Following Expert Predictions Can Prove Costly

Another new year has begun, which means the financial media’s “Where to Invest Now” guides are coming to newsstands near you. As usual, headlines will look something like “Top Stock Picks from Top Pros” and “Make More Money in 2015.” Investors hoping to profit from these expert predictions should first review these publications’ can’t-miss picks from last year.

To beat the market in 2014, long-time Kiplinger’s Personal Finance columnist James K. Glassman offered his 10 best stock picks for the coming year. Glassman, who “hit a home run” with his 2013 stock recommendations, carefully chose stocks which could best repeat his prior year’s at-bat.1 Unfortunately for Kiplinger’s readers, Glassman’s 2014 picks struck out.  Home Inns & Hotels declined 17%, Stemline Therapeutics dropped 41% and Tower Group sank 44%. While the S&P 500 Index rose nearly 14%, the return of Glassman’s picks was a total whiff—0.0%.

Fortune’s 2014 Investor’s Guide shared the best picks of an eclectic group of top fund managers from Causeway, Dreyfus and Franklin Templeton, among others.2 This diverse set of experts, claimed Fortune, all had one thing in common: A superior long-term record in selecting stocks. How did this “time-tested group of elite fund managers” fare? Not so well. Their daring picks turned out to be little more than duds. The average return for the 20 stocks listed, from recommendation date through year-end, underperformed the S&P 500 Index by 10%.

 

Barron’s once again assembled ten of the industry’s most high-profile investors—including Goldman Sachs’ Abby Joseph Cohen, PIMCO’s then-CIO Bill Gross, and Mario Gabelli of Gabelli Funds—to share their insights for the year ahead.3 While some in the group were optimistic, others saw crippled global economies and rotten government policies rekindling fears of a 2008-type meltdown. Somewhere between these poles, Barron’s assured readers, lie plenty of investments worth a wager. With the benefit of hindsight, however, these experts’ recommendations appear more like blind wagers: While positive, the return of picks from Cohen (+9%) and Gross (+10%) both fell short of the U.S. market, while Gabelli’s recommendations (-3%) actually lost readers money. Collectively, the recommendations of Barron’s 10 market mavens gained just 5.9%—less than half the return of the S&P 500 and 2% less than a globally-diversified 60/40 portfolio.

USA Today’s 18th annual Investment Roundtable gathered five top investment managers to share how to best make money in the coming year.4 The profits from prescient picks LifePoint Hospitals (+42%), Apple (+41%), and Cisco (+37%) were more than offset by poor performers Google (-5%), Marathon Oil (-20%) and GT Advanced Technologies (-95%). While USA Today’s nineteen carefully-selected stocks delivered 6.7% in 2014, a low-cost total U.S. market index fund would have delivered twice as much.

The lesson for investors? Attempting to pick next year’s winning investments is possible, but not probable. Rather than rely on speculative forecasts fueled by experts in the media, successful investors harness the collective wisdom of the market via a low-cost and well-diversified portfolio. After all, expert predictions may be a great way to sell magazines, but following that advice can prove costly.

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1 Glassman, James K. “James K. Glassman’s 10 Stock Picks for 2014.”  Kiplinger’s Personal Finance. January 2014.
2 Birger, Jon and Scott Medintz. “Top Picks from 20 Star Investors.”  Fortune. December 23, 2013.
3 Rublin, Lauren E. “Barron’s Roundtable, Part 1.”  Barron’s. January 18, 2014.
4 Shell, Adam. “Investment Roundtable:  Top stock picks for 2014.”  USA Today. December 31, 2013.

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