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8:30 AM EST, Monday, March 26, 2007: You can buy good companies and watch their shares rise in value. This is slow and not always reliable. Sometimes things go awry and the shares fall. There are better ways. One is to buy shares and then call your favored journalists up and tell them what a great stock you've found. They'll write up your stock's virtues. Bingo, the price will rise. And your purchase will look brilliant.

Another way is to be a broker. A big institution like a mutual fund asks you to buy lots of shares in ABC Company. Before you buy the shares on behalf of your client, you buy a few for yourself. As you place the large institution order, the stock will rise. And everyone will make lots of money.

Much of this is illegal and immoral, but happens every day. Reporters need stories of hot stocks. Institutions need to place orders for hot stocks. The investing public -- i.e. you and I -- rarely hear about these stories. Fact is Wall Street lives on short-term information and most hedge funds -- i.e. most of the trading on Wall Street these days -- don't "buy and hold." They trade. They buy and sell, hoping to make a few bucks today and sell quickly, before the impetus (story writeup, big order placement, the great "news", etc. ) fades. As a result, what successful hedge funds are buying and selling becomes "hot" information. Since most clients don't trust Wall Street research, brokers are more likely to use as their sales pitch "So and So hedge fund is buying XYZ Corporation" instead of "Our research department thinks it's a great stock." In today's upside down world what a hot fund is doing has much more credibility, i.e. it will sell some shares and generate a commission.

I going on this article as a result of a bunch of weekend events. First, I receive this email written by the SVP, Head of Global Securities Research & Economics at Merrill Lynch, Candace Browning:

March 22, 2007

Dear Client,

Not long ago, something very disturbing happened to me while I was sitting at my desk listening to our morning call. That morning, we featured a contrarian upgrade of a major U.S. company's common stock which went on to generate over a 40 percent return for our clients. What happened was that within 60 seconds of releasing our opinion change, this same information we had just sent out on our private platforms was being replicated with plagiaristic precision by a New Jersey-based digital financial news source. This is a website that purports to provide its paying customers with research it compares to "having a seat at Wall Street's best houses and learning what they know when they know it."

The heart and soul of what sell-side analysts do is to provide well-grounded investment ideas to individual and institutional clients to support them in making timely and (we hope) profitable investment decisions. But that day I realized that, much like the music and film industries before us, Merrill Lynch Research is in the throes of being Napsterized. I also realized that like every other content provider from the Walt Disney Company to obscure news outlets Merrill Lynch Research needed to regain control of our distribution channels in order to preserve and protect our hard-earned intellectual capital for you.

So, starting this month, we have begun to take a number of aggressive steps to ensure that we can continue to provide premium products and services for the exclusive use of our clients. We are rolling out a digital distribution strategy that 1) terminates research access to non-clients on our proprietary site and external vendor platforms; 2) further restricts and delays media access to selected content; 3) eliminates existing licensing arrangements that erode the value of our written product and 4) establishes licensing agreements at market prices competitive with services offered by other providers.

For a number of years, I have been listening with mounting frustration to a never-ending litany of statements that erroneously predict the demise of sell-side research, labeling it as virtually without value in the digital era. Certainly the ease and speed with which the fruits of our efforts can be posted on the web for the world to review has pointed yet another arrow at the chests of sell-side research organizations. Yet, when I listen to these predictions, I feel like Tom Sawyer covertly present at his own funeral: perversely proud to be there while basking in an inviolable certainty that sell-side research is alive and well.

Sell-side research is not only surviving but thriving in today's global marketplace, because it plays a critical role in ensuring that corporate, fixed income and other securities are priced as fairly as possible in the primary and secondary markets, thereby delivering one of the most important functional elements of a market economy: efficient capital allocation. Sell-side research turns information into insight both in the form of investor education and specific recommended investment ideas. Merrill Lynch currently employs 750 analysts who follow more than 3,000 stocks and other securities for institutional and individual clients. The educational value and investment recommendations produced by those analysts is not only broad, it is exceedingly valuable: Last year, our recommendations produced a total global return (calculated in local currency) of 19.5% versus the MSCI's 16.2%.

