Signs of a Market Top

[The following is from p.93-95 of The Successful Investor - What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses by William O'Neil (2004)]

The sell disciplines listed so far are derived from cold, hard technical and fundamental analysis over many years. And you should be just as objective and highly disciplined in applying them. There are a few sell signals, however, that fall into the subjective category. One is when you see a CEO's picture on the cover of Business Week, Forbes, or Fortune, with a story inside on how great his or her company is. I remember one Internet company in particular a few years ago. You could see by the look on the CEO's face how proud he was of everything he'd accomplished. I remember saying, "It must be all over with now." And sure enough, it was.

Some studies have found that CEOs with huge egos, and especially the hard chargers who lead mainly with their personalities, don't do quite as well in the long run as those with more humility. They also find that the CEOs with the very best records had very few stories written about them while their stocks were making their biggest moves. Wal-Mart had gone up 10 or 20 times before the media really got to know and write about Sam Walton.

Don't worry, then, if the big magazines haven't started writing feature articles about the company you own. The time to worry is when they do. And when they get around to putting a picture of the CEO on the cover, the time may have come to consider selling. Remember: the market is a contrary animal, and when it's finally obvious to the masses, it seldom continues to work. Markets move to fool and outwit the majority.

Also keep an eye out for signs of extravaganceBthe corporate equivalent of conspicuous consumption. A big new headquarters may be the envy of all the other executives in town, but to you as a shareholder, it could be a sign that the company is starting to splurge and the stock has reached or is nearing a top. Headquarters didn't come any bigger than the Sears Tower in downtown Chicago, started in 1970 and completed in 1973. Sears stock has generally underperformed ever since--for 30 years, to be exact. Tops were also near when the Pan Am building was built over Grand Central Station, when General Motors built executive offices opposite the Plaza Hotel, and Gulf + Western built its new headquarters overlooking Central Park, all in New York. Bethlehem Steel's new headquarters building and country club was a similar case, as was the new eToys headquarters on Olympic Boulevard in Los Angeles at the height of the Internet boom.

A warning light should also go on when a company indicates it wants to be the biggest in its field. What usually follows is a merger and acquisition binge that leads to a hangover from which the original company rarely recovers. Does anyone remember the conglomerate craze led by Jimmy Ling? Ling-Temco-Vought sold for $170 in the summer of 1967 when it peaked. Peter Lynch, one of Fidelity Funds' many great portfolio managers, referred to diversification as "deworseification."