Market Boom or Bust? Don’t Rely on Pundits

Following the advice of financial pundits is speculating, not investing.

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It’s hard to view the financial news without seeing speculation about whether the stock market is poised to continue its remarkable run or is about to burst and send the country into another recession. This debate is particularly insidious because it keeps you from focusing on issues you can control, like your asset allocation, costs and tax efficiency.

On September 20, I wrote a blog post titled “The Great Hedge Fund Myth”, in which I noted the poor historical performance of hedge funds and questioned what value investors were receiving for the obscene fees they were paying. I referenced a September 14 blog post by Jeff Macke, the supremely confident host of Yahoo’s Breakout. Macke observed that hedge fund managers had two basic choices. They could write their investors and explain their refusal to “take part in this bogus rally based on little more than a possibly corrupt Fed chair dumping money into the system". Alternatively, he told them: “You need to buy Amazon (AMZN), Apple (AAPL) and Google (GOOG). You have to take fliers on left-for-dead names like JC Penney (JCP) and, yes, even Facebook (FB).”

On September 14, the DJIA closed at 13,593. It closed on March 22, 2013 at 14,512. The “bogus rally” continued its upward trajectory. Here are the stocks recommended by Macke, along with their closing prices on Sept. 14 and March 22:

Stock      Price on Sept. 14, 2012    Price on March 22, 2013

AMZN      261.40                                  257.75

AAPL       691.28                                  461.91

GOOG     709.68                                  810.31

JCP         28.82                                    15.43

FB          22.00                                    25.73

Macke’s crystal ball turned out to be cloudy. He is so far wrong about the “bogus rally” (although no one knows what tomorrow will bring). Of his five stock picks, three were losers and two were winners, which is slightly worse than you would expect from random chance.

Relying on financial pundits is speculating and not investing. The expected return of speculation is zero before costs and negative after costs. Macke has no greater ability to time the market or pick outperforming stocks than a monkey throwing a dart at a board, yet some investors will follow his advice, on the flawed assumption it’s worthy of consideration.

It’s unfortunate that the financial media continues to place advertising revenue over the best interest of investors. Shows where self-styled experts purport to predict the unpredictable should have extensive disclaimers indicating there’s no evidence their advice is more reliable than a crap shoot. They should also be required to give a periodic accounting of the accuracy of their past predictions, so investors can evaluate the merit of their current musings.

As Jon Stewart famously said in his skewering of Jim Cramer: “Isn’t there a problem selling snake oil as vitamin tonic?”

Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now, was published on Dec. 31, 2012.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information, and content on this blog is for information purposes only and should not be construed as an offer of advisory services.