The stock market just finished a great year. For every dollar invested on January 1, 2017 in an index fund tracking the S&P 500, the market returned a whopping 19.42% in appreciation by the end of the year. That’s not even taking into consideration the dividends paid. If you add in those, the index investor saw a return of 21.83% on each dollar invested (less fees, which of course should be kept to a minimum).
Those are exciting numbers.
What does a 21.83% return get you? Well, it doubles your money every 3.3 years for a start. You could get pretty rich pretty quickly with a 21% return. It also happens to be a better return that Warren Buffett – the world’s most famous investor – achieved over his 50+ year investing career. In short, 21% is an incredible year. It’s the type of year when everyone in the accumulating phase of their career wishes they had more money in the market. I know I wish I did.
But an amazing year doesn’t stop silly people from making predictions about the “hot” stocks for the upcoming year.
“LET’S BEAT THE MARKET!” they say.
We can do better than 21.83%.
When will the majority of investors realize that financial news is about selling clicks? They aren’t incentivized to get it right. They’re incentivized for you to read their articles. I’ve written ad nauseum about how good investing is boring. Could any financial news site pump out 10 articles a day about index investing? Doubtful. There would be no clicks.
So what do they do instead?
They make silly predictions.
So let’s see how they did.
Here’s an article from the Motley Fool from the beginning of last year, called 5 Top Stocks to Buy in 2017 (with a domain named fool.com, what could go wrong??)
The article recommends that you buy:
- Under Armour
- T-Mobile
- Dave & Buster’s Entertainment
- Diamondback Energy
- Core Laboratories
Why should you buy these stocks? Because “Under Armour is set to achieve longer-term revenue growth despite a recent slowdown in the North American apparel industry …” Or because T-Mobile is a “dual threat” and Diamondback Energy is “ratcheting its growth rate up to 60% … coming just as the oil market appears to be finally turning a corner.” Meanwhile, Core Labs, which is “not a household name … is on the speed dial of every top oil and gas producer in the United States.”
Each of those statements should sound absurd because they are absurd.
The idea that five contributing writers would have anything more than a random guess at which stocks will perform better than the market is also absurd.
I know you don’t need me to tell you how this story ends but let’s take a peak.
Remember that the S&P 500 returned 21.83% last year.
Here’s how each stock performed:
- Under Armour (-48.29%)
- T-Mobile (8.90%)
- Dave & Buster’s Entertainment (-1.20%)
- Diamondback Energy (22.28%)
- Core Laboratories (-8.10%)
That’s right. You would have LOST money if you invested in that basket of stocks. Not just “lost” money in the sense that you would have missed all the wonderful gains from the market but “lost” money in the sense that you would have less money than when you started.
An investment of $50,000 in the “5 Top Stocks to Buy in 2017” would have been worth $47,359 by the end of the year. Meanwhile, the same investment in the S&P 500 would be worth $60,915. Why were they so wrong? Because they can’t predict the future.
And while I doubt anyone reading would take investing advice from The Motley Fool, there are hundreds of other “special” investing newsletters, websites, analysis, etc. trying to prove that they have an edge which can justify their price (whether you’re paying cash or paying with your attention, since it’s all the same).
No thank you.
I’m lazy.
I’ve got a career.
I have other things to do in my day.
I will take the market return and win.
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money. He's also exploring real estate crowdfunding platforms like Fundrise which are open to both accredited and non-accredited investors.
Preach on Brother! I’m too lazy to invest the time into individual stocks as well. I’d much rather set things on autopilot with most of my investments and have my advisor put the time in. There are so many other things in life to be doing than picking the right stock.
When I was right out of college, I fell for those stock picking newsletters, once, a bunch of times. It purely a marketing play for sucker like myself.
Warren Buffet has $80 billion reasons why he chooses index funds with low fees. That is $79,999,999,999 billion more reasons than the 1 I had in 2002. I bought a Canadian lumber company for $0.01 that was going to “REVOLUTIONIZE” wood.
Yeah….I fell for that one.
When I was right out of college (and in college), I fell for stuff like this too. I believe I bought a bunch of healthcare stocks because “baby boomers are aging” so those are about to shoot up, right? I thought I was a genius.
What about this: http://www.businessinsider.com/warren-buffett-vs-sp-500-2017-5
Exactly right, Joe.
The thing I always wonder is how come these people never get called out for their predictions? It seems like every year, you can find an article from some guy who says the market is going to crash this year. Then, once they get it right one time, they’ll go on and say how they predicted this and will spout that stuff for the next decade about how all-seeing they are.
I listened to a podcast last year that I hard to turn off because it was some dude talking about how bad 2017 was going to be and how he had predicted 2008 or whatever. I’m sure the dude is out talking about how bad 2018 will be now and is going to spout the same stuff.