Fortunately, clients grasp the value of sell-side research. According to a recent poll of more than 2,000 institutional clients by Greenwich Associates, U.S. respondents reported that they effectively allocated nearly half (42%) of their total commission spend on high-quality sell-side ideas. And, the much-bandied-about notion that hedge funds value research less than other money management firms is further contradicted by the same poll's finding that U.S. hedge funds allocate 55% of their commissions for research, as opposed to 33% at mutual funds.

There is little doubt that sell-side research continues to be highly valued by those in the know, yet at the same time it is incumbent upon us to nimbly adjust to the ever-shifting exigencies of the digital era. By continuing to deliver alpha and eliminating access to research by non-clients, we can and will regain the recognition that the sell-side research profession deserves, and we will also better serve you.

Then I send it to a bunch of friends who work managing money. One replies:

I got this too. I noticed how they failed to mention that they make much of their money taking advantage of the trading flows of its large institutional clients... I like how she makes the Merrill Lynch equity research department (home of Henry Blodget) out to be the greatest victims of all time.

I asked how this happens? The reply:

They get a big buy order from us. They tell their hedge fund clients (including their own prop desk) that we're buying. They put those orders ahead of ours and everyone (but we and our shareholders) profits as the stock goes up with our buy.

This isn't a ML-specific thing, but generally understood to happen across the Street.

I replied and asked: "Isn’t this called front-running? Isn’t it illegal?" And the answer?:

Yes and yes. It's hard to prove, but it definitely happens.

Then I pick up the Sunday New York Times. There's a headline, "James Cramer as Emily Litella." For those of you who don't who Emily Litella is, let me quote from Wikipedia:

"Emily Litella" was a fictional character played by comedian Gilda Radner in a series of appearances on Saturday Night Live.

Emily Litella was an elderly woman with a hearing problem seen on the op-ed Weekend Update segment in the late 1970s. Frumpily attired in a dress and a sweater, "Miss Emily Litella" was introduced with professional dignity by the news anchors, who could sometimes be seen cringing slightly in anticipation of the faux pas which they knew would follow as their "guest" launched into tirades on various topics.

Radner's character peered through her bifocals and read a prepared letter addressing some public issue, becoming increasingly agitated as her statement progressed, only to discover in the middle of her report that she had misheard what the issue was. A typical example:

"What is all this fuss I hear about the Supreme Court decision on a "deaf" penalty? It's terrible! Deaf people have enough problems as it is!"

When the on-air reporter interrupted to point out her error (death vs. deaf), she would crinkle her nose, usually say, "Oh, that's quite different...", and then humbly say to the audience, "Never mind." ...

Other misunderstood topics included Saving Soviet Jewelry ("Jewry"), Endangered Feces, Flea Erections, Making Puerto Rico a Steak ("..next thing you know, they'll also want a baked potato with sour cream!"), Presidential Erections, Pouring Money into Canker Research, the Eagle Rights Amendment, Busting School Children (bussing school children), Conserving our Natural Racehorses, Youth in Asia (Euthanasia), and Sax and Violins on Television.

The NY Times' article reported on how Cramer fed information to a "bozo reporter" on a stock he wanted pushed up or down. Of course, Cramer denied all. But I distinctly remember him discussing this technique in one of his early books. I got the impression talking to bozo reporters was a critical part of his success as a hedge manager.

March 25, 2007
James Cramer as Emily Litella
Correction Appended

James J. Cramer, CNBC’s televangelist of trading with his manic “Mad Money” show, now says that those sins he was confessing were not his own.

In a video interview taped in December for TheStreet.com that quickly turned into a big hit on YouTube last week before TheStreet.com had it removed, Mr. Cramer laid out in bombastic detail how to really make mad money on Wall Street. He would “foment,” he said, to push a stock up or down. If he wanted a stock’s price to fall, he recommended spreading negative information about the company to a “bozo reporter” at The Wall Street Journal. Bob Pisani, a CNBC reporter, is another useful conduit of damaging rumors, he said. “No one else in the world would ever admit it,” he said of the various methods, “but I don’t care.”

But on Thursday morning, he was worried. Mr. Cramer appeared on the “Imus in the Morning” radio show to say that he had misspoken. He said that he did not do any of those things when he ran a hedge fund, nor did he even believe what he had said.

