Can Celebrity Pundits Predict the Profitable?
Far from the sublime corners of some Wall Street suite, stock pundit Jim Cramer gained fame by pumping up the volume on CNBC's "Mad Money" -- a TV show, you could say, that calls to mind the labels "showboat," "showoff" and "showman" as opposed to "shaman" or "hot shot."
In fact, few in investment history have gotten it so colossally, overwhelmingly wrong as Cramer did on March 11, 2008. Word for word, here's how the host and former hedge fund manager addressed a viewer's concern over Bear Stearns' liquidity problem: "No! No! No! Bear Stearns is not in trouble. If anything, they're more likely to be taken over. Don't move your money from Bear."
Three days later, of course, Bear Stearns stock fell 92 percent on news of a Fed bailout and $2-a-share takeover by JPMorgan Chase & Co. (ticker: JPM). And with the fall of Bear Stearns, Cramer became the Ultimate Bear.
[See: 13 Ways to Take the Emotions Out of Investing.]
Granted, sometimes Cramer and his ilk get it right -- and not by luck, either. Early in Cramer's career, New Republic Editor Martin Peretz gave him $500,000 to invest; Cramer's picks returned 30 percent over the next two years.
Yet that was some 30 years ago, before Cramer became a media personality. This raises the larger question: Can anyone who partially measures their success by the ratings book be reasonably trusted with the average investor's pocketbook? (That's a theme the drama "Money Monster" explored, with George Clooney playing a Crameresque character in the lead role.)
A huge issue that comes into play is selection bias, a favorite trope of pundits in the investing world and beyond. In this scenario, a stock picker who champions enough companies knows that some have to win. Those predictions then become the ones they work overtime to publicize.
"It reminds me of the quote by Nobel Prize winning economist Paul Samuelson, who once remarked, 'Wall Street indexes predicted nine of the last five recessions,'" says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. "Many pundits have predicted nine of the last five stock market crashes."
For this reason, and their circus-style knack for capturing short attention spans, "Pundits do a disservice," Johnson says. "They distract investors from the long run and cause them to focus on the short run."
That kind of near-term focus borders on market timing: the largely debunked theory that an investor can profit by knowing exactly when to buy and sell a stock so as to take advantage of its "up" cycle.
But while some follow pundits, others choose gurus -- and there's nothing to debunk the likes of Warren Buffett. In his 2013 Berkshire Hathaway annual report, Buffett fired this shot across Pundit Bow: "Forming macro opinions or listening to the macro or market predictions of others is a waste of time."
[See: 9 Investing Steps From Warren Buffett's Playbook.]
Or, as Johnson contextualizes it: "When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: 'You don't know how easy this game is until you get into that broadcasting booth.'"
So what explains their popularity? In the case of the doomsday-sayers, some nervous investors find themselves naturally attracted to those who hand out advice that might as well double as a hand-carried placard that proclaims, "THE END IS NEAR!"
"Marc Faber is publisher of the 'Gloom Boom & Doom Report' newsletter and that should tell you a lot of what you need to know," Johnson says. In case that doesn't, Faber positions himself on his website as a lone pundit who wants to sound an awful lot like a lofty prophet.
"[My] guiding philosophy is that, as Horace already observed, 'Many shall be restored that are now fallen and many shall fall that are now in honor,'" Faber says.
"Faber has made a reputation making extremely bold and largely negative predictions," Johnson says. And sometimes, bad is good, as when Faber implored his flock to get out of the stock market before the 1987 crash.
But other times bad is just bad, as was the case with Meredith Whitney. Once a high-profile equity analyst who doubled as a lively TV personality on Fox News, Whitney turned heads with her ultra-bearish views on Citigroup ( C) in 2007.
In predicting the bank would have to cut its dividend, she turned out to be spot on. In 2008 a Fortune reporter described her thus: "In less than a year she has transformed herself from a Wall Street back-bencher ... into the most influential stock analyst in America."
But it wasn't long before she was back on the bench. That same writer noted that Whitney's stock picking ranked in the bottom third out of roughly 1,900 equity analysts in 2007, and 919th through the first half of 2008.
Whitney's attempts to start her own advisory group and a hedge fund failed, the latter effort resulting in a $50 million lawsuit settled out of court. Today she lives in Bermuda with another former celebrity, her ex-pro wrestler husband, and works for an insurer.
So in the end, is there value in following the pundits? Yes, the experts agree -- if you count entertainment value.
[See: 10 ETFs That Pay Sky-High Dividends.]
"It can be entertaining to listen to some of the high-visibility stock prognosticators," Johnson says. "And, it doesn't cost anything to listen to them. But relying on their advice can cost you a lot."
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