Likewise, there are countless things that will distract you from adhering to a disciplined investment strategy. My goal over the next few months is to answer the following three questions: What are these distractions? Why are we distracted? What are the consequences? For now let’s answer the first question.
Month after month popular personal finance magazines offer “amazing” investment ideas. After all, they interview the best money managers and have research analysts on staff to pick the next breakthrough stock. So I decided to look at how the best picks of a few popular magazines fared in 2008. With such intellectual prowess, surely they avoided the crash, right? The Motley Fool’s “Best Stocks for 2008” only underperformed the broad US stock market by about 1%, being down 38% vs. 37% for the broad US market. Fortune’s “Best Stocks for 2008” and Kiplinger’s “8 Stocks to Buy Now” were down 40% each—not too reassuring. So I looked at Forbes magazine’s picks from their “superstar lineup”: I figured putting five top brains together is better than one. Unfortunately, their picks lost 52% in 2008. Take a look at some of the interesting comments written by these experts about their stock picks and the economy in general:
Love him or ridicule him, we all know him. Jim Cramer’s TV show Mad Money is one of the top rated shows on CNBC. From throwing things at the camera or predicting the next market move at lightning speed, he definitely gets your attention. But how have his stock picks done? A study from Barron’s magazine in 2007 showed that in the previous two years Cramer’s 1,300 buy recommendations underperformed the broad market. Further, while his recommended stocks generally rise in the first few days after his show, they generally trend down for the next 30 days. A follow up study in 2009 concluded, “Cramer’s recommendations underperform the market by most measures.” The problem for us as investors is that he has so many stock picks and very little guidance about the amount of time we should hold those stocks.
You know how this works: your advisor calls you up and says that the research analysts at his global firm have just issued buy recommendations on several stocks and have identified the mutual fund managers that have a great 3 year track record. Sounds tempting, doesn’t it? Before you throw your hard earned EMTALA-diminished money at these ideas, ask him this:
Millions of investors have determined the best estimate of a stock’s price. What makes you think that your analysts are right and all of these millions of people are wrong?
Are you personally buying these recommendations for your own portfolio? If so, show me. If not, why not?
It’s inevitable—at some point during a social gathering, you’ll hear someone brag about the “grand slam” they hit with one of their investments. Naturally, it raises your curiosity as you think “How can I get in on the action?” After all, if he can do it, why can’t I? When you’re caught in this situation, keep a few things in mind:
You have no idea what the person’s overall track record is. Have him show you a list of all of his picks and the percentage that outperformed.
What was his overall investment return for his ENTIRE portfolio? Most people have no idea what their overall return was.
Was it skill or merely luck? How do you know?
All of these examples try to persuade you to do something with your investment portfolio. The headlines use words like “now” or “top” or “best” or “rich” or “will” to grab your attention. So next time you turn on the TV or pick up Money magazine, just keep in mind that you could lose a bundle by listening to shady advice. Up next month: the greatest distraction of all.
Setu Mazumdar, MD practices EM and he is the president of Lotus Wealth Solutions in Atlanta, GA www.lotuswealthsolutions.com