The folly of stock picks

Discussion in 'Trading' started by tradermike, Dec 30, 2002.

  1. my thoughts on running a financial website and getting people constantly begging for stock picks:

    "The mid-1970s were not a productive time for the markets, which stagnated between 1964 and 1982; the Dow closed at 874 in 1964 and at 875 in 1981, racking up a magnificent gain of one point in seventeen years. Anybody who began investing in the 1990s, and had the expectation that stocks regularly outperform all other investments, should spend a moment pondering those two numbers and two dates." - Leon Levy, founder of the Oppenheimer funds.

    One of the dumbest sayings that I hear on the financial networks is that this is a "stock pickers" market. The truth is it is the most amateur of investors who are obsessed with stock picks. You don't make fortunes in the stock market by picking stocks, but by managing your risk and cutting losses. If you can be right half the time and make sure that when you are wrong it doesn't matter then you'll make money. Or to put things another way if half of the stocks you bought went up 30% and the other half fell 50% you should still make money. If you cut your losses you will. I never got rich by picking the right stocks, but by using stocks as one part of a larger strategy: position managing, risk management, and maintaining psychological control. Sure without stocks these are meaningless, but stocks without these are tickets to financial ruin.

    But these talking heads never talk about how to actually manage your money and cut losses. Part of the reason is because most of them are total investment failures themselves. There are two regular guests on CNNFN's morning business show that started mutual funds and shut them down due to redemptions, while guest after guest on CNBC is down this year big time. 

    If you run a mutual fund though your goal is to be fully invested in the market. Mutual fund managers don't try to trade and actually make profits. Instead they just take any money that comes into the fund and use it to buy stocks. They think of themselves as paid stock pickers, not as traders. That is easier than trading.

    But to make money in an investment you have to sell it. It is supposed to be the responsibility of your investment advisor or stock broker to advise you to sell. If he never does that then he will never be able to help you and if you keep your money with him you'll keep losing it. Ultimately it is your own responsibility.

    Another reason why the networks love it when their guests say "this is a stock pickers market" is because they have organized their shows around stock picks. Stock picks provoke their viewers into grabbing the telephone and telling their broker to buy the recommended stocks which brings commissions to the brokerage houses which have huge advertising budgets for the channels. Plus it is a way to remain upbeat no matter what the market is doing. And it is what the audience wants in the end, because most of the people who watch these things don't know a thing about making money in the stock market. In fact, most of them are market losers. That is why they keep watching.
    About a thousand people hit my website during any given day.

    I'll get a dozen messages every week from people who want to know what the track record for my stock picks is. They don't realize that they are asking a stupid question. I'll show you why.
    During 1999 and 2000 there were thousands of financial stock picking websites. Now there are probably less than 1,000 financially successful ones. These sites usually show you a list of stock picks and then give show you a percentage gain next to them.

    Take this snapshot from TokyoJoe's website( and hit previous plays for an example.
    On this page TokyoJoe lists some the open, intraday high, and close for his daytrading stock picks. For example one pick he has is TMPW. On August 22 it opened at 10.90 and had an intraday high of 12.98. Next to the pick Joe says that TMPW went up 19.1%.

    He lists pick after pick like this.

    None of that tells you how you would have done buying these stocks. It would have been impossible for you to get out at the daily high and there is a good chance that you might have sold a lot of them for losses a day or two later.

    That is why when someone asks me how my stock picks do I never answer them. I'm not interesting in misleading people with that type of information and I really don't know what the peaks of my stock picks are. It doesn't mean anything. The question people ask shouldn't be how do your stock picks do, but how much money do you make off of them and how can you help me make money. Of course that takes you beyond just simple stock picking.

    The truth is a lot of the people running these financial sites don't even trade their own stock picks. I know of a few sites that call themselves "trading universities" that are run by people who don't even trade!

    Like I said at the top of this message, in the end it is not the stocks that make you money, but how you manage your account that does.
  2. thats why nothing but the gurus actual trading records will do for proof. if he isnt making money nothing else matters. if he wont show you those copies of his trading account walk away.
  3. Cramer quotes his wife Karen in his book to the effect " if it's not booked, it's not jack."

    The biggest mistake you can make, other than position sizing issues, is letting a loser get away from you. The next biggest mistake is not booking a winner.

    And Mike, I agree with you--calling it a "stock picker's market" is nothing but a giant cop out. Particularly since most of these experts can only make money in a raging bull market.