What One Stock Expert's Epically Bad Prediction Teaches Us About Investing

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You might not be familiar with the name Whitney Tilson, but you should be, because a spectacularly wrong prediction he made back in 2004 can teach you all you need to know about investing in stocks.

Well-known in financial circles, Tilson graduated magna cum laude from Harvard in 1989 with a Bachelor of Science in government studies and went on to earn his MBA with high honors from Harvard Business School. After that, he founded Kase Capital Management -- which runs three value-oriented hedge funds -- where today he serves as managing partner.

Tilson has written for Forbes, Kiplinger's, and the Financial Times, and is also a contributor to CNBC. You'll also find him regularly on Bloomberg TV and the Fox Business Network.

In 2004, Tilson founded the Value Investing Congress -- often called the "Super Bowl of Value Investing" -- a semiannual gathering of the best minds in the financial industry, where participants give presentations that are heavily covered by the media and often move individual stocks.

Tilson, by all traditional standards, has all the credentials and real-world experience to make investors stand up and take notice when he talks about the stock market, which is why you might be surprised to read what he wrote about Google's IPO almost 10 years ago:
Think about it. What are the odds that it is the leading search engine in five years (much less 20)? 50/50 at best, I suspect, and I'd wager that odds are at least 90% that its profit margins and growth rate will be materially lower five years from now. Yet investors appear ready to value this company at as much as $36 billion, nearly 200 times trailing earnings! Google with the same market cap of McDonald's (a stock I own)?! HA! I believe that it is virtually certain that Google's stock will be highly disappointing to investors foolish enough to participate in its overhyped offering -- you can hold me to that.
For the record, Google (GOOG) went public at $85 and is currently trading near its all-time high of $1,186.54, almost a 1,200 percent return.
It's hard to imagine how Tilson's call could've been any more wrong, and it illustrates some very important lessons for investors, the first of which is that there are no experts in the market.

An expert is defined as someone with comprehensive and authoritative knowledge in a particular field, but the nature of successfully investing in the market involves being wrong more often than not. Great investors aren't experts; they prosper not by being right on every stock they trade, but by constantly cutting their losers and letting their winners run.

Once you grasp this, it leads to the second lesson: Only price pays. No matter what script you think your investment will follow, there has to be some point at which you'll allow price movement to prove you wrong and exit the position.

But perhaps the most important lesson from Tilson's tale is to never rely on anyone else to make your investment decisions, no matter what school he went to, what he does for a living, or which TV shows he appears on.

We're living in a time now where, thanks to the Internet and social media, a farmer in Nebraska has access to a quality of information and analysis similar to that available to a broker in Manhattan. Take into account the opinions of those you find reliable, but then incorporate your own analysis to come up with an action plan you believe in and take responsibility for.

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best - Top Trading Tips for Our Time".

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Cody Freeman

I love your work! But I feel sorry for you BC after coming from "the knowledgable investing community" to this collection of muppets who read this site. Although I'm sure your pay is nicer here : )

No one here understands the concept of active investing or stops. Price is not considered by them and then the conversation diverges into some political rant. Great perspective on using your own knowledge and experience to execute your investment plan...never rely on someone else to tell you what's a good buy or sell.

The most important line in this post: only price pays
Boom!! That's dropping knowledge

February 15 2014 at 10:46 PM Report abuse rate up rate down Reply

This is certainly true, read Malkiel's "Random Walk on Wall Street." His premise is that a monkey throwing darts at a page is as successful as brokers at picking individual stocks.

February 15 2014 at 8:34 PM Report abuse rate up rate down Reply
1 reply to joyceand's comment
Cody Freeman

This is simply not true. You're saying a monkey or you for that matter could be more successful than warren Buffett, peter lynch, einhorn, or Icahn by simply throwing darts? Laughable. I would highly recommend you pay someone else to manage your money for you immediately.

February 15 2014 at 10:49 PM Report abuse rate up rate down Reply
Ken Sailler

Gold was a 10 bagger but it crashed suddenly when everyone jumped on it. Demand can drain anytime. Anything can crash all of a sudden.

February 15 2014 at 7:34 PM Report abuse +1 rate up rate down Reply
2 replies to Ken Sailler's comment

Right, that's where diversifying one's portfolio comes in.

February 15 2014 at 8:32 PM Report abuse rate up rate down Reply
Cody Freeman

This is why stops and risk management are the most important aspects of managing investments

February 15 2014 at 10:50 PM Report abuse rate up rate down Reply

When Google went public, the belief was that it was just another search engine, albeit faster and more likely to get the results that a person wanted.

No one saw the Android operating system, which it and the iPhone led to the decline and fall of BlackBerry.

Every investor has a loser or two that they wish they could take back. Warren Buffet lost a lot of money on his investment in US Air.

I remember Jim Cramer calling the original iPhone a toy that was great for his kids, but useless for a person who needed a phone for work, such as the BlackBerry. He didn't see how versions 2 through 5 would ween people off of the "Crack Berry".

February 15 2014 at 5:46 PM Report abuse +1 rate up rate down Reply

I bought Disney at $20 and it is now close to $80. This obviously makes me a genius!

Ahem...hold the applause. What I did not see when I bought the stock was the merger of Marvel Entertainment, the explosive growth of sports programming, Disneyland international expansion to the extent that has occured, tent-pole movies and many other events some of which I might still be oblivious that they have transpired. Similarly, I thought Google was fully value on the offering only belatedly appreciating that this company could richly monetize moving the information needle at levels which were only previously dreamed.

The "secret" is to ride good quality companies for 10-30 years or more, if you can. They will do things in the future to enhance value and you will have climbed aboard at a fraction of the value of future endeavors. Which ones to pick? That is the smart part of being lucky and smart.

February 15 2014 at 12:50 PM Report abuse +2 rate up rate down Reply

His comps were not applicable or relevant to Google. Nor did he fully comprehend the future potential for paid search and advertising.

Valuation side analysts, investment bankers, etc., fail to properly "value" high growth, high beta, volatile stocks, like Google. Instead they try to value high growth with value stocks like McDonald's and miss the future.

February 15 2014 at 12:40 PM Report abuse +2 rate up rate down Reply

Thanks for a bit of perspective!

February 15 2014 at 7:03 AM Report abuse +1 rate up rate down Reply

Just for the record ... an "epically bad" prediction was stockbrokers telling investors that they couldn't go wrong by buying Enron. And we all know how that story ended.

February 14 2014 at 8:09 PM Report abuse +1 rate up rate down Reply
1 reply to Valerie's comment

As did George Bush when he stated that we in America need more companies like Enron,even wanted to put are Social Security money into it...we all know how that turned out!!!

February 15 2014 at 7:29 PM Report abuse rate up rate down Reply

Tilson could have been right! However, in this case he was wrong

February 14 2014 at 8:03 PM Report abuse -1 rate up rate down Reply

trusting a tip on a horse has more merit then a tip on a stock.........

February 14 2014 at 5:26 PM Report abuse +1 rate up rate down Reply