I still don’t understand why people pay much heed to headlines in newspapers (if it’s in the news it’s already old news, and can’t make you money) or to those who’ve unilaterally appointed themselves as experts on money matters. Some journalists are pretty good, but because investor enthusiasm for a sector or stock is inversely correlated with smart investment decisions (think about it, you’ll get it) the columnists who do give reasonbly good advice don’t get as much publicity and remain relatively obscure. The ones who get the most attention, shouldn’t! Here’s a classic example: The following (edited to make it shorter) clip is Mr. “Mad Money” Jim Cramer. At the peak of the market (when I was warning readers in this blog that it was time to SELL), Cramer’s pitch was something like this: Sure the market has run up, and although you might think it’s too late to be investing things are different this time and stocks are just going to keep going up!!!!
From that moment in time (April 28, 2011) to today (June 7, 2011) Nasdaq has declined almost -6%, and the S&P500 is down about -4% (down nearly -7% from its earlier peak during April). Nobody cares about the quality of the advice these days, as long as its delivered with fanfare. Popularity (entertainment) is today’s ticket into becoming an investment adviser/fund manager. Despite volumes of testimonials and evidence on blogs and chat rooms that entertainers manage to get it wrong more often than real experts (who get it wrong often enough already), they continue to get an abundance of airtime which means a whole lot of stupid people (and all of us are stupid to some degree) actually might follow their advice. I found this quote today:
In April, TheStreet.com sent out an email urging readers to subscribe to Action Alerts PLUS, a trading-tip service from The Street’s co-founder and CNBC host James J. Cramer. Douglas Zitzmann recently posted it on his Fumbled Returns blog.
Sent out under Mr. Cramer’s name, with the subject line “My portfolio is CRUSHING the S&P 500,” the email said Action Alerts PLUS is “producing some truly incredible results.” From Jan. 1, 2002, to April 1, said the email, the portfolio’s “total average return has averaged more than DOUBLE the return of the S&P 500.” An accompanying bar graph showed the S&P 500 returning 15.5%, versus 39.2% for Mr. Cramer’s portfolio.
Incredible indeed, if you include dividends for Mr. Cramer’s portfolio and exclude them for the S&P 500. With dividends, the total return of the S&P over the same period was 38.3%. Viewed this way, Action Alerts PLUS didn’t double the market’s return; it squeaked past by a cumulative 0.9 percentage point. That is before tax and before the annual subscription fee ($299.95 the first year).
“I do not do anything but manage the portfolio,” Mr. Cramer replied in an email response to questions from The Wall Street Journal. He referred inquiries to Gregory Barton, general counsel at TheStreet. Mr. Barton confirmed in an email that Mr. Cramer’s performance does include dividends while the S&P 500 return cited in the promotion doesn’t.
This suggests that even if the advice is bad (or at best neutral) there’s no shortage of shady promoters (investment bankers, fund distributors etc.) willing to exploit the advice, so long as there’s a big enough audience to exploit. If the numbers need massaging, no problemo. Who needs numbers anyway? It’s the sizzle that sells, not the steak. And celebrity investors are not just a U.S. phenomenon (what name rhymes with old & weary).
So what’s the merit in working hard to obtain professional credentials (like Chartered Financial Analyst) when you’d be better off apprenticing at the local TV station?
The flip side of the coin is that the ticket to becoming a very wealthy money manager (whether a good one or bad one matters not) is conforming to a world that thrives on hype. I can’t explain even after 30 years in the portfolio manager business (but then even Cramer claims to have been “in the business” for thirty years…..which part of the business I don’t know or care really) why it is that being a money manager and popular (good press agent?) launches one to celebrity status complete with endorsements, books (ones that actually sell, not mine lol) and paid speaking engagements. Crazy world eh?
I spend some time in my book “A Maverick Investor’s Guidebook‘ warning of the perils of mimicking investment gurus. Fame doesn’t mean that every they decision they might make will prove to be a good one. I pulled this chart from my book as a ‘for instance’:
Even guru Kirk Kerkorian can buy high and sell low. Thousands and possibly millions of innocent folks have instant and constant access to what celebrity ‘gurus’ are recommending or doing – but they cannot afford to take the same risks. Thanks to the media, the credibility of celebrities is enhanced by the constant favourable publicity while at the same time the public has grown suspicious of those who actually have professional training, years of experience, standards of conduct and act for the benefit of clients above themselves. These professionals are portrayed as arrogant and untrustworthy by the press – and the stereotype is fueled by the tiny minority who really are sleazy. Oftentimes these bad apples misrepresent their professional credentials but “investment advisor accused of fraud” is a better storyline than “sleazy dude posing as a qualified investment advisor is accused of fraud.” The odd bad apple is awarded a disproportionate amount of bad publicity, just as the ‘gurus’ get much more coverage than is reasonably warranted. Because one ‘investment professional’ was a crook, all of them must be shady. It’s alot like telling your kids to keep clear of all Harley riders, because a miniscule but ‘press-worthy’ few have been known to belong to criminal motorcycle clubs