Even Experts and Analysts Make Investing Mistakes

What is the value of expert advice? How should you use it? Who qualifies as an expert? These are important questions for investors today, and they have been a hot topic recently in Money Central's message boards.

A thread started by a member named "Pokie" suggests that I be fired because I'm not qualified to give advice. If you follow the thread down to about 60 replies, you'll discover that Pokie lost a lot of money because he bought the Nasdaq 100(QQQ) after I wrote about it.

I like this thread because it illustrates an important issue: Today, many investors put financial experts on a pedestal and believe whatever they say. More to the point, some investors want a definitive answer and they'll listen to anyone who gives them one.

All of this might be harmless, but often it's not. The problem comes when investors abdicate their responsibility for picking their own investments.

A couple of years ago, I did a book tour for my mutual fund book The Commonsense Guide to Mutual Funds and I told investors: There is no one magic mutual fund that's best for everybody. You must learn to research funds yourself. But that's too tough for a lot of people. They want the magic bullet. In the question-and-answer period, someone would always say, "Yes, but what's the best fund for me to buy right now?"

I suspect one reason Pokie became frustrated with me was because I recently wrote a column detailing my own investing mistakes. If I make so many mistakes, why should I be a columnist and give advice to other people? That's what Pokie wanted to know.

Well, here's a new flash: Everyone makes mistakes. If financial experts had a batting average and you saw their hits and misses flashing under their heads on the TV screen, I'll bet you would take their advice more cautiously.

( Validea.com compiles a batting average of sorts for stock analysts and investment writers. As of this writing, Jon Markman and Jim Jubak rank number one and four, respectively, over the past year for portfolios of 50 "mentions" or more. As the mutual funds say, however, past performance is no guarantee of future results.)

That's not to say that expert advice is worthless, but it shouldn't be swallowed wholesale, either. I consider it either a starting place or a contrary indicator.

How Analysts Work

Let's start with securities analysts. These are the folks hired by Wall Street brokerage houses to analyze stocks and put out buy, sell and hold recommendations. You can look in the Investing section of MSN Money to see how many analysts are recommending a particular stock.

When I first moved to New York, I covered securities analysis for a Wall Street magazine and I got an insider's view of how analysts operate. I consider their recommendations a contrary indicator. Analysts move in a pack. Usually there's a lead analyst for each stock, and when he moves, the others follow. Analysts worry about offending the companies they cover, who might also be investment banking clients of the firm.

For a number of reasons, I discount most of the things they say. The worst time to buy a stock is often when it has the most recommendations because the potential appreciation is already written into the price. But if I really like a company and analysts dump on it, I might get interested.

I don't like newsletter recommendations, either. But one good thing to be said for them is that Mark Hulbert has been tracking the batting average of newsletter writers for what must be 20 years now. In his Hulbert Financial Digest, he reports on 500 portfolios in 160 newsletters, rating and ranking them. That makes it difficult for newsletters to make claims that are untrue. (Note: Hulbert does not post the rankings on his site; you have to subscribe to his newsletter.)

Make a List

Most expert opinion is just a starting place, though. Take Jim Jubak's list of the 50 Best Stocks in the World. Only 10 stocks on the list are flagged as a "buy" right now, and those can be a great place to start your research.

If you want to see what other investors are buying, the National Association of Investors, which represents investment clubs, provides more detailed lists that include the top 200 holdings for this year compared with last year. The top five are Cisco Systems(CSCO), Intel(INTC), Lucent (LU), Home Depot(HD) and Microsoft(MSFT) (Microsoft owns MSN Money).

What are these lists worth? Because these are the most popular stocks, does it mean they're the best? Not necessarily. The fact that I see Lucent on the list makes me think there must be a lot of investors who suffer the same kind of inertia I have. Still, they're interesting.

I also like to see what my favorite portfolio managers own. If you check the top holdings of a mutual fund like (CFIMX)Clipper on MSN Money, you will see the 10 largest stock positions owned by the fund. Be aware, though, that the information is dated. Funds are required to report only twice a year. So when I looked in early July, the information was from March 31. Still.

Jim Oelschlager of Oak Associates is one of my favorite managers. His top holdings included Merck(MRK), Applied Materials(AMAT), Eli Lilly(LLY), Pfizer(PFE) and Medtronic(MDT). I wouldn't run out and buy them. But I might put them on my list of stocks to watch.

Every investor should be developing a list of stocks or funds that he would like to buy when the price is right. Cross-checking lists like these and listening to advice from experts can give you ideas.

In the end, though, you're the one who's going to own them. And so you're the one who's going to have to decide what to buy and when to buy it.

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