This seemingly simple topic has been the subject of thou- sands of books, hundreds of seminars, and thousands of articles.
You can’t buy a copy of Forbesmagazine or any of the numerous other financial publications without being exposed to recom- mendations and suggestions. I’m sure you’ve seen the provoca- tive headlines . . .
Ten Stocks to Buy Now for Your Retirement Years
Stocks That Can Double Next Year
Riding the Profit Wave of Biotechnology
Gold Stocks for the Small Investor
The Power of Options Trading
High Income Stocks for the Higher Risk Investor
Properties to Buy Now for Tomorrow’s Big Profits
The sad fact about most, if not all, of these alluring head- lines is that they are designed mainly to entice you to buy the publication. If you examine the recommendations in retrospect, you’ll find that many of them failed to pan out. What’s worse, in many cases the recommendations went bad before they turned to the good. And while the individuals who recommended these strategies or investments can come back in one year and state that their strategies made money, they fail to tell you what hap- pened in the interim. For example, if a stock was recommended as a buy at $30 per share and it declined to $10 per share there- after, many investors would have bailed out, taking the loss. If the stock thereafter went up to $44 per share, the individuals who recommended the stock can state that they were correct in their forecast. In the long run, the recommendation made money IF you did not panic and sell when the stock declined and IF you had the patience and emotional strength to hold on and IF you didn’t get out at the first sign of recovery in the price of the stock. Skillful financial writers, analysts, or stock pickers can pull the wool over your eyes and look good when they are, in fact, wrong. There are only a handful of market timers out there in the investment world who have been consistently good at their job. (I name names in the Resources at the back of the
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book, but don’t go there yet!) I want you to be your own expert and your own stock picker. I want you to become independent.
Remember that there are basically five types of experts in the investment field. They are as follows:
1. The biased expert. Forget about these people! They usually work for brokerage houses. Because of the stock-picking scandals that surfaced in the early 2000s and changes im- plemented to avoid such problems in the future, many brokerage houses have separated their research depart- ments from their sales departments. Many independent research firms have come forward as alternatives. This may prove helpful. However, I strongly advise you to avoid any brokerage house research and recommendations, be- cause they will likely be biased sooner or later.
2. The general trend follower.These individuals are good at an- alyzing and forecasting the general direction of markets.
They can correctly forecast pig-picture trends—the direc- tion stocks are likely to move over the next three to five years and the outlook for the real estate market. Such in- formation can be helpful but in some cases is not specific enough. However, the work of some good general trend followers out there is worth following.
3. The marker timer. These individuals have a shorter-term focus than the general trend follower. They want to pick market turns that are shorter term in nature and seek to move in and out with the twists and turns in stock trends. There are several excellent market timers but they are subject to some of the limitations we will discuss later on.
4. The stock picker.There are thousands of stock pickers who claim to have excellent records. In most cases, their work is less than 50 percent accurate. They make their money by getting out of losing positions quickly, while riding winning positions for a longer time. Following a stock picker has its good points and its bad points. The good points are you don’t have to do the work yourself and they’re good at what they do. The bad news is they have their downtimes as well as uptimes and you’ll have to pay for their services. Finally, some stock pickers and market timers are better in some areas than in others. Some are especially good at mutual fund timing, whereas others are excellent gold stock pickers. If you want to have a balanced list of investments, you may need to follow a group of experts and deal with opinions that are, at times, contradictory.
5. The sector expert. These people excel in one area or an- other. They are highly focused, tend to have tunnel vision, and are all too often fanatical in their points of view. You will find many of the “gold bugs” in this camp. The good news is they usually know their stuff. The bad news is they will often stick to their expectations through thick and thin and all too often their timing is bad. They may con- tinue to recommend a given strategy, even if it has been a losing one for many years. Eventually, they will be right and they’ll never let you forget it! Don’t get me wrong.
There are some excellent names in this area but don’t go here with the intention of putting all your eggs in one basket. Diversification is the name of the investment game!
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