That’s the cardinal rule of why stock picking is for suckers. Not only do you have to be right about the direction, you have to be right about when it will happen. There’s lots of dudes that predicted 2008, only they thought it was coming in 2005 and 2006. Unfortunately, being two years off is a big difference.
It’s just like all the people predicting that the current stock market run can’t last and they want to wait on the sidelines so they can buy back in cheap. The sooner everyone realizes they can’t predict the future, the better!
I love it when the market seers are taken to task with a look-back at their recommendations. This should happen more often, and it rarely does. Apparently, we’re more interested in hearing the recommendations for the coming year than investigating whether or not prior recommendations have worked out.
Cheers!
-PoF
I found five articles from 2017 in my research that were all good candidates for retro analysis. This one was the first where I ran the numbers and I realized I didn’t need to dig any further. If these prognosticators were so great, they’d be billionaires with their own hedge funds and not posting the advice for free on the internet.
The most famous stock market predictor
Lehman Fires Elaine Garzarelli
Oct 27, 1994 – Elaine Garzarelli, a prominent Wall Street stock strategist best known for calling the October, 1987, market crash, was fired by Lehman Bros. on Wednesday. Garzarelli was dismissed because she and I used to be a CNBC addict. Elaine Garzarelli predicted the 87 crash and was highly touted but her own firm failed. Occasionally people make one big prognostication that is correct but I am unaware of anyone that repeatedly does it.
Thanks for the link Hatton. That was a good read. With so many predictions being made it makes sense that someone is going to get it right – and that’s the person that becomes famous! Getting it right time after time? Highly unlikely …
Here’s my question: If you take the ordinary advice everyone else is taking, how do you expect to achieve extraordinary results?
For me, I focus where I have the competitive advantage. The savings rate is where you can truly differentiate and make the biggest impact. The top 1% wealthiest in the US invested at a rate of ~38%, top 1-10 at ~12%, and bottom 90% at ~3% (2010-12). It’s hard to beat the market but easy to beat the savings rate of those investing in the market. And quite honestly, once you accumulate wealth to a certain level, it opens up doors outside the market to invest in like real estate and businesses either from an active or passive basis with higher returns.
So much fun to look back. I can’t believe Under Armour did so poorly. You would think it is as bad as Go Pro. Keep it simple and keep on earning (and occasionally loosing) with others….Thanks for the look back in time
I had a high concern the market would hve difficult because of the 2016 election results. I’m sure I believed in the predictions because I disliked the winning candidate.
However I had an investing plan, which was to keep the same course. Maxed out every account I could in 2017 with the same asset allocation, and I reaped the 20% reward.
I have a confession to make, I actually went into 2017 with an Under Armor stock position. Holy heck did I learn to just index almost everything…
Great article, the biggest challenge with all these “prognosticators” is people reading this stuff believes them! I have a family member near retirement who’s been sending me stuff about a market crash every month since 2011. He’s missed out on 100%+ gains
Agree! It is amazing that articles are still published with that kind of advice. Stock picking involves the triumph of hope over experience. Personally, I think there is still a role for detailed value analysis, especially for private company offerings but anyone who follows advice like offered for these stocks is fooling themselves. Do they really think other analysts and buyers didn’t know that simplistic one-paragraph explanation of why the stock would go up? hilarious.
It is so hard for individual investors to pick stocks. It is a game of information and we are the last ones to know. Some times investors get lucky picking stocks. It is much easier to just accept average returns and move on with your life.
Love it…
Personally the fiancée and I literally only invest in the Vanguard Total Stock Market Index Fund in our Roth IRA’s, and the Vanguard Total Stock Market ETF in our taxable account. A lot of my colleagues around my age (25) at the office find my way boring and began throwing their money in “hot” bio-engineering, tech chip, and other “growth” oriented individual stocks this year. For the most part, they did pretty well actually. Unfortunately for them though, they don’t understand this history of the market and believe that they are “expert” stock pickers who will obtain 20%+ returns every year for the rest of their lives…They could be in for a rude awakening soon.
Everyone is trying so hard to be special that they end up below average. It doesn’t seem to matter how much research or Warren Buffet bets take place; people always want to beat the market! Sure you may be able to do that for a short period of time (I’ve had a 5% piece of my portfolio that is play money return over 5 x the market in the past 3 years) but the market will ultimately win out over the long haul.
Great work here!
Those absurd statements… not enough technobabble and buzz words! “dual threat” “ratcheting” “speed dial”. C’mon, where’s the synergism, value-added, engagement, and growth hacking? No wonder they performed badly!
I am even more amazed at why companies would pay consultants the top 1% salary for prediction that never seems to happen. But they makes the world rolling with conferences and high level meetings that keeps the manager’s job. I guess.