Warning: For Entertainment Purposes Only

“Warning:  For Entertainment Purposes Only.”  This is the label that ought to be slapped on the financial media’s annual Where-to-Invest-Now publications.  After all, nothing attracts reader interest more than an issue chalk full of savvy fund managers’ predictions.  But don’t believe what you read.

Why?  It’s all a game.  A charade.  A ploy to sell more magazines and line Wall Street’s pocket with fees.  So, with this year’s stock market guides now hitting stores, we think a review of last year’s predictions might provide investors with the necessary caution:

Fortune Magazine assembled a team of Wall Street pros to share its “Ten Best Stocks for 2011”.  Unfortunately for readers, six of the ten stocks plunged an average of 37%.  (The S&P 500 Index returned 2%).^[1]  Transocean declined 40%, Royal Caribbean fell nearly 50%, and Entropic Communications plummeted 60%.  The average return for all of Fortune’s “Ten Best”?  A total bust—down 20%.

SmartMoney published its own “Where to Invest” guide, in which it shared the stock picks of fund managers from the likes of T. Rowe Price, Legg Mason, and Morgan Stanley.^[2]  These experts, hinted SmartMoney, had a track record of making “the boldest moves in dark times.”  How did these gallant Wall Street pros fare?  Not so well.  Their daring picks turned out to be nothing more than duds. The average return for the 13 stocks listed, from recommendation date through year-end, was a whopping zero percent.

Barron’s assembled ten of the industry’s most “estimable” investors—the likes of Abby Joseph Cohen, Bill Gross , and Mario Gabelli—to share their insights for the year ahead.^[3]   Most of the pros warned against Treasury bonds (up 13% in 2011), favoring instead commodities (-12%), gold (+14%) and stocks in high-growth emerging markets (-18%).  Eight of these “market mavens” provided stock tips; only two selected stocks which collectively delivered positive returns.  The average return of all eight experts’ picks?   Minus 3%—five percentage points less than the S&P 500 Index.

The Wall Street Journal proclaimed “the stage is set for stock-pickers to shine”, yet cautioned readers against picking just any active fund manager.^[4]  Most managers, claimed the WSJ, are really “closet indexers”, meaning they claim to pick and choose stocks but in fact seek to closely track their benchmark index, such as the S&P 500.  The WSJ suggested investors try a different approach:  favor only those managers willing to make big active bets and deviate significantly from the index by holding concentrated portfolios of just their best stock ideas.  The WSJ identified four such managers willing to “chart their own course.” And chart their own course they did.  While the S&P 500 Index returned 2%, three of the four funds ran aground—underperforming the S&P 500 Index by at least 5% each.

Longtime Forbes columnist and money manager Ken Fisher peered into his crystal ball and declared 2011 would be “an easy one for stock pickers”.^[5]  He then recommended five stocks readers must buy.  From the January recommendation date through December 30th, Fisher’s five recommendations tumbled an average of 20%.  Oops.
What’s the takeaway for investors?  Instead of seeking to predict the unpredictable, investors should focus on the things they can control—asset allocation, minimizing costs and taxes, and staying disciplined.  After all, reading an expert’s view of the future is entertaining, but following that advice sure can prove costly.