When Don Imus, the show’s host, asked him, “Who’s the bozo at The Wall Street Journal?” Mr. Cramer dodged the question. He also said he had apologized to Mr. Pisani, whom he called “one of the best.” Mr. Cramer added, “I screwed up in saying that stuff about him.”

What happens when your broadband line screws up?: Every weekday morning at about 8, the DSL line at my country house slows down to a crawl and eventually seizes. When I report the problem, my phone company says they'll "speed up my line," which accomplishes nothing. The problem is not my DSL line. It's their connection to the Internet. They don't have enough capacity. Getting this message through can take months. The higher you escalate your complaints and problem diagnostics the better.

Sadly, you can't complain to any government agency -- like the local Public Service Commission -- because the telephone industry has conveniently organized broadband service to be non-regulated. I've been complaining up the chain for many months. Last Friday I learned that my local phone company had actually listened to me and had placed an order for an OC-3 line back in December. But Qwest had screwed the order up. It hadn't been able to deliver the equipment necessary to hook up the 155.5 million bit per second OC-3 line. And Verizon, which was delivering the line from our phone company to the Internet, had canceled its order. In short, total mess.

The only lesson: Stay on top. Keep complaining. In the bureaucratic, slow-moving telephony world, the squeak wheel gets the most attention.

The future of books: I just sent the 23rd edition of Newton's Telecom Dictionary to the printer. Am I wasting my time making "dead-tree" editions? Should I sell the book electronically? But how? The world of books is changing. If you're interested in books, this piece from the Economist is worth reading:

The future of books. Not bound by anything

Now that books are being digitized, how will people read?

IN SECRET locations and using secret methods, human beings are scanning lots and lots of books for Google, the world's largest web-search company. That humans are involved is beyond doubt (fingers are visible in the corners of many pages on books.google.com) although this is uncharacteristic of Google, which has a fetish for purist technology.

Google will not divulge exact numbers, but Daniel Clancy, the project's lead engineer, gives enough guidance for an educated guess: Google's contract with one university library, Berkeley's, stipulates that it must digitize 3,000 books a day. The minimum for the other 12 universities involved may be lower, but the rate for participating publishers is higher. So a conservative estimate has Google digitizing at least 10m books a year. The total number of titles in existence is estimated to be about 65m.

Google's is not the only project of its kind. The Internet Archive, for instance, is a non-profit organization founded in 1996 by Brewster Kahle, a San Francisco idealist who wants to re-create a modern Library of Alexandria containing all public-domain texts and videos. Amazon has been scanning books, as have Microsoft and Yahoo!, Google's biggest rivals in web-search, and individual libraries around the world. Eager not to be left out, publishers are also doing the same. But Google's effort, in scale and ambition, is off the charts.

As books go digital, new questions, both philosophical and commercial, arise. How, physically, will people read books in future? Will technology “unbind” books, as it has unbundled other media, such as music albums? Will reading habits change as a result? What happens when books are interlinked? And what is a book anyway?

Change is least likely in the physical medium of books. Electronic books do exist; the best-known is the Sony Reader, a book-sized gadget made by the eponymous consumer-electronics company. Sony currently makes 12,000 books available online for download, but “our mission is not to replace the print book,” says Ron Hawkins, the Sony Reader's marketing boss.

There is an obvious analogy between what Apple's iPods have done to CD players and what electronic books may do to the printed page, but the shift is unlikely to be quite so comprehensive. The simplest difference is that transferring one's old music CDs onto iPods is easy, whereas transferring one's old books onto an e-book is impossible.

So who is going to read the millions of pages that Google and its colleagues are so busy digitising? Some people will read them on-screen, some will use Google as a taster for books they will then buy in paper form or borrow from a library, and still more will use it to look for specific snippets that interest them.

The biggest changes are likely to be seen in what becomes a book in the first place. Here the internet may indeed be to some book genres what Apple has been to music or what YouTube (now part of Google) has been to video. Among younger listeners albums are dead. They have been replaced by playlists of individual songs designed to be shared with friends.

