A recent blog by Suzanne McGee on cnbc.com (originally published on The Fiscal Times) is a perfect example of how the financial media shills for your broker. McGee identified “4 tech stocks every investor should consider.” These stocks are Apple [APPL], Qualcomm [QCOM], Cisco Systems [CSCO], and Facebook [FB]. McGee believes these stocks are a good place to begin your quest for growth and value.
I have no idea whether any of these stocks will increase or decrease in value. Neither does McGee, but her article suggests that her opinion is worthy of your consideration. It isn’t. All publicly disseminated information about these stocks has been considered by the millions of traders who buy and sell stocks every day. It’s factored into the current price. There’s no reason to believe that price is not fair. What will drive the price in the future is tomorrow’s news. No one knows that news. Trying to predict tomorrow’s news is not investing. It’s rank speculation.
I don’t understand why investors buy individual stocks. The expected return is the same as the index of stocks to which they belong, but with significantly more risk. Individual stocks have what is called "idiosyncratic (or unsystematic) risk", which describes risk unique to that particular stock (like fraud perpetrated by the Chief Financial Officer of a company). This risk can almost be eliminated through broad diversification. Why would you take much higher risk for the same expected return?
I doubt that McGee’s predictions are better or worse than her colleagues. They are likely to be what you would expect from random chance. When she is wrong, it can cost you big time. Back in October, 2011, she advised investors with exposure to banking stocks to “batten down the hatches and prepare to ride out some stormy markets.” It was her view that there was a significant risk these stocks would “turn out to be value traps.”
Fast forward one year. In his column for the Boston Globe dated October 12, 2012, Steve Syre noted that banking stocks have been stellar performers. The leading bank-stock index was up 30 percent as of that date, compared to a gain of 14 percent for the Standard & Poor’s index. Syre observed that banking stocks “hit bottom”, in November, 2011, shortly after McGee told investors to be wary of them.
Investors who rely on predictions about future stock prices often pay a penalty. Brokers always win, whether the stock goes up or down. There is no peer-reviewed data indicating anyone has the expertise to predict stock prices with accuracy greater than you would expect from random chance. Why then do so many financial journalists do it?
The cynic in me believes they know their limitations and are acting to benefit their advertisers, at the expense of those they pretend to serve.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, The Smartest Portfolio You'll Ever Own, and The Smartest Money Book You'll Ever Read.
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