Posted on 05/17/2006 3:02:05 AM PDT by RWR8189
Stocks go up and down, but eventually, most go up. So if you invest and hold on, odds are you'll do quite well. As my former Princeton economics professor, Burton Malkiel, told me, "The stock market is like a gambling casino with the odds in your favor. Over the long pull, it beats inflation, and beats it by a great deal."
If you want to beat other investors, too, it's logical to think that you should turn to the most visible specialists for advice. These men and women make their living studying stocks, and they sound so confident on CNBC. You'd think they could beat the market.
Don't bet on it.
"Most of the guys on TV -- they're not that good," said Jim Cramer. He should know: He's all over the place talking about investing -- CNBC, CBS Radio, the Web, bookstore shelves, and New York magazine. Cramer told me that he is different from other stock-pickers because he has no hidden motives.
"A guy comes on TV," said Cramer. "Thought process at home: 'There's a person who has looked at the whole industry and is making judgments about what are the best stocks.' Wrong! Wrong! The worst are guys who say that they love a stock and they're selling the stock. That happens all the time."
Then there are the guys who pump the stocks of companies with whom they're doing business.
CNBC's "Guidelines for Appearances by Financial Professionals" now require its experts to tell it, so it can tell you, about any ties they have to the companies they discuss. But even the scrupulous expert, the one who's not touting his friends or customers, is unlikely to give you much of an edge.
"I ended up losing just over $40,000," trailer park manager David Talevi told "20/20." That was a year's salary for him. He lost it buying stocks they recommended on TV. "You just took their word for granted," he said. "I figured, you know, 'This thing is going to take off.'"
"This thing" crashed instead.
How could the TV experts be so wrong? They are well-educated people who call and visit individual companies, and study the balance sheets, new products, and marketing techniques. They work at this full time. You'd think this would give them an advantage. But it doesn't, Professor Malkiel said, because what they learn is information all the analysts have. Malkiel wrote a book about the process called "A Random Walk Down Wall Street." He studied stock movements of the past, and concluded that the advice produced by the in-house experts has little value. "Most of it is just absolute nonsense," he told me, "and most of it is really designed to get people to trade more than they should."
The brokerage firms want you to trade more, because they charge a commission on every trade. But year after year the trading advice that comes out of most of the big brokerage firms is no better at selecting winners than throwing darts at the stock table, or having a monkey throw darts. In fact, the advice is usually worse! People who chart the brokerage firms' recommendations said that over a 15-year period ending in 2005, only 5.72 percent of actively managed mutual funds had beaten the 500 stocks that make up the Standard & Poor's Index. In other words, 94 percent did worse.
None of the big brokerage firms would talk to me about their failure to outperform dart-throwing monkeys, so I interviewed successful money manager Robert Stovall. He used to run research departments at EF Hutton and Dean Witter Reynolds, and he told me just when the experts are useful.
"Everybody has a boss," he said. "Professionals won't buy Coca-Cola or some other stock unless they have reports in the file produced by well-known analysts so if something goes wrong with the stock they buy, they can show their boss, 'Hey, I've got a big file on this stock. All these analysts said it was a good one. Something went wrong.'"
So go ahead. Follow an expert. Then, when something goes wrong, you can blame him.
But if it's your money at stake, you'll probably do better with an index fund -- or a monkey.
Bananas are cheaper than brokerage fees.
By the time you hear about a stock pick, everyone else has too, and the price reflects that. Buying stocks you hear about on TV only makes the insiders rich.
Good advice. Most people (i.e. those who are able to spend fewer than 3-5 hours a week keeping up with their investments and financial news) are probably better off simply buying a well-designed portfolio of ETFs or no-load mutual funds, rather than trade.
1. One risk one seldom mentioned is the risk of withdrawal. If the the stock market is in a bear phase and one is required to withdraw funds, one's capital is disproportionally diminished.
2. Many studies promoting index funds use historical indices to prove the wisdom of investing in such funds. What these studies rarely mention is that indices are constantly by dropping some stocks while adding new stocks.
3. One should pay close attention to the starting and ending dates of the studies mentioned in point 2 above.
correctamundo
I listen to Bob Brinker's "Money Talk" on the weekends, and he knows what he's talking about when it comes to investments. Then I hear him say some incredibly stupid socialist thing about the economy, and I just cringe. I can never understand how he understands investing so well, but can still spout socialist viewpoints on the economy. It's just amazing.
Ever know of a mechanic with poor taste in cars?
It happens.
Hooray for low-fee index funds.
I also love to ask them if they are such an "expert" why are they working for a living. They should be rich beyond belief.
It seems to be something they can't answer.
I used to really enjoy listening to Brinker. I stopped, for the very reason you mention.
Ditto!
I would love to see the looks on their faces when they get asked that question!
ping for later
Well that's amusing. Why not just go to the craps table and put your money on the pass line? At least the casino gives you complimentary beer.
Jim Cramer *is* rich beyond belief. OTOH, I'm not particularly convinced that the ordinary guy can get rich with Cramer's picks.
Parrots and cage liner. I've heard good things.
SIR-PRIZE SIR-PRIZE SIR-PRIZE!
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