The predictions of this book have not been borne out by later events. At least, not for the Republicans. Applebee’s Ameican says that the Republicans had a huge lead on the Democrats in terms of using their “life targeting” techniques to identify navigators and in different cultural niches and that the Democrats would have to catch up or be left behind. However, D Magazine reported that the Republicans faired very poorly in the 2006 election despite (or perhaps because of) their dependance on this new way of thinking. Election consultants said that the North Texas Republican efforts were “too fancy” and that it cost them a lot of positions to the Democrats.

Of course, I’m going to assume that the authors of Applebee’s America would say that this is simply because the Republican party was no longer making a “gut values connection” with voters anymore, but the horror stories of Republican door-to-door vote canvassers who were finding a hostile audience of non-Republicans who “kicked them off their driveways and yelled at them.” That indicates a fundamental disconnect between the people that they were trying to reach and the people whose doors they were ringing, and that would indicate a flawed methodology.

Props to Obama’s First Two Days

I have to say that it’s nice to have a Democrat in power again. I have some Republican readers out there (just embrace it, Kevin; talk to Taylor — he’ll help you) who I know will find it very annoying for me to be joining in the celebration of Obama’s first couple of days. But, I have to say, that I like what Obama’s done so far: moving to close Guantanamo and the CIA’s secret prisons is simply awesome. The very existence of these programs is not only Un-American, but, I believe, unconstitutional.

Where, in our Constitution, does it say that the United States can take people into custody and detain them for years at a time without bringing them up on charges? I was hoping that the justice system would actually reject Bush’s programs, but the years went on and nothing happened. It seemed that someone in the Bush Administration decided to leave the people detained in Guantanamo for the next President to sort out. (I felt this even before Bush got re-elected in 2004.)

For that matter, Iraq seemed little more than a talking point in the “War on Terror” in Bush’s second term; other than sending some additional troops into Iraq, what really changed there? For that matter, what did the additional troops accomplish other than to give John McCain something to ramble on about during his campaign for President? I love what The Daily Reckoning’s Bill Bonner said about the Iraqi journalist throwing a shoe at Bush: “What’s wrong with our American journalists? Have they no shoes?”

Indeed, I wondered the same thing about a lot of people. How could we allow the Bush administration to rewrite the power of the executive branch before our very eyes and have so little outrage? So, I am pleased to see Obama’s first acts being so definitive to curtail the obvious abuses of the prior administration. Although, Wall Street doesn’t seem quite so happy about it.

As Taylor pointed out in his last comment,

“The percentage decline is the worst ever for the Dow on a president’s first day in office. That would break the old record, 2.9%, set on Nov. 22, 1963, when Lyndon Johnson took over after John F. Kennedy’s assassination.”

Of course, there’s a maxim on Wall Street that the first two years of a new Presidency will be down years and the last two will be good ones.

Still, that was a particularly violent reaction to Obama’s first day.

Although, I made money. As you can see in the chart below, Barrick Gold has been doing just fine over the 3 months since Obama was elected President. On that fateful day of which Taylor spoke, when the Dow was down 4%, Barrick was up some 5.8%. What can I say? Gold’s been treating me well.

Barrick Gold Over the Last 90 Days
Barrick Gold Over the Last 90 Days

That’s not to say that I think this stock isn’t going to see some rocky times ahead. I do think the forces of liquidation are taking a breather — for now. The volatility of this week is more the Wall Street traders showing their displeasure at the forces of Socialism that Obama represents. But I expect it to stabilize over the next few weeks. In fact, I’m expecting a bit of a rally. It’s going to be a sucker’s rally, though; but I still expect it’s going to trap a lot of people who are thinking that the worst is behind us.

Barrick will probably be taken down a peg or two in the upcoming collapse, but it’ll come back. I can’t say the same for the rest of the stock market. We’re making the bitter transition from a consumer-driven economy to a producing one. The first stage is that the businesses that catered to consumer spending need to leave the scene to clear the field for the new companies. That means you can expect a lot of companies going bankrupt this year.

As for me, I’m doing a bit of trading. As you can see from that chart of Barrick, it seems to be hovering between a range of $31 and $36. That’s a pretty healthy trading range to buy in at the bottom and sell at the top, and that’s what I’ve started doing. I’ve turned some extra profit from it so far. I expect that all my profits will be taken out by the upcoming collapse, but those profits should help to cushion the blow. It’s the buying at the bottom where you can expect to make some real money.

I can only hope that these easing up on the powers of the executive branch may indicate that, perhaps, my fears of him being the next FDR and implementing a lot of BS controls — such as gold confiscation — may prove false.

Mercifully, false.

