Should You Listen to Investment Advice? Part IV

My last point on investment advice is to think long-term and treat it as a business.  You are trying to buy underpriced cash flow streams.

Should You Listen to Investment Advice? Part IV

 

Because it is a business, you must focus on the long term, and downplay short cycle information.  Don’t let the media scare you or make you greedy.  There are bumps and jolts in all investing.  Keep your eyes on the long term.  Always ask yourself when reading news, “What is the long-term effect on profitability?”  Often good companies have bad quarters or years.  The same is true of bad companies having good years.  Look at the long-term profitability, and downplay the short-term noise.

By short-term noise, I largely mean the media.  That includes the web, and those that tout stocks on a short-run basis. There are several problems here:

1) Media investment advice (and that from Wall Street as well) is biased toward buying.  Articles will give you a list of stocks to buy either generally, or in a given industry.  The biggest problem is that they won’t generally follow up on their recommendations, nor will they tell you what the time horizon is for the recommendation, or what catalyst should lead you to sell.

2) You will not see many articles offering a list of stocks to sell.  There are several reasons for this: a) most readers have some cash, which they could use to buy stock.  Most readers do not own the stocks that one might suggest to sell, so unless readers are enterprising enough to sell short, which even fewer are willing to do, your article is of little value to the average person. b) Do you want the possibility of a lawsuit?  Unlikely, but could happen. c) If you rely on advertising, do you want the reputation of shooting companies down?

There is an even bigger reason behind this: the world is designed to be 100% long.  That is the norm.  Shorting is a side-bet.  Even holding cash is a side bet, trusting in the veracity of a central bank that mostly has claims on the taxation power of the government.

3) Most people in the media are not investors.  As journalists, they have to be neutral.  At least there has to be significant disclosure of interests.  Readers should ask themselves, “What does this writer know that I don’t?  Who disagrees with him?”  In good investment shops, they have a process where they challenge opinions.  Rarely do you see that in the media, where two parties present opposite opinions.

4) Even when professionals go on the air or on the web, be skeptical.  (This includes me.)  They may have an interest to mention stocks that are close to their “Sell” level, but they will not mention companies that they are currently acquiring.  Hey, I went through that when writing for RealMoney.  I could write about things only once we had our full position on.  It is normal for firms to not allow their employees to write, ever.  It is second most normal to allow them to write only when the firm’s interests are not affected.

5) There’s no measurement process, no feedback when people give investment advice in the media.  They seem more credible when they are on the Web, TV, Radio, but does that really make them more competent?  It does make them more marketable.

6) Investing is best when it is businesslike.  Good opinions take a lot of time to form within investment firms.  If anyone can do the “lightning round,” Cramer can.  But good investing isn’t typically snap decisions, so we should not give a lot of credence to anyone’s off-the-cuff remarks.

7) Remember, few people writing/speaking on investments are doing you favors.  They have their agenda.  Some make it clearer, like me, and others don’t.  Be aware, you are your own best defender.

8 ) Few writers will urge caution on asset allocation because it is a boring topic, and besides articles on bonds don’t sell.  People read advice that excites, not that which preserves safety, at least not to the same degree.

9) One last note, good value investing is usually boring.  There may be some interesting tales, but who will be good/talented enough to do all of the research and spill it for free?  There are uses for such a person that pay more.

This probably ends my series on Investment Advice, but feel free to send questions, ideas, etc.  Thanks for reading this.

By David Merkel, CFA of Aleph Blog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.