Bad Investment Advice Knows No Boundaries

I don't have data to support this observation, but I suspect the ratio of bad investment advice to sound advice is around 10:1. I understand the reasons for this disparity. For the financial media, disseminating bad advice pays the bills. For the securities industry, providing bad advice is far more lucrative than dispensing sound, academically based advice. I get it.

An example of bad investment advice

Although "following the money" explains why you are exposed to much misinformation, it's still painful for those of us who care about the welfare of investors to watch this play out in real time. Here's a recent example of bad financial journalism which is compounded by the fact that it is published in a highly respected Canadian newspaper, The Globe and Mail.

The Globe and Mail describes itself as "Canada's #1 national newspaper." It has been in business for 172 years and prides itself on showcasing its "award winning journalism."

Some of its journalists live up to this reputation. Rob Carrick, its personal finance columnist, is a source of sound advice. I highly recommend his columns.

Financial pressure on the media

Unfortunately, sound advice alone may not be enough to generate advertising revenues, as the financial media in the U.S. and elsewhere is well aware. This financial pressure causes even the most reputable media to publish articles like this one, which appeared on August 6, 2016 in The Globe and Mail. The article features "three top stock picks" from Paul Harris, who is a partner and portfolio manager at Avenue Investment Management where "his focus is on North American and global equities."

Articles featuring "experts" giving stock tips is common fare for the financial media. I don't mean to single out The Globe and Mail unfairly for doing so or to suggest that Mr. Harris is right or wrong in his stock picks. In the U.S., CNBC routinely inundates viewers with stock picks from Jim Cramer and others. I can find no evidence that those engaged in this activity have the expertise to reliably select outperforming stocks. There's ample evidence indicating their "hit" rate is no more (and often less) than you would expect from random chance. In fact, the evidence of the dismal track record of stock pickers (summarized here) is so overwhelming investors would be well advised to eliminate it as a viable investment strategy.

Stock picking is unreliable

Mr. Harris' provides intelligent sounding justifications for his stock picks. They would seem to uninformed investors to make sense, and might cause them to purchase these stocks. What's missing is the fact that all of his bullish logic is premised on information already disseminated to millions of investors trading these stocks. These traders have collectively incorporated this information into current prices. Those prices are likely to be fair. What will determine the future price of these (and other stocks) is tomorrow's news (about these companies or matters affecting stock prices in general), and neither Mr. Harris nor anyone else knows what that news will be.

Raising the journalistic bar

Of course, Mr. Harris is entitled to express his opinions and the financial media has every right to publish them. But is it consistent with The Globe and Mail's well-deserved reputation of presenting "award winning journalism" for it to do so? At the very least, should it (and others in the financial media wherever located) accompany these articles with a disclaimer setting forth the data on stock picking in general, together with a required disclosure from Mr. Harris and other stock pickers, indicating their predictive track record? We know this information is readily available because at least one website provides the track record of U.S. gurus who purport to have stock picking expertise.

There's little possibility these suggestions will be adopted in the U.S. Perhaps the chances are better in Canada.

I hope so.

Dan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and his latest, The Smartest Sales Book You'll Ever Read.

The views of the author are his alone. He is not affiliated with any broker or advisory firm. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.