this showed up on eturd:
Oops: I have to eat crow over these 'stupid' picks
By Chuck Jaffe
Jun 19, 2009 08:08:00 (ET)
BOSTON (MarketWatch) -- It may be time to start marinating the crow and looking for a good recipe for humble pie.
Near the year's half-way mark, the market's three-month rally has resulted in something of a slump for a guy picking stupid investments, the same way that the market's slump in 2008 made it a banner year for bad actors.
It's enough to have me asking myself the same question that Michael C. of Boston asked me in a recent email: "Are you going to get anything right this year?"
It's a good question with a bad answer. I've already made some calls that were spot on, but it's clear to me I won't get as many "right" as a year ago, no matter how you define a "correct" pick. And if I am going to call out investments for being "less than ideal for average investors," I need to periodically see if my advice is suitable for that audience too.
That's particularly important now because if my primary concern was getting everything "right," I would probably change the thinking that underlies the entire process.
And changing your long-term investment philosophies based on short-term thinking makes for stupid investments.
Stupid Investment of the Week highlights the concerns and characteristics that make a security less than ideal for the average consumer, hoping that showcasing one dangerous situation will make it easier to unmask others.
Sometimes an investment wins the prize due to unusual circumstances, such as bad stewardship or outright mismanagement; in those cases, the investment may improve -- the way Fidelity Magellan (FMAGX, Trade) has since it was chosen in February -- but price movement is not enough to change the recommendation.
When the selection is purely for current investment reasons -- where the column makes the statement "this looks like a bad deal right now" -- the idea is to find securities poised for a decline of at least 20% and preferably 25%, because surveys show that is the point where the pain is so severe that an average investor will bail out. Even if the decline is temporary, the average investor -- typically playing a buy-and-hold strategy -- will get out at the bottom and never see any turnaround.
I also typically expect to see that decline before I see a gain of 20%; I hate to see investors surrendering gains but if a stock or fund does exactly the opposite of what I expect, there's no way that time heals that wound. That's why my pick of Red Robin Gourmet Burgers (RRGB, Trade ) in early April doesn't feel so great; while the stock is off more than 10% from where I picked it, it actually gained more than 25% before the tide turned against it.
And this is why I'm expecting to have some crow to choke down when I review picks at the end of the year. The current rally has been led by stocks that have plenty of momentum but weak fundamentals, precisely the kind of stocks that traders can use, but that whipsaw the average Joe. The rising tide has lifted most boats; that doesn't mean they're all seaworthy, it just means they are sitting higher for as long as the tide can support them.
So while I would not change my analysis on Peet's Coffee and Tea (PEET, Trade ) or United Healthgroup (UNH, Trade ), there's no denying that the numbers are working against me.
Likewise, the nine "swine-flu stocks" I singled out at the beginning of May have proven the dangers of lumping a group of stocks together. A few of the issues -- like Hemispherx BioPharma (HEB, Trade ) and AVII BioPharma (AVII, Trade ) -- have basically gone strong and had their rallies show some staying power. And while there were initial declines in stocks with swine-flu ties like BioCryst (BCRX, Trade ) and Novavax (NVAX, Trade ), they didn't cross that "average investors sell now" point, and have bounced back hard, showing significantly more business savvy than the "hurricane stocks" they felt like at the height of the swine-flu headlines in early May.
On the plus side, REIT General Growth Properties, chosen last December, went on to file for bankruptcy protection, and Millenium Bank -- which was selling offshore certificates of deposit -- was shut down by regulators within a week of being Stupid Investment of the Week. Somehow, the investment notes issued by Advanta (ADVNB, Trade ) have managed to avoid default, but every bit of news out about the troubled credit company would suggest that this still is no way for the average investor to stretch for yield.
Regardless of how things turn out, however, there won't be a change in what goes into making an investment stupid.
There is plenty of research to show that investors who chase performance wind up getting the worst of it. They need a big increase to prove that an investment is worth buying, so they wind up getting in when the price is high, and they get scared out when things go down, so they sell low.
Bill O'Neil, the founder of Investor's Business Daily and author of "How to Make Money in Stocks," told me this week that the idea for most investors is to find a system that works for them and to then stick with it, knowing that they will never be right all of the time but that if they win more often than they lose, they'll make money in the market.
"Most people would be better off if they found a system they could live with," O'Neil said. "You will always have times where you say 'I could have made some money in there,' but if it's against your rules and your rules work over time, you can live with the mistakes."
The market can make fools of every investor, at times, and it may be my turn. But knowing that the methodology is sound -- that the issues I pick truly strike me as wrong for the average investor -- allows me to heed O'Neil's advice, accept that some picks won't turn out and should make it easier to chow down on some crow if the rest of the year's stupid investments play out like the selections from the last six months.
News 
Market Data 
Discover 
AI
