Michael on August 14th, 2007
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You: What do you make of stock tips?

I am not a big fan. Market timing is not a strategy that works over the long-term.

Gary: Funny, that’s how I make most of my money.

That’s right Gary, it is how you make most of your money.

Gary: So you admit it, then?

I concede that you can make a good amount of money giving stock tips, yes. However, I must point out that you don’t make nearly as much money trading on your own stock tips.

Gary: You’re splitting hairs.

Not in the least. If your tips were worth half of what you charged for them, you wouldn’t share your tips because you’d be making too much money trading in your own account. But the reality is that you’ll never stop providing stock tips because it is from giving the advice–not using the advice–that you make the most money.

You: But what about tips that come from more reputable sources?

They’re still guesses and represent market timing so I’m still not a fan. For example, I greatly enjoy FORTUNE magazine and often read it from cover to cover. Well, not really, I usually read it from the front cover to about ten pages short of the back cover.

You: Why stop there? Next issue arrive? That annoys me too.

No, it’s just that I have better uses of my time than reading about the stock tips contained in each issue’s final pages. But like most people I do occasionally get curious. I just finished reading “Why Banks Beat Bonds” in the August 6 issue in which FORTUNE calls the following stocks “excellent choices right now”: Bank of America (BAC), Citigroup (C), and Wachovia (WB).

You: Okay?

You may recall that since this issue came out there has been a lot of tumult in the stock market and in financial (including bank) stocks especially.

You: That’s one way to put it. But the Dow Jones Industrial Average is down only slightly during this time.

Very true – good job taking the long-term, big-picture view. Note that the article wasn’t talking about the stock market in general. This is the section where they talk about specific stocks, in this case bank stocks.

Furthermore, remember that articles in print magazines must be finalized long before you actually see them. My unofficial investigative reporting concludes that “Why Banks Beat Bonds” was finalized on July 12 or July 13. The stock prices listed in the magazines of those bank stocks match up to those days.

You: Okay, Woodward, what’s the conspiracy?

No conspiracy, just the fact that if you had purchased each of these stocks when the article was finalized, when you had the most timely recommendations possible–as though you sat next to the editor–you’d currently be way down on your “hot picks.”

You: How so?

Based on current prices, you’d be down as follows:

  • Bank of America: -3.0%
  • Citigroup: -11.5%
  • Wachovia: -12.2%

You: That’s quite a hit.

Yes, in just one month.

You: Does this mean that these stocks are bad buys?

I don’t know.

You: What?

Gary: What?

I really don’t know. I don’t think like that and neither should you. You’re asking me about a form of market timing. One could expect that FORTUNE would be even more passionately in favor of buying these stocks now since they are cheaper. On the other hand, the market as a whole certainly doesn’t view these stocks as optimistically as it did just a month ago.

You: So what do you do?

Whenever I read or hear about a stock pick, I do absolutely nothing. And that’s what I suggest you do too. Be a buy and hold investor. Focus on high-quality low-cost mutual fund managers and index funds. That’s what allows you the best chance to grow your wealth over the long-term. That’s following an unbiased financial planning education.

You: Not too exciting.

No, you won’t dominate the cocktail party conversation, but you will be laughing all the way to the bank.

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