What Hemingway said about writing is the same axiom that you should apply to all of the investment information that you get, good and bad: You need a good shockproof sh-t detector.

Every day there is as much misinformation, disinformation, arse-covering and spin applied to the financial analysis that is given to you as there is fact.

The most egregiously unfiltered sewage comes through CNBC.  There, every kind of broker, trader, fund manager, and CEO is welcome to put out their own particular spin on the market, what to do, and what constitutes the truth of finance, usually without much critical analysis or attempt to discover the agenda of the guest by whatever talking head is on.

Not surprisingly, the gold guy wants you to buy gold. The broker that is shorting stocks talks down a sector or the market as a whole to shore up his gambling on the market.  When someone even mentions that they are short-selling (See below for a definition)  a stock or a market sector, no one even bothers to question the validity of their negative advice.

On CNN, there is a recession, because apparently, in spite of the financial data and facts that suggest otherwise, the fact that enough of these oracles have said that there is one is enough to give them hours of financial programming for the financial illiterate: "In our next segment, how to protect your money in these troubled times" really ends up being a six minute infomercial for popping your money into the same banks that raped and pillaged the public during the mortgage glut and are now stampeding the herd into financial instruments that will rape and pillage their investment portfolios to recover lost money from their poor management of the home loan process in a speculative housing market.

A Citi analyst used the term "run on the bank" relative to E*Trade, a wholly irresponsible comment that actually creates the self-fulfilling prophecy that drove a lot of money out of the company and nearly brought it to its knees. 

Even here at Morningstar, an analyst will say privately that certain stocks that have had the snot hammered out of them by unwarranted lemming over-corrections look cheap, but when they end up writing the report for your consumption, the wrapper of "sanitized for your protection" is put on their opinion by Morningstar and you are getting a more cautious and less honest opinion of value because of their fear of having any more straightforward opinion not be well reflected in a volatile market like we've been experiencing over the past couple of months.

You have to learn how to listen to the news you get, and sort out the bipolar commentary that happens both when the "experts" gush and wring their hands.

Most of that commentary revolves around risk, and the perception of risk to people's investments.  First, you have to really understand how "risk" is used and misused.

In theory, risk should be a gauge of how much potential trouble that a company or a stock might have if conditions in the world, political, climate, raw materials, etc., don't work out in their favor.

Risk is an attempt to quanitfy fear by wrapping it in a comfortable term or number.  What does it mean when Morningstar ranks a stock at "Above Average"  or "Average" risk? 

In pure form, the number or term should be an assessment of the stock's strength or weakness given what the company sells, how its customers either want or can pay for what the company sells, and how outside forces outside of the company's control can affect its ability to do business with its customers, partners, and suppliers. 

The practical problem with putting a number around an emotional state that one of the largest forces, sophisticated brokerages and other gamblers have a strangle-hold on the stock market and like to make money in an up or down market. The practice of short-selling, which I believe should be banned, allows traders to make as much, if not more, money by driving the momentum of the market downward as they make following the momentum upward.

A short sale is anti-investing, a bet, a gamble.  Speculators are allowed by your broker to borrow your stock in, say, Citibank (C). They buy the access to your stock on the gamble that it will go down.  If it does, they buy back the security at a lower market price and make as much money, less commissions and fees, as if they had held the asset as an investment to the upside.  If the stock doesn't go down, lose their whole gamble.

This is a game played by the big boys, and by legions of high-risk junkies who momentum trade. So many of the brokers and financial institutions short sell that any advice about a stock or the condition of the market coming from any of them, on the tube or in print or on the web, should be considered highly suspect.

A big part of a risk rating in the real world is trying to assess how vulnerable a company is to being sacked by the short-selling hyenas. In some ways, they provide us value vultures with windows of opportunity as they gnaw the flesh of a stock down to the bone.

The very brokerage firms and mutual fund professionals from whom millions of investors buy their stocks and bonds and other instruments both make pronouncements on risk designed to promote their own agendas.  Sometimes those are in sync with their investors, and sometimes they are just covering their own arses.

One of the general strengths of Morningstar is that they are not part of a brokerage, so the investment advice that they give to you is not influenced by large institutional clients or billionaires whose funds are being managed by the firms.  Still even they will shade a risk rating to avoid either sticking out their neck on a value stock or to keep you from sticking your investment into a short-selling buzzsaw.

