This is the time of year when financial pundits give us the benefit of their wisdom. No end of predictions will be made, best fund managers will be anointed, and market timers will peer into their crystal balls to tell us what they see for the coming year.
There is so much misinformation that passes for financial advice that selecting the worst financial blog of the year should have been challenging. It wasn’t. It was very easy.
The hands-down winner is a blog entitled: Purple Crayon: Two 2011 Trends and a Pick for 2012, by Jeff Macke. It appeared on December 22 on Yahoo’s Breakout.
Macke manages in one blog to reinforce basic misconceptions about investing. The only saving grace I found in his blog was the rather incongruous caveat that he was not giving advice, but simply telling his readers what he was trading and why. I doubt many readers will heed this admonition, but I hope they do.
The first pearl of wisdom from Macke gives us his key to successful trading. Here it is: “Making money in stocks is the result of seeing what's been happening in the recent past then using the information to deploy your money in a way that takes advantage of the future.”
Wow! That’s it? You just have to see what happened and extrapolate that information to take advantage of it in the future? How exactly do you do that? Since millions of investors are looking at the same data, have they collectively mispriced the stocks you are watching? If so, how do you know which stocks to pick? You are unlikely to be successful using publicly available information about a stock. And if you know something about a publicly traded stock that is not already disseminated, it’s illegal to use it and profit from it.
Macke cites no data supporting his view that engaging in this exercise is an intelligent strategy. That’s not surprising. According to William Bernstein, author of The Intelligent Asset Allocator, there is no such thing as stock picking skill. Bernstein found that mutual fund manager performance does not persist and “the return of stock picking is zero."
If anyone could successfully pick stocks, you would think it would be fund managers. They are highly compensated and well trained. How do they do? Studies by Standard and Poors consistently show most actively managed U.S. equity mutual funds underperform their benchmarks.
Macke would have earned my award merely by extolling the virtues of the discredited notion of stock picking, but he didn’t stop there. He is guided by several themes that he “cared about in 2011.” He tells readers how he is “playing them in 2012.” One of his themes is so surprising I am quoting it to avoid taking anything out of context:
"Buying and holding didn't work for the 13th straight year. A lot of folks have been dogmatically holding stocks or shorting markets over that time span. You could have made money trading the market or buying and holding certain select winners, but if you bought into the promise of 10 percent annualized returns for stocks you've spent about 15 percent of your life getting nothing out of your portfolio. That is a lousy trade.”
Investing decisions should be based on data. The data should be presented in a way that is not misleading. The data contradicts his theme.
Index Funds Advisors (with whom I am affiliated) publishes long term risk and return data for its portfolios on its web page. All of these portfolios are “buy and hold with annual January 1st rebalancing” and consist of globally diversified, low management fee, passively managed mutual funds. The IFA index portfolios range from very conservative (15 percent stocks, 85 percent bonds) to very aggressive (100 percent stocks). I ran the returns at these two extremes for the past 13 years from December 1, 1998 to November 30, 2011. You can check these results and run your own calculations at ifacalc.com.
The very conservative index portfolio had an annualized return of 4.07 percent, with an annualized standard deviation (which measures risk) of only 2.75 percent. The most aggressive index portfolio had an annualized return of 8.2 percent, with an annualized standard deviation of 18.88 percent. This is the index portfolio of all stocks, which Macke asserted gave investors “nothing.” It actually gave investors a total return during this period of 178.46 percent.
Macke does not provide readers with any data from which they could measure the risk and return of his trading strategies. However, if he will provide me with audited copies of all his stock transactions for the past 13 years, I will run an analysis and publish the results. If he has a better way, the investing world deserves to know about it.
For encouraging investors to adopt trading strategies likely to harm their financial well-being, Macke well deserves the Solin award for worst financial blog in 2011.
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, and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published on December 27, 2011.
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