If you are an investor in the stock market, you have my sympathy. Not because it is a bad place to invest. It is a terrific place to invest. The stock market abounds in opportunities for savvy, long-term investors.
Investors have my sympathy because they are subject to an unrelenting barrage of investment advice from a variety of media. Scores of experts on television or in columns will tell you to do this or that. The problem is that a large percentage of this advice is lousy.
How do you know if the market pundit to whom you are listening is competent? How can an investor ferret through the noise and identify the financial experts worth listening to?
Here are some filters that will help. Of course, even the smartest analysts are wrong sometimes. These filters will not prevent you from making investing mistakes. The purpose of these filters is to help you identify the financial experts who are non-starters. These are the experts you should ignore completely.
• Experts who predict the level of a market index. Changes in the market indices are random and subject to myriad influences that are unpredictable. You will never hear any of the great investors, such as Warren Buffett, Eddie Lampert or Marty Whitman, predict the level of a market index.
The next time you hear a pundit on television predict the level of the Dow Jones Industrial Average or the S&P 500, change the channel. You stand a better chance of learning something useful by watching a cartoon.
• Experts who use technical analysis. Business television shows trot out one technical analyst after another to tell you how to invest, based on resistance levels, moving averages, momentum and buy/sell signals. Don’t listen to them. Technical analysis is an oxymoron. It sounds technical, but it is not analysis. It is rubbish, plain and simple.
There is not a single money manager or mutual fund who has generated an impressive long-term record using technical analysis. Nor a single academic study that indicates technical analysis offers any utility to investors. It is the stock market’s version of snake oil. Columns touting investment strategies based on technical analysis belong in the horoscope section of the newspaper, not in the business section.
• Experts who don’t understand price and value. This is an all too common foible. An expert will recommend the stock of a company because the underlying business is thriving. This sort of linkage is often specious. Just because a business is operating at optimal levels does not automatically mean the stock is good value.
In fact, the opposite is generally true. The best time to buy the stock of a company is, generally, when it is operating at subnormal or trough levels. Coincident with trough levels is a public perception of the company that is marked by negativity. This is when the stock will sell at a discount. The worst time to buy stock, generally, is when the company is operating at peak levels and is enveloped by enthusiasm. At this juncture, the stock will be at least fully priced, and often overpriced.
• Experts who parrot popular stocks. Use the mute button on your remote control the next time you hear a financial expert on television recommend one. You will accomplish more by taking a nap than by listening to yet another talking head recite a litany of the most popular stocks in the market.
Everybody already knows the popular stocks. As a result, they are almost never undervalued. That makes buying them a dangerous game. If you are buying an overpriced asset, your only hope of making a profit is if you can sell it later at an even richer price.
• Experts who have all the answers. Avoid listening to people who are willing to pontificate on anything and everything. They will not only tell you how to invest in the stock market, but will also predict the price of oil, changes in interest rates and the dollar, and which commodities you should invest in. I’m sure, if asked, many of these experts would be happy to share their opinion on whether or not the Yankees will win the World Series.
Buffett is frequently asked about the near-term direction of the stock market. His answer is always the same. He will respond with a chuckle or a smile, and say: “I don’t have any idea.” Marty Whitman usually says something a bit more colourful, like: “Hell, I haven’t a clue.” Buffett and Whitman have always been quick to admit they do not have all the answers. And that makes them worth listening to.
The writer is a portfolio manager for Alsin Capital and the Turnaround Fund. firstname.lastname@example.org