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VIDEOReal or Ridiculous? The Magazine Cover Indicator
Editors have a knack for uncovering a trend just before it ends.
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Want to quickly derail your business? Get tabbed as the cover story for a major magazine... like this:
Amazon's (AMZN) Jeff Bezos named Time magazine's Person of the Year. December, 1999.
And it made sense. At the time it certainly felt like Bezos was doing something important at Amazon. The company's stock was trading near an all-time high of $113 per share. But in less than a year following this cover story, the stock, along with the rest of the Internet bubble world, would collapse by 95%. It would take nearly 10 full years for those losses to be recouped.
If it seems magazine covers have a long history of steering investors the wrong way, then it's probably because they really do. In 2007, three professors at the University of Richmond proved it. In their study, “Are Cover Stories Effective Contrarian Indicators?", the researchers looked at companies featured on the covers of three business magazines, Business Week, Fortune, and Forbes, over the course of 20 years. Their study found a statistically significant correlation between appearance on the cover of one of the magazines and the subsequent performance of the company's stock.
Unfortunately for the companies, the correlation was inversely related to positive magazine covers, although if you were among the few appearing in a negative light -- magazines tend to focus on the positive -- then you could at least find a small ray of light on the horizon. The net of the study was that a positive cover story typically marked the end of a stock's outperformance of the broad market while a negative cover story, if it didn't actually mark the end of a stock's underperformance of the broad market, at least marked the point where shorts should cover.
Long before the researchers latched onto the idea, Legg Mason strategist Paul MacRae Montgomery, the originator of the Magazine Cover Indicator, showed that once a magazine cover such as Time or Newsweek features a definitive statement on a financial trend, bullish or bearish, the buyers, or sellers as the case may be, are almost fully baked into the pie.
Okay, so all this proves what some savvy Wall Street soothsayers have long known; that magazine covers are poor predictors of subsequent performance. The question is, why? Are magazines just bad at business? Are journalists just bad at identifying good and bad companies? The answer will actually get your favorite magazines and journalists off the hook for being poor stock market prognosticators.
If you think about what it takes to move a story from a journalistic thought to cover, then you can begin to see why the market has already moved on by the time a story cracks the cover code. After all, magazines like to pursue cover stories that hold broad appeal. The accumulation of mainstream popularity it takes to land Lady Ga Ga on a magazine cover is the same for Apple (AAPL); because it's hot, people dig it, they want to know more about it, the image sells.
In the accompanying slideshow, see some famous wrong-way predictions that have appeared on mainstream magazine covers over the past 50 years. Take a look at our gallery of covers, here.
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