Why You Shouldn’t Trust Financial News

These sources of financial information could be harmful to your wealth.

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I find it depressing that much of what passes as financial journalism is misinformation that is harmful to investors. Here’s a sampling of recent posts that fall squarely into this category:

Daniel Solin
Daniel Solin
The musings of Jim Cramer. CNBC is a rich source of useless financial information. Typical is Cramer’s recent endorsement of Facebook. He now believes the stock is a buy because it has entered a "virtuous cycle" in advertising.

Respected journalist Allan Roth reviewed Cramer’s stock-picking skill in a scathing blog post. The results aren’t pretty. Roth calculated the odds of Cramer’s four erroneous sell recommendations for stocks that turned out to be the best performers out of 749 different stocks for the six-month period ending in May 2013. They were 1 in 13.1 billion.

Cramer may be right or wrong about Facebook, but his track record does not inspire confidence. Relying on his stock picks is gambling and not investing.

Motley Fool. This popular website clearly has an identity crisis. I have seen some very good postings that note how difficult it is to beat the markets and advise readers to consider index funds. Yet the site clings to the notion that its insights on the merits of stocks and actively managed mutual funds are valuable, with columns like “How Stocks With Strong Fundamentals Beat the S&P.”

Here’s what is not well-known. Motley Fool is the fund manager of three funds bearing its name: The Motley Fool Independence Fund, the Motley Fool Great America Fund and the Motley Fool Epic Voyage Fund. According to its latest semiannual report, each of these funds underperformed its relevant index over the six-month period from November 1, 2012, through April 30, 2013.

Presumably, if the Motley Fool had stock-picking expertise, it would be reflected in the performance of its proprietary funds.

Articles picking outperforming countries. There is no end to pundits telling investors which country is a fertile source of stellar investment returns. A recent article in Forbes by James Gruber, entitled “Why Investors Have Got It Wrong on China, is representative. Gruber notes that most of the bearish predictions about China are being made by those who were “cheerleaders” 18 months ago. He names famed investors and economists who were “wrong” about China. He even admits his own mistakes that led to “underperformance” in an Asia ex-Japan fund for which he served as portfolio manager.

Gruber concludes that making bets on countries can be a viable strategy if you understand the “nuances” of these markets and don’t extrapolate the past into the future, among other guidelines. He cites no data indicating these guidelines have any predictive value. A far more logical conclusion is that it is exceedingly difficult to pick countries likely to outperform. As of June 7, these were the countries with the top-performing stock markets year-to-date: Dubai, Nigeria, Abu Dhabi, Kuwait, Pakistan, Bulgaria and Vietnam. I wonder how many “experts” advised their clients to overweight their portfolios in the stock market of any of these countries.

Unfortunately, to be a successful and responsible investor, you need to ignore most of what is written in the financial media.

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.