Business | Your Money

Hot tip: Few experts are worth listening to

Wth few exceptions, most predictions turn out to be wrong

  • By Susan Antilla
  • Published: 17:59 January 20, 2013
  • Gulf News

I have the ultimate hot tip if you’re 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’s left of the holiday eggnog 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 surf for another 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 burned.

Personal-finance news became a growing subgenre 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” says Dean Starkman, who runs a business-journalism blog at Columbia Journalism School. The resulting coverage to help the public manage its own money “perpetuates the idea that individuals can beat the market,” he says, “and that’s just not true.”

An army of commentators, many with abysmal track 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.

Few Exceptions

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? Smart Money’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 on Jan. 4, 2012, had three winners and four losers.

Even when a best-stocks list manages to keep up with the stock-market averages, which you can do in an index fund, it doesn’t necessarily help actual investors. My guess is that investors in real life don’t have the resources to buy more than one or two of the recommendations on any given tout list. Buy the wrong one, and it doesn’t 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 Corp. (which failed), Nokia Oyj (which fell from $43 to $9.63 during the next 10 years), Nortel Networks Corp. (which filed for bankruptcy protection in 2009) and Broadcom Corp. (which fell from $143 to $36 during the decade after the article).

In case no one has let you in on the secret, it’s old news that money managers rarely beat the stock-market indexes. So why pay attention when some journalist under orders to interview those managers woos you with headlines that promise a winning list of investments for the year ahead?

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, a newsletter that caters to investment advisers, said on Jan. 1, 2012, that only 43 percent of advisers planned to increase their clients’ equity holdings, down from 63 percent in 2011. The S&P 500, of course, proceeded to go up 13 percent 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 Jan. 23, 2012, by newsletter writer Joseph Granville. He told Bloomberg Television that day that the Dow Jones Industrial Average would decline 4,000 points by year-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 LLC chief investment officer who is a contributor to CNBC, wrote in the Washington Post on Sept. 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 Inc., of course, collapsed the next day, shifting the financial catastrophe of 2008 into overdrive.

‘Batting Average’

Myron Kandel, founding financial editor at CNN, says there is a way to raise standards. Qualified professionals should be used as sources, Kandel says, and the public should be told how the person’s past predictions have fared. Otherwise, it’s “like evaluating a baseball player without mentioning his batting average,” he says.

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. Barry Ritholtz, the chief executive officer of Fusion IQ, 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 stock market. The editor advised Ritholtz that it was a big double-issue that sold a lot of advertising, and the format wasn’t going to change. “So do you want to be in it or not?” the editor asked. 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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