Occasionally, when I am away from home, the tv remote control leads me to CNBC or Bloomberg. It is remarkable how they can make something that should really be quite dull–the financial markets– into great entertainment. It can be strangely engrossing to watch some chap in an expensive suit with billions under management dispensing short, sharp pearls of wisdom about market cycles, where we are, where we are going, and what we should buy or sell NOW! But there used to be an expression that a newspaper doesn’t refuse ink and, in today’s world, I think that needs to be adapted for Bloomberg or CNBC.
The main problem with pundit predictions, for me, is that you have no idea what the pundit’s terms are when he makes a stock recommendation. What is the timeframe for his target? What future event might cause him to change his mind? If he predicts a market fall is he selling out of all his positions? Also, is his position in the touted share 3% of his portfolio or 10%? Finally, too many of these pundits are not asked to revisit their predictions. They are effectively allowed to shoot their bows and arrow for free, while the viewer just sits back and watches the arrow land–somewhere. No score is called and the archer just returns to the studio in six months time to repeat the performance.
All of these usually issues, I think, make predictions delivered worse than harmless entertainment; they are actually dangerous. The reason for this is because they constantly urge action. Cramer must buy and sell more stocks in a week than I read newspaper articles. At the risk of spelling out the obvious, action costs money: broker costs, tax, the spread. Add all of these up and subtract them from the price of the share you are buying to replace the share you are selling and you need a big gain just to get back to par. Why stack the odds against yourself?
I think pundit predictions are particularly dangerous at a time of falling prices. It is not much fun seeing the value of your portfolio falling week after week and it is so seductive to think that you can nimbly sidestep the rest of a rout by selling. But what happens if you sell out and then… nothing happens, but perhaps the index drifts slightly higher? Well, yes, you just buy back in again, having lost out on the gains and paid two sets of trading costs. You are also even more twitchy this time and so prone to selling even more quickly. Alternatively, you might sell and miss the initial rebound (which is often much faster and more furious than a fall). Market timing is an expert’s game, and I will leave it to them. Most of these market calls you see and read are meaningless trading calls with obscure terms of reference and zero consequences for the callers.
The small, amateur, low frequency investor must surely do better (mentally and financially) by ignoring all of these calls and simply watching their dividends come in while reading their companies’ annual reports. No destabilising noise and no distractions; stick to the movie or sports channels for entertainment.
Anyway, I think that these pundits get away too easily with some of their wild predictions, so I am going to start logging a few of them for future reference and amusement purposes: see FI Punditwatch.