My Investment Scorecard for 2008

I just went through and reviewed how my investments did throughout 2008. I will now reveal my result. Drumroll, please.

In 2008 … my ROI  was …


That’s right. While everyone else went broke, I was makin’ bank. How on earth did I do it? Okay, okay, okay — I’ll tell you. But only ’cause I’m a nice guy; I had three investment accounts: a ROTH IRA, a traditional brokerage account, and a Variable-Universal Life Insurance Policy. At the start of the year, my accounts were invested as follows:

* My VUL Policy had roughly $3500 invested in Gold Mining Stocks through the Rydex Precious Metals Fund. (RYPMX)
* My Roth IRA had roughly $17,000 invested in Water Mining Companies (PHO) and gold bullion (GLD).
* My traditional brokerage account has roughly $1500 invested in the Prudent Global Income Fund (PSAFX)

As you can see from the start, I was invested to profit from a falling dollar. Let’s take a quick step back into the recent past; last fall, to be specific.

It’s October, 2007. The stock markets have recently reached their peak with the Dow Jones closing at 14,100 on the 9th, and I just don’t see how stocks will possibly hold any value with all the bad news now coming out. At the dawn of 2008, I want to try and steer as clear of the main stock market as I can; as February ends, I liquidate both of my Roth positions, basically breaking even.

Springtime, and the market’s begun to heavily swoon; I want to reposition myself to profit from the short side. I put my Roth money into the Prudent Bear Fund, (or BEARX) since it’s 70% short the market, and 30% long on gold mining stocks. Now it’s June; I’m investing another $5,000 into my Roth, (my 2008 contribution), and also continuing to invest in Prudent Bear.

Here comes a September to remember. We see the bankruptcy of Lehman, and the stock market rallying on the news. I’m basically sitting flat in my portfolio for the whole year — quite frustrating. I’d positioned myself well to profit from all of the bad news, and despite the copious amount of it, I’ve yet to show a profit. In fact, the stock market’s flaunting its irrationality by rallying strongly on Lehman’s failure. Over the next couple of days, it’ll proceed to fall, only to rally again as a Keynesian trifecta of Paulson, Bush, and Bernanke totally blow my mind announcing the TARP program.

Now, I’m in totally uncharted territory. I knew the period of history I was living in would show a stock market deflation in comparison to gold, but I wasn’t sure if it would from stocks falling, or gold rising. At the time, it seemed the Powers That Be would be combating the falling market with inflation, and so betting the market would fall, wouldn’t be a winning choice. Going forward, I figured that either: inflation would take hold, raising all boats, (favoring gold particularly), or the market would crash, causing people to then rush to gold in the panic. So, either way, gold was the way to go.

But here is where I made a critical error, choosing to liquidate my short positions just prior to the October crash. I wasn’t sure where to put my money, so half of it went into Barrick gold mining stock (ABX) @ $37, and the other, just sat in cash. A week later, the market’s started crashing, as the credit markets freeze. Barrick’s up to $38, but everything else is uncertain. Volatility has overtaken the market, values bouncing all over the place.

The now frozen credit market prompts me to look into bonds; and, sure enough, I find some South Trust, rated AAA, maturing six weeks from the day I bought them, yielding an annualized 30%. Having done my homework, I knew South Trust, recently acquired by Wachovia, had now been taken over by Citigroup. Seemed pretty clear from all of the TARP madness that Hank, George, and Ben were peddling that Citi wouldn’t be allowed to go bankrupt. So, I sold most of my Barrick stock (for a small profit) and put the $20,000 into the South Trust bonds.

Turned out, it was a great move. Not only did I make $800 in six weeks when they hit maturity, but I say out the bulk of the decline in Barrick. I’d been actively trading it up and down in my traditional brokerage account, pretty much breaking even once all was said and done. But, as the bonds matured, I was still able to scoop up a ton of Barrick Gold close to the bottom. It was a decision at the time, trying to figure out if I should put the whole $21,000 to work in Barrick, or only half, instead. At this point, Barrick was range-bound between $20 and $25, so I decided to invest $11,000 into Barrick at $20.50, leaving the rest in cash to buy more, should it have fallen any further.

Of course, this was a decision I’d come to regret as Barrick took off — and never looked back.

But, by year’s end, Barrick would be trading in the neighborhood of $36 a share, my $11,000 investment now worth $20,600; had I bought in with everything, knowing I would’ve made even more.

Ah, well. It beats losing money.

As 2008 came to a close, I broke even in my traditional brokerage, (funded up to $9,000), my VUL had fallen to $2,200, or so, with my Roth sitting pretty at $32,000.

