Hot tip: Beware the tipsters
If it sounds too good to be true, it probably is, Susan Antilla warns investors bombarded with "how-to" advice in the new year.
If it sounds too good to be true, it probably is, Susan Antilla warns investors bombarded with "how-to" advice in the new year. I HAVE the ultimate hot tip if you are obsessing over what to do with your portfolio in 2013: ignore all the "how to invest in 2013" nonsense that you see in magazines, blogs and on business television this time of year.My advice? When you see one of those how-to articles, retreat to the kitchen for what is left of the holiday treats and shut off the computer.If some TV stock-jock is interviewing a Wall Street star about a "best pick" for the year ahead, grab the remote and change the channel.There is a good chance that you will lose money if you follow the 2013 top stock recommendations. And the grander the promise of profits, the more you should worry about getting burnt.According to Dean Starkman, who runs a business-journalism blog at Columbia journalism school, personal-finance news became a growing sub-genre of business journalism in the 1970s, after companies started dropping defined-benefit retirement plans and the public "was thrown into this system and forced to make their way".He says the resulting coverage to help the public manage its own money "perpetuates the idea that individuals can beat the market, and that's just not true".An army of commentators, many with abysmal records, helps spread the useless predictions. You will see them quoted, photographed for magazine cover stories and trotted out for appearances at investor conferences."The entire conversation is corrupt," says Starkman, who sees much of personal-finance writing as marketing material for the investment industry.With a smattering of exceptions, even the best of the annual how-to-invest offerings will leave you winning about half the time, which, of course, means losing half the time. And what's the point of paying commissions to end up where you started?In the US, SmartMoney's "Where to invest 2012", for example, picked six winners and four losers. The "Guru round-up: best investment ideas for 2012" that ran in Forbes magazine, had three winners and four losers.Even when a best-stocks list manages to keep up with the sharemarket averages, which you can do in an index fund, it does not necessarily help actual investors.My guess is investors in real life do not have the resources to buy more than one or two of the recommendations on any given tout list. Buy the wrong one, and it does not matter if the list's author is taking a bow for outperforming the Standard & Poor's 500.Along with the year-ahead coverage, be wary of the ambitious journalistic efforts that purport to impart brilliant investment ideas for the long term. Fortune magazine's August 2000 list of 10 Stocks to Last the Decade included Enron Corporation (which failed), Nokia Oyj (which fell from $US43 to $US9.63 during the next 10 years), Nortel Networks Corporation (which filed for bankruptcy protection in 2009) and Broadcom Corporation (which fell from $US143 to $US36 during the decade after the article).Money managers rarely beat the sharemarket indices.Ditto for the usefulness of predictions as to which way the markets and the economy are headed. Beneath the headline "Little enthusiasm for equities among advisers," Investment News said on January 1, 2012, that only 43 per cent of advisers planned to increase their clients' equity holdings, down from 63 per cent in 2011. The S&P 500, of course, proceeded to go up 13 per cent in 2012, the year advisers were more negative. It was little changed in 2011, the year they expected significant gains.And then there was arguably the worst market call of the year, made on January 23, 2012, by newsletter writer Joseph Granville. He told Bloomberg Television that the Dow Jones Industrial Average would decline 4000 points by year's end. The Dow wound up rising 887 points.Terrible predictions ought to be career killers, but they aren't."There is no prediction so stupid you won't be invited back," Starkman says.Apparently so. Donald Luskin, the Trend Macrolytics chief investment officer who is a contributor to CNBC, wrote in The Washington Post on September 14, 2008, that doomsayers on the economy had it all wrong. The facts suggested that we were not on the brink of a recession but of "accelerating prosperity", he wrote. Lehman Brothers Holdings, of course, collapsed the next day, shifting the financial catastrophe of 2008 into overdrive.The founding financial editor at CNN, Myron Kandel, says there is a way to raise standards: qualified professionals should be used as sources and the public should be told how the person's past predictions have fared. Otherwise, it is "like evaluating a baseball player without mentioning his batting average".That sort of policy might not sit well in a personal-finance industry where everybody except the small investor seems to profit from the status quo. The chief executive of Fusion IQ, Barry Ritholtz, said he once had the temerity to ask a magazine editor if he could contribute an item about the foolishness of financial forecasting, after having been invited to write a forecast for the 2004 sharemarket. The editor advised Ritholtz it was a big double-issue that sold a lot of advertising, and the format was not going to change.Ritholtz dutifully wrote up his prediction of a year-end Dow close of 10,403 (it ended the year at 10,783).I can, with confidence, pass on this one prediction for 2013: A lot more experts will dole out financial advice. Few will say anything worth listening to.BLOOMBERG
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