Who Listens To This Stuff?
I try to ignore most of the media most of the time, but once in a while something slips through and I read it long enough to remind myself why it’s such a waste of time. Here are a few investment-related examples:
CBS News Article: I’m familiar with CBS News’ online articles because I occasionally see Larry Swedroe’s great writing here… and then there’s this guy. It’s not clear whether this is about rebalancing, cutting back sharply, or selling out of stocks completely, but the article does claim that the market is overvalued. His proof? It has risen by 17% over 5 years. That’s the total, not the annualized return. Ok, that’s a little underwhelming so he backs it up with some mumbo-jumbo about government debt. What’s the stock ticker for the US Government again?
Oh, wait, you’re telling me that I can only invest in companies that have nothing to do with that drama? And they’re currently doing far better than the government with record levels of cash and profits as well as falling borrowing costs that allow them to access cheap leverage? And you further claim that the stock market is a leading indicator for the economy and it may be 3 – 12 months before we really understand why it went up but that doesn’t mean there is no good reason?
I would stay away from that too. Especially since this guy, if you believe his chart, has bought exactly at the last two bottoms and sold exactly at the top and now he’s selling. Three perfect market timing decisions is enough evidence for me that he’s a genius. He can’t just be someone who got lucky, grew overconfident, and is going to lead readers into big mistakes because it looks like he knows better than the market.
Globe and Mail column: I agree with many others that value investing sounds good in principle. But when you look at how investors actually practice it you find things like this. A minimally-qualified journalist heard about a hot stock with a high yield. For confirmation that it was sustainable he trusted securities analysts who, as we know, are paid to promote stocks and will rarely say anything bad about them (not to mention their herd/trend following instincts). He writes that he had to rely on their opinion because he “didn’t really have a good idea of the company’s sustainable competitive advantages” and wanted to buy anyways. The thinnest positive information would apparently be enough to confirm his decision.
In turn tens of thousands of people trust his advice because, after all, he writes for the newspaper so he must know what he was doing. Once it was revealed that most of the company’s reports were fraudulent those readers lost big. Judging by a few comments readers may have lost hundreds of thousands of dollars if not millions based on this recommendation. The author himself apparently only lost $4,000 on this. Some, though, stayed out because they noticed a few things such as rising receivables, quickly falling cash balances, and the company borrowing a lot to pay a dividend. Surely finding that information can’t have taken more than 30 minutes, and yet many investors seem to think that reading a newspaper column in the “investment ideas” section is sufficient research. Starting from a few weeks before he told readers this was a good stock, the price has gone down by approximately 98%.
Although these recommendations are worse than worthless, the good thing about this article is that it gives people a more realistic view of investing. Most of the time people only talk about a trade that went well, ignoring 10 others that ended like this and making it sound like it’s easy to make money by trading.
Same Writer, New Target: Not to be discouraged by his admitted lack of knowledge, he keeps on going. This time it’s about a new stock that is currently trading close to $5 and will soon reach $50. Now that’s a pretty big claim. Not to worry though, it’s totally going to happen soon. After all it went up to $80 a couple of years ago when commodity prices spiked, and in the writer’s own words “It’s fair to say Molycorp should never have traded at $80” but it will at least get to $50 or $60 because that’s a much better value. The company’s products sell for about 20% of the price they fetched during the last run-up of the stock and the company has invested billions of dollars in projects that just don’t make sense at today’s prices, therefore it must have a bright future.
Further proof of this comes in the fact that “the U.S. Securities and Exchange Commission is formally investigating the company’s disclosures”. The company may have hidden bad news in the past, but now we can rest assured that it has told investors about everything that could go wrong and it’s really hiding good news that will cause the stock price to shoot up. That’s how it works right? No executive who owns options for their company’s stock would think of broadcasting the good news while hiding the bad…
Are you worried that other investors will drive up the price before you have a chance to get into this hot stock? That would be a silly fear since the new CEO of the company comes from Canada which means that, according to the article, “we have a shot at understanding this story before the Americans.” This stock really can’t fail. After all some guy in the newspaper wrote about it…