Okay, I know my math isn’t exact here, because I’ve not annualized any of these figures to correct for the fact that a lot of the money was added mid-year. If I did, my ROI would be even higher. But why be greedy?

All that being said, my final scorecard was:

Start 2007                    Money Added                     Subtotal                      Year-End
Roth IRA                   $17,000                           $5,000                          $22,000                       $32,000
Traditional                 $1,500                           $7,500                           $9,000                         $9,200
VUL                            $3,500                             $260                           $3,750                          $2,250

Totaling up the subtotal field, I get $34,750 and a year-ending of $43,450. That’s right at 25%. As I mentioned, if I’d have corrected the ROI by factoring in the added money only being used for half the year, that ROI would be even higher.

Furthermore, since the major gains all came in the Roth account (which is TAX FREE, don’t forget) that means that my “tax equivalent yield” is even higher. That’s just a fancy way of saying, that since I don’t have to pay taxes on the gains in the Roth, the return is the same as making a greater amount that I would pay taxes on.

All in all, it was a profitable year.

The Not-So-Efficient Market

There is a theory in stock circles called the “Efficient Market Hypothesis.” It was first proposed by a student of famed mathematician Benoit Mandlebroit (who proposed Chaos Theory) named Eugene Fama. The theory is easy to understand; markets such as the stock market have so many players that it reacts instantaneously to process all known information about a given security. A corollary of this theory is that because all information about the market has already been “priced in”, that it’s impossible to beat the market because any actionable information about a given security is already reflected in its price. This theory was popularized in books such as A Random Walk Down Wall Street. It has been attacked in a number of books including Benoit Madlebroit’s The Misbehavior of Markets as well as my book, What Do You Mean My Money’s Worthless.

I’ve found that some of my biggest investing mistakes are caused by giving any credence to the notion that the market has priced in any information at all. Case in point, for much of this year I was an investor in the Prudent Bear Fund (ticker=BEARX) which is a mutual fund that is short the market, yet, despite many of my predictions of doom and gloom coming true, the stock market continued to hold its value in the face of more and more bad news. Then came October. Paulson and Bush announced that they were going to do a massive bailout of all troubled assets on bank balance sheets after allowing Lehman Brother to fail, and the stock market rallied strongly. 

At that point I lost faith that the stock market was going to decline. It seemed that the Federal Reserve and the US Treasury were simply going to inflate the problem away, and the market was responding in just such a direction. So the logical move to me seemed to be to invest in gold in order to protect from inflation and away from shorting. I figured that, with all the bad news that has come out, if the stock market was going to crash it would have already done so. I closed my short positions just before one of the most violent stock market collapses ever based on the belief that knowledge of the credit freeze and oncoming recession were already “priced into” the market. I’m still up on the year (which few people can say) but I missed out on a great opportunity to profit due to my putting ANY credence in the notion that the market was efficient. 

Now I’m realizing that the key to investing is not to predict the tomorrow’s headlines, but rather to figure out which of yesterday’s headlines will the have staying power to shape market movements in the future. That’s what I’m trying to do today. Call it the “Slow Market Hypothesis”- which significant piece of news will the market take the longest to get through its thick head? A question that is very much on my mind today. 

The headline that’s dominated the last couple of months has been that “Deflation is Coming. Run to Cash!” Call me crazy, but I think that headline’s played out now. The headline of today was that “Dollar slides as Obama vows stimulus.” Gold moved strongly up and Barrick Gold, my personal investment vehicle of choice, closed the day up 8.39%. I think that the headlines going forward are going to become more focused on inflation rather than deflation as markets react to the new ending stream of new dollars being cranked out by the Treasury and the Federal Reserve. Just today, it seems that Congress and Bush are dipping into the bailout goody bag for $15 Billion to loan the auto industry. The hard figures on M2 straight from the Federal Reserve says that our money supply has expanded by 7% over the course of year, which is not nearly as alarming as the “Adjusted Monetary Basis” (a measure which accounts for changes in the reserve requirements as well as changes in foreign exchange market intervention) which the St. Louis Federal Reserve Bank publishes. Here, take a look at it yourself:

That’s a rather astounding rise in the monetary base (1400% annualized), and it’s only going to get worse. The next stimulus package that’s being proposed by Barack Obama is roughly $1 trillion

The rise in the value of the dollar was caused because liquidation was forcing people to sell their assets in order to meet margin calls that were written in terms of US dollars, but that’s going to be a short lived phenomenon. As the full impact of these monetary shenanigans start to sink in, the market will seek a safe haven that isn’t being grossly tampered with, and that’s going to lead them back to gold. That’s my prediction anyway, we’ll see how it turns out.