Picking stocks fills intangible desire to be in the game

The Insider

Your Money

July 04, 2004|By BILL BARNHART

IN THE WORLD of personal money management, there's nothing quite so satisfying as a stock pick.

When you buy shares of a company that somebody else recommended, you get a lot for what you pay.

You own the equity stake. It's simple to track the performance of your stocks, including fees and expenses you pay.

You also acquire a belief - a psychic reward - that you've got a friend, your stock-pick source.

Who knows what that belief is worth? But it doesn't cost much. You can obtain picks from reputedly reliable sources for the price of a financial magazine.

I occasionally review the performance of stock picks published by financial magazines in their annual outlook editions.

In the first half of this year, major stock market indexes posted sub-par performances. This should have been an ideal period for professional stock-pickers, selected by financial editors, to prove their worth.

Yet a midyear look at the aggregate performance of stocks picked six months ago for 2004 by Business Week and Money magazines demonstrates, once again, that you'd do as well in a low-cost stock index fund.

The average return of 75 stocks recommended in the two magazines would not quite cover the 3.4 percent S&P total return in the first half, plus what you'd pay for active investment management.

Similar results could be gleaned from a random sample of low-cost investment Web sites, newsletters and other media.

No one denies reality.

"We acknowledge that," said Eric Gelman, executive editor of Money magazine. "One thing we recommend over and over again is index funds."

"It's good we're performing at least as well" as the market, said Mark Morrison, Business Week's managing editor.

Nonetheless, Morrison and Gelman note that many investors simply prefer to assemble their portfolios, based on information from magazines and other sources, rather than buy a passive index fund.

This preference usually makes no sense, based on long-term investment return statistics. But it reflects an intangible desire to be in the game.

No harm, no foul. But the price of psychic rewards will rise as Wall Street promotes its latest gimmick: hedge funds and other programs that feature the flip side of stock picking.

Selling short (selling borrowed shares) and other strategies that profit from falling stock prices are in vogue. But despite the logic of matching long (buy) and short (sell) strategies, the popular press has not embraced the idea.

You're unlikely this December to see a Money headline such as "Stocks You Need to Sell." Wall Street has this game pretty much to itself and will charge accordingly.

"We haven't avoided the topic, but for what we