Take the very long cautionary statement by John Owens on Ruth's Chris Steakhouses (RUTH) which actually is a long advisory on a bunch of restaurants whose risk rating they're inching up from average to "above average."  Is that really prudent?

In practical terms, John and others at Morningstar know that, long term, these restaurants are not only exceptional values (hence their five-star rating), but that they are well run companies that can probably withstand far more punishment than the current economy can dish out.

Witness the general track records of many of these companies through the post 9/11 years, which was a particularly bad time for restaurants, hotels, and airlines. Yet throughout that period, I do not recall Morningstar raising the risk level to "above average" because the analysts saw the after-effects of a man-made terrorist disaster as transitory.  The rest of the market was fundamentally healthy and growing.

The good news is that the world economy, even with the housing crises, is fundamentally healthy and growing. Witness the irritated BASF CEO JÜRGEN HAMBRECHT who recently took to task banks for their bad management practices, and stated very confidently that not only his company, but that the super-corporations of the world were continuing to do healthy business even in the light of the financial crisis which their bad loan practices generated.

There is a lot of fear, uncertainty and doubt (FUD) driving the stock market right now.  It is a reaction to the news that large banks and brokerages had to write down, rather than quantify the extent of, bad loans that they either made or picked up on the secondary market. Some of that reaction is organic fear, but a larger part of it is institutionally generated: It is in the interest of these banks and brokerages to just take the write downs and generate market conditions favorable to their long-term healing and growth than it is to quantify and isolate the problem and take years of punishment for their bad judgment.  The Savings & Loans were bailed out by a company, the Resolution Trust Corporation to resolve that crisis. While that may be the last bastion of the current crop of financial scoundrels, the larger move seems to be to stampede conservative, risk-averse investors into bank-based financial investments that get the banks fat and healthy again, even at the cost of millions of more dollars in lost gains to the lemmings whom they are fleecing.

The Morningstar analysts are reflecting a certain amount of arse-covering by promoting the risk ratings of stocks that didn't get such an increase post 9/11 when they should have been far riskier. In part, this is being done because Morningstar is probably the only real value analyst in the mainstream market. It takes a lot of guff for being contrarian to the large corps of analysts supporting the investment community's general directional pushes.  In this market, though, where it has drawn fire from other "profesionals" from S&P to Jim Cramer as being "lightweight" seems to not want to stick its neck out and state what I've had analysts here mention privately, that many of the five star stocks in restaurant and retail are highly undervalued and make for exceptional buying opportunities.

What is always somewhat amusing is that the very same people in the market, who are often telling you how risky a particular stock has become, are heavily buying up the stuff that you're frantically selling at exceptional discounts to fair market value after they panic you into making your exit at a loss.

So you have to take what you read with a grain of salt. You have to look at the health of the company, the balance sheet, and even, in the case of restaurants, visit a couple and talk to their managers about how things are going at their unit.  

The market worries about Ruth Chris sales. I go into their Mizner Park, Boca Raton location and the place is mobbed. Same is true in Ft. Lauderdale area. I also couldn't get in to their Austin, Texas location on a recent trip.  What does that anecdotal information mean?

First, it causes me to question about how bad the "recession" that we're allegedly  must be. When I see a lot of patrons moving out of prime locations, the malls are full and the Apple Stores still look like it's Christmas in February (FEBRUARY!!), perhaps these guys need to get out of their Wall Street offices and LOOK AROUND more. I was in Texas recently and also did the same reality check. Even if I assume that there are enough places where the economy is hurting, like California, I can walk away feeling that my reality check shows at the least that there is a mixed bag out there.

When I see numbers that are generally supportive of a mild to modest correction to top off what I see in the real world, I then go back and look at the risk ratings of the companies not just here at Morningstar but with S&P and others.  How much of what they're saying is street-speak risk and how much is reality?  I then adjust my own risk assessments accordingly in my buy/sell decisions.  The same also holds true in an up market. While analysts are singing the glowing praises of a company's future, if I see warning signs that suggests the analysts have had a lot of sunshine pumped up their collective skirts, I'm on the trigger to sell.

REMEMBER: Every degree that all of these ladies and gentlemen possess give them better tools to be making educated guesses, but in the end, even we poor laymen who do our homework are probably working with about the same information set. The difference is that we aren't beholding to a bigger company, or our bosses at a brokerage, to be politically correct. That allows you to assess risk, and the news that you digest in the best way possible: To your personal benefit.