On Star Stockpickers

We have a fascination with stockpickers. Big name stockpickers like Peter Lynch or Carl Icahn, comes to mind. Star stockpickers are glamourized because investors think they have the magic wand to make fast and easy money. They know the secret to the next big name that will make them rich. And when you hold the secret to riches, the star stockpicker gets outsize attention. The star stockpicker appears on magazine covers and TV. Barron’s Magazine dedicates an annual roundtable to them. It’s very tempting for an investor to follow the recommendations of the stars. After all aren’t they the best of the brightest? They have done the research and analysis. Their past returns are juicy. They look rich and successful and you probably want to put your money where their mouth is.

First, it doesn’t work that way. Getting rich off stock tips would be too easy and it’s not supposed to be easy. I don’t know anybody who got wealthy buying stocks off a one minute TV pitch. However I’m pretty sure I can find a good sample size of unrich people that took the dive.

Second, let me hit you with the classic buzz killer “past performance is no guarantee of future results”. Why does every investment disclosure insist on including the oft-repeated phrase? Aside the legal obligation and the statement hold its weight in terms of truth.

The phrase also goes to the heart of something important if you want to make intelligent decisions and manage your risk: It is the process that counts, not the recent scorecard. There’s more on this below.

Third, chasing high returns can cause problems for your portfolio. The typical stock pitch is in a hot sector and as a result viewers pull their money out of their other investments and pour it into the new object of their affection. The investor is reacting out of emotion, most likely greed or the fear of missing out (FOMO). There’s no shortage of study documenting that investors are constantly buying and selling at the wrong time.

Fourth, there are many things we don’t know. There’s a lack of information. There a chance that we don’t understand what we are investing in and that can lead to trouble.

We don’t know the motives of the stockpicker. Is the stockpicker doing this out of self-interest? Is he trying to pump a stock where he has a loss position? Is he trying to raise money for his new fund? Is he trying to get a particular company’s business for a stock issuance? Or maybe he is simply trying to help us. We ignore “the when” and “the why” that triggers the stockpicker to get in and out of his recommendation. We don’t know when the stockpicker changed his mind and got out of the position. The viewer might be tempted to invest a sizable amount with the aim of making good money. But the allocation to the stock recommended is likely a small percentage, much likely less than 2-3%, of the total portfolio.

Fifth, some stockpickers have the “it” factor. “It” is the personality to make great TV. You are not going to see a boring Carl Icahn interview. He squared off against Bill Ackman in one of financial TV’s most interesting moment. But if you followed Carl Icahn in some of his purchases, like SandRidge Energy or Hertz, you would have seen your investment melt 60% or more. The mix of the right personality trait and charisma can get to somebody’s head. I should mention that not all star stockpickers are in media hungry. Seth Klarman of Baupost Group has been labeled media shy.

My take on star stockpickers can be seen as overly negative. I don’t want to disparage the individual pitching stock. They are not doing anything wrong. They are fun to watch. It’s entertainment. They are smart individuals and some of them are very successful, like Carl Icahn despite what I wrote in the previous paragraph. I believe they have the right intention and after all the whole point is to make money.

So what should you make of this?

Of course you might make money off the occasional stock pitch just like you can hit red at the roulette table. There’s an element of luck and speculation has its moments. I’m not saying you can’t money off ideas sourced on TV or in a magazine. It’s the behavior that is wrong. Jumping on the cool stock of the moment violates the bigger picture. Speculation violates the “why” you are investing.  You have a plan to build long-term wealth and bandwagoning on cool stocks is not contributing. I understand that respecting the investment process is not sexy. But messing around with your retirement fund or pension plan is not supposed to be sexy. And losing money is very unsexy. One bad decision can be a killer for your portfolio. Don’t forget that the beneficiary is you. You are impacted by your decisions. Humans are terrible are market timing. Studies after studies mention that asset allocation is responsible for 90% of the returns. Not picking stock skills and not hot TV stocks.

If there’s one thing to retain is that the next time you get a hot stock tip, resist the urge to open your trading app on your mobile to have a feel good moment. You can wretch your portfolio with just a few clicks.

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