I think most of us are optimistic that 2011 will be a little kinder to our pocketbooks than the last few years. As I wrote a few days ago, most experts are confident that the stock market is poised for good gains. And if you are like most investors, you are anxious to get back in a game that doesn’t feel rigged or too turbulent. You’re probably reading all the money magazines and listening to the financial analysts hoping for a few great tips on investments.
In the past I have made the somewhat negative…..ok….even potentially insulting comments that most stock pickers have about the same success ratio as retarded monkeys throwing darts. I didn’t mean to offend stock pickers or retarded monkeys, and I decided that perhaps I better do a little research to support the supposition.
This time of year – and especially as we move into a fresh decade – the money magazines especially like to hype the “stocks of the year and the decade”.
Ten years ago, in 2000, these were Smart Money’s picks as the “ten stocks for the next decade”. I have also listed the ten year return for each of the stocks.
Stock Ten Year Return
Scientific Atlantic +56%
Red Hat -18%
America Online -23%
Hmmm, so if you built a portfolio based on Smart Money’s advice, only two of the ten stocks would have made any gains, and a couple of the ten really tanked. Doesn’t seem like a portfolio I would be happy with. Not so Smart Money.
But what if you were to follow the advice of a really prestigous magazine like Fortune? Here were their “Ten Stocks To Last The Decade” as they appeared in 2000, and the returns on those equities from 2000 to 2009.
Stock Return 2000 to 2009
Morgan Stanley -60%
Wow, suprising that the Enron recommendation didn’t work out. And nine out of ten lost money. I doubt they would have beat the retarded monkey portfolio. (One caveat here….. we did have a little thing called the recession hit us during this period which certainly impacted some of these stocks, and in the case of Fortune a more current valuation would make some of their picks look better. But the recession had little to do with problems had AOL, Nortel, Enron, and many of these other companies.)
So what’s the lesson here?
Well, don’t get me wrong. I am not saying “don’t take financial advice”. I am a big believer in the value of legitimate financial planners and managers for many people (with emphasis on legitimate and many – but that is a different blog entry).
But you should not take financial advice from advertising-driven publications and television programs. They tend to pick overly-hyped stocks that look good in print. They advocate “swinging for the fence” in the hope that a year later they can print a great “we told you so” article after they recommended the new Google. Accordingly, you get stocks that are usually trading at huge valuations and banking on the fact that they become the standard in the industry. It sometimes happens, but that is a huge leap to make.
Most investors should not “swing for the fence”. That is gambling – not investing. The average investor would be best-served by ignoring hot stock tips, and put their money into properly allocated index funds that have low fees and minimal turbulence.
Investing isn’t just about finding that new hot stock, it is a long-term planning process that involves analyzing your immediate, mid, and long-term financial requirements balanced against your projected revenue. Do it right, and you assure yourself a healthy and happy long-term financial outlook. But take a gambler’s mentality to the market and you might end up spending your golden years saying “Welcome to Walmart.”
(Note – A good read on the subject is David Gaffen’s new book “Never Buy Another Stock Again” which will be released sometime next month.)