In books this has already happened for encyclopedias. Wikipedia, which is free, collaborative and online, has eaten into sales of paper-bound alternatives. So books that people would not traditionally read in their entirety, or that require frequent updating, are likely to migrate online and perhaps to cease being books at all. Telephone directories and dictionaries, and probably cookbooks and textbooks, will all fall into this category.

With non-fiction the situation is more nuanced. Many non-fiction books express an intellectual idea. Traditionally, the only way to deliver such an idea profitably involved binding it into a 300-page book, says Seth Godin, a blogger and author of eight books on marketing. “If you had a 50-page idea, you couldn't make any money from it,” he says, so a lot of non-fiction books end up on shelves with 250 unread pages. Freedom from such rigidities may save a lot of authorial time.

Non-fiction books will also benefit from another change that comes with digitization. Like web pages, digitized books can have incoming and outgoing hyperlinks. On books.google.com at the moment, links are only to entire books. But in future, says Google's Mr. Clancy, links will point to and from specific phrases or words inside books. Footnotes, citations and bibliographies are obvious points for live links.

This has several benefits. It will help scholarly research, since it makes primary sources much more accessible. And it will reduce the slog of academic book-worming—jotting down the location of a book, trudging through the library, pulling it off the shelf, queuing for the photocopier—to the negligible effort of clicking a mouse.

Such links will also make books much easier to discover, by helping search engines. As link structures develop around books, search algorithms can count incoming links as “votes”, giving more weight to incoming links from much-cited places and less to obscure ones. The (offline) citation culture of academic literature already works this way. This, in fact, is what gave Larry Page, one of Google's co-founders, the original idea for his search algorithm, which he cheekily called PageRank.

What about all the genres of books that fill a different human need? Certainly, some types of fiction—novels as well as novellas—are also likely to migrate online and to cease being books. Many fantasy fans, for example, have already put aside books and logged on to “virtual worlds” such as “World of Warcraft”, in which muscular heroes and heroines get together to slay dragons and such like. Science fiction may go the same way, and is arguably already being created by “residents” of online worlds such as Second Life.

Most stories, however, will never find a better medium than the paper-bound novel. That is because readers immersed in a storyline want above all not to be interrupted, and all online media teem with distractions (even a hyperlink is an interruption). People do not read fiction in order to accomplish a specific task in a limited amount of time, as they read reference and schoolbooks. Random-access dictionaries and cookbooks may be useful; random-access novels less so.

What about short stories and poems? Being short, they fit the new media, so some may do well online and need not be bound in paper. Commuters could receive their daily haiku or sonnet on their mobile phones while taking the bus to work. They might also use the new media to enjoy poetry in a more traditional way. “Storytelling started as oral history,” says Adam Smith, the boss of Google's book project, so a partial reversion to that form, through podcasting, would be natural.

But even anthologies of short stories and poems, like longer novels, are unlikely to disappear. People want to be guided by others. They also want media suitable for unhurried reading in beds and bathtubs and on beaches. Above all, they want paper books for what digitization is revealing them to be. Books are not primarily artifacts, nor necessarily vehicles for ideas. Rather, as Mr. Godin puts it, they are “souvenirs of the way we felt” when we read something. That is something that people are likely to go on buying.

Being nice to Osama bin Laden
Little Melissa comes home from first grade and tells her father that they learned about the history of Valentine's Day.

"Since Valentine's Day is for a Christian Saint and we're Jewish," she asks, "will God get mad at me for giving someone a valentine?

Melissa's father thinks a bit, then says "No, I don't think God would get mad. Who do you want to give a valentine to?"

"Osama Bin Laden," she says.

"Why Osama Bin Laden?" her father asks in shock.

"Well," she says, "I thought if a little American Jewish girl could have enough love to give Osama a valentine, he might start to think that maybe we're not all bad, and maybe start loving us Americans a little bit. And if other kids saw what I did and sent valentines to Osama, he'd love everyone a lot. And then he'd start going all over the place to tell everyone how much he loved them and how he didn't hate anyone anymore."

Her father's heart swells and he looks at his daughter with newfound pride. "Melissa, that's the most wonderful thing I've ever heard."

"I know," Melissa says, "and once that gets him out in the open, the Marines could come in and blow the shit out of him."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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