The Return of the Dreaded -- and Dreadful -- Stock Pickers

Market turbulence and economic uncertainty create fear and anxiety among investors. Unfortunately, many turn to advice freely dispensed by self-styled investment gurus -- who claim they can predict the direction of the markets or pick outperforming stocks. Reliance on this advice can be very harmful to your financial well-being.

One form of stock market crystal ball reading is so-called "technical analysis." This, according to its proponents, is the examination of patterns in the market to identify the current trend, and then looking for patterns that suggest whether that trend is likely to continue or change.

Sharing "a Pedestal with Alchemy"

There's compelling evidence that technical analysis is nonsense. The view of those who study the capital markets, and publish peer-reviewed papers setting forth their conclusions, was nicely summarized by Burton Malkiel of Princeton University, in his seminal book, A Random Walk Down Wall Street. Professor Malkiel concluded that "under scientific scrutiny, chart reading must share a pedestal with alchemy." The concept of using past data to predict future prices has been debunked by the efficient market hypothesis -- which holds that markets are random and efficient. It is tomorrow's news that moves stock prices and markets, not yesterday's. No technical chart can predict tomorrow's headlines.

Stock pickers fare no better, but they keep trying to convince you they have predictive power that will help you to gain outsized returns.The unstoppable Jim Cramer advises you to buy banks, industrials and metals and mining. Should you listen to him?

No Better Than Coin Flipping?

Consider this: A study of 1,446 large-cap blend mutual funds for the 10-year period ending Oct. 31, 2004, found only 35 outperformed the S&P 500 index. Do you believe any individual stock picker is better than these handsomely paid and well-credentialed mutual fund managers?

The CXO Advisory Group tracks Cramer's picks, and those of other alleged "stock picking gurus." The overall rating of the stock pickers was 48%. You could replicate these dismal results by coin-flipping or by tossing a dart at a list of stocks. Is this an intelligent way to invest and plan for retirement?

In May, 2009, CXO did an analysis of Cramer's buy and sell recommendations. It concluded his recommendations are not particularly good or unusually bad. While Cramer likes to compare his performance to the S&P 500, the reality is his stock picks are often riskier than those in that index. In a bull market, you would expect higher returns from riskier asset classes.

A study by Barron's may also give investors pause before following Cramer's latest recommendations. It found Cramer's stock picks typically underperform the market. From May to December 2008, the market lost 30%. Investors who followed Cramer's advice would have lost 35%.

"No Such Thing as Stock Picking Skill"

There's something fundamentally wrong about making stock picks and knowing that some investors will rely on them, when there is no data indicating anyone has this expertise. William Bernstein, author of The Intelligent Asset Allocator and other valuable investing books, said: "It turns out for all practical purposes, there is no such thing as stock picking skill." His views are shared by Nobel laureates Merton Miller, William Sharpe and Paul Samuelson, and backed up by hundreds of academic studies.

Yet the charade continues. The same "gurus" who recommended Lehman Brothers, Washington Mutual, Worldcom, Enron and other companies that later filed for bankruptcy continue to tout their skills as investing prognosticators, unashamed and without remorse. They have new "stocks picks" for gullible investors with short memories. They hope their purported "expertise" will convince you to read their blogs, watch their television shows or -- worst of all -- entrust your money to them. I don't mean to pick on Cramer, who is no better or worse than his stock-picking colleagues. However, it is noteworthy that he recommended Lehman Brothers on Aug. 17, 2007, together with other financial stocks. That day, it closed at $58.11. Its most recent close was around 4 cents.

It may be entertaining to read their musings and watch their antics, but it has nothing to do with intelligent investing.

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May 29 2011 at 12:27 AM Report abuse rate up rate down Reply

GOD BLESS PRESIDENT OBAMA = courage, wisdom, decisiveness ! Obama's handling of the Egyptian crisis and now the Libyan crisis plus Japan proves what a brilliant & great leader he is , respected and admired the world over

See full article from DailyFinance:

March 28 2011 at 11:59 AM Report abuse rate up rate down Reply

I thought it was interesting that Warren Buffet sold his shares of Bank of America and the Nightly Business Report shows it going down ever since but I still don't know why. It was a small portion of my portfolio that is very diversified.

