“He recommended Amazon and Apple. What is he recommending now?”
“He predicted the market crash of 2007. Here’s what he says now.”
And so on.
You may have seen ad headlines just like the ones above recently. The specifics change, but the idea is always the same. Here is a person who predicted a certain event, or recommended certain stocks at the perfect time, and if you would have followed that advice, you would have made a ton of money. That being the case, shouldn’t your find out what they are recommending or predicting now?
Did He Really Predict Stock Market Moves?
If you doubt that these people made these recommendations, or predictions, I admire your skepticism. However, these ads and their subjects can often back up these statements with records showing that they did, indeed, predict or recommend the perfect stock moves at the perfect time.
So, should you run out and give them your money and subscribe to their newsletters?
To answer that question, let’s backup for a second.
There is a scam whereby a company claims to be able to predict the winners in certain sporting events so you can bet on them and make money fast. To “prove” that their system works, they send you mail, or email, with one free pick, in advance. When they correctly predict the winner of the game, that is proof that their system works. Of course, everyone can get lucky, so they send you the pick for the following week too, and they get it right also! After a few weeks, the only logical conclusion is that their system really does work, and you should pay for it, right now.
Only, not really.
What really happens is that they start with an enormous mailing list. They send half the people on that list a pick for one team in the game, and the other half of the people a pick for the other team. Whichever team turns out to be wrong, gets eliminated from the mailing list. Then, half of the people left get a pick for a team, and the other half get a pick for the opponent. Again, only the winners keep getting mail. In this way, you have a certain number of people who will see you be right four, five, or even six times in a row.
Which brings us back to our stock picking geniuses and market predictors.
Remember the woman who said that therewas a nationwide, mass failure of municipal bonds coming in the next 12 months a few years ago? The reason anyone listened to her at the timewas because she had “predicted” trouble at Citigroup and other banks before the financial market implosion that led to the Great Recession. That “proved” she knewabout the markets and you couldmake money listening to her.
So, when she predicted trouble with munis, people listened. When itdidn’t happen, she said that it was the media’s fault and that wasn’t what she meant. Do you think that would be the same story if there had been a muni bond market failure, or do you suppose, “Correctly Predicted Muni Bond Crash,” would be on every ad out there? Funny how while her name was splashed across the front page of every newspapermaking her famous (again) she couldn’t be bothered to correct the media that was getting her so wrong. That didn’t happen until a year or two later for some reason…
If an ad says that a certain stock analyst picked Amazon in 1990, and Tesla in 2011, the question you should ask is not, did they really, which they probably did, butwhat else did they recommend?
You see, 2011 was a long time ago. Have they really made no stock recommendations since then? What about the years in between 1990 and 2011. Did they recommend Apple stock at $200? Good for them. Did they also recommend it at $800? Oops. But, to seem like a winner, all you have to do is amplify the calls that went right, and ignore those that didn’t.
Another way to read those ads is:
I’ve made hundreds of stock calls in the last 10 years, but here are just my two best ones so that you will foolishly assume that they all turned out this well, and will continue to do so.
The most likely reality is that they did make a couple of calls that turned out really great, everone does. But, if you averaged out ALL of their recommendations over the same time period, you would most likely get a return very close to the S&P 500 index… if they’re lucky.
Most people who sell stock picking advice tell you about all the really great BUY calls they made. They almost never make a sell call. That’s convenient.
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You see, if I recommend Tesla today, and then I never mention it again, I can in 10 years, say, “See?! I recommended Tesla at $225, and now it trades for $800!” Of course, if Tesla goes to $50, I just never say a word. Instead, I’ll tell you about how I recommended Disney at $100. If you call me on it, I’ll say, something about how I sold Tesla a long time ago, but I still made plenty of money. Why are you bringing this up, anyway? It’s been years since I recommended Tesla.
If someone recommended a certain stock 10 years ago, they almost certainly have recommended others since then. Where are those picks? Were they just as good? Why are they not advertised? If I get just one right pick out of a hundred, that would lose you a lot of money, but if I only list the one good one on the advertisem*nt, then how would you know?
Not to mention, listing a stock pick from several years ago isn’t necessarily that amazing. The reason a well diversified portfolio works over time, is that most stocks go up if the are successful enough to stay in business. In other words, A LOT of stocks go up over time. Coca-Cola (KO) is up 33% from five years ago. GE is up 77%. Disney is up 153%. Is that amazing stock picking, or are those just Dow Jones Industrial component stocks that I picked at random and looked up?
Of course, the best thing would be to go back through all my stock picks and see how they correlate with the biggest returns. Did you know I recommended Lending Tree (TREE) five years ago? It’s up 1,632% since then. (I didn’t really. I don’t recommend stocks.) Never mind what other recommendations I’ve made since then.
As always, virtually no one beats the index over time. A few lucky years, or lucky stock picks along the way are a given, but that advice isn’t worth paying for. That’s why those stock picking subscriptions show you the last 12 months of returns. It’s also why there are multiple stock pick lists. Just like the sports betting scam above, those lists that don’t turn out so well just disappear, usually so they can “focus” on their good list.
Instead, as always, for most long-term investors, nothing beats a well diversified portfolio rebalanced annually, but that won’t stop people from trying to sell you their stock picks.