March 27 2011 at 11:03 PM Report abuse +1 rate up rate down Reply

Cramer is just another loser on Fox News. If you want some real advice or want to learn about stocks and the market watch the Nightly Business Report on public television. They are always right on the money.

March 27 2011 at 11:01 PM Report abuse rate up rate down Reply
1 reply to inasctg56's comment

hey jackass. cramer is on cnbc. Libturd just looking for a

March 27 2011 at 11:18 PM Report abuse +1 rate up rate down Reply

GOD BLESS PRESIDENT OBAMA = courage, wisdom, decisiveness ! Obama's handling of the Egyptian crisis and now the Libyan crisis plus Japan proves what a brilliant & great leader he is , respected and admired the world over

See full article from DailyFinance:

March 27 2011 at 11:13 AM Report abuse +1 rate up rate down Reply
1 reply to fpfp040408's comment

I hope your being sarcastic. WOW!!!!!!

March 27 2011 at 11:22 PM Report abuse +1 rate up rate down Reply

Some can predict the market but who would believe them??/ so they believe the experts or analysts instead... Whatever, you can use some hand holdings with your full commission broker to keep you calm as your stcok resume the steady climb unseen by others..

March 27 2011 at 3:32 AM Report abuse +1 rate up rate down Reply

Wow! What a powerful article. I hope I can find an Advisor that knows nothing about market dynamics, doesn't care and justifies his or her position with knuckleheaded statements like this. I can think of no better way to spend my money than by paying a fee and having the Advisor tell me that "the best anyone can do is to throw darts at the stock pages." That's "Intelligent Investing"? I don't think so.

March 26 2011 at 12:04 PM Report abuse +1 rate up rate down Reply
Ange Purs

So how would this wise ole investor blogger invest his money? No noise about that. Does he like ETFs? Does he know what they are? He seems to think mutual fund managers are sharp cookies cause they manage large sums of $$$. Well folks, plot most any large fund against the DOW or S&P and notice that it is in lock step (mostly) with either or both indices. Most large mutual funds are proxies for the DOW and/or the S&P index. You might as well buy the indices. It is also known that at any given time some sectors are doing better than others just because of the economic climate...which can change rapidly. Picking stocks within those better performing sectors is not a long term investment's short term. You are meant to get in on a dip and out on a rally. Buying ETFs with the same strategy will net good results for those would dont want to pick an individual stock, but would rather have a basket of the best performing stocks of a particular genre/sector. If you arent up to any of this, then you are stuck with mutual funds. That strategy floats with the market...up or down.

March 26 2011 at 3:30 AM Report abuse +2 rate up rate down Reply

Bla Bla Bla. You said Cramer's picks are riskier than average then seemed surprised that his portfolio lost 5% more than the S&P 500 during a downturn. Of course he would be down more than the average in a down market if his stocks are riskier, i.e., have a higher Beta. Cramer made a very good living picking stocks. If he didn't perform; he lost his clients.

Let's see here: technical analysis is alchemy and stock pickers are charlatans. Who can we rely on for help, not the boob who wrote this blog.

March 26 2011 at 12:27 AM Report abuse rate up rate down Reply
2 replies to jtmpmm's comment
Ange Purs

When the system is chaotic (no matter how it's defined), it is mathematically impossible to use historical data to accurately predict the future past a certain time horizon. In the case of the stock market, this time horizon is very close to zero. Read about the theory of chaos. There was a layman's book published about it 10 or so yrs ago. It has only 4 (or less) equations
in it.

March 26 2011 at 3:50 AM Report abuse +2 rate up rate down Reply

Fox seems to excel at picking up losers.

March 27 2011 at 11:04 PM Report abuse -1 rate up rate down Reply

I remember in 08 the comment, the dow wont go below 12000. I remember, if you dont buy stocks listen to ken heebner. Damn. I wish I would of watched the next episode!

March 25 2011 at 5:32 PM Report abuse +1 rate up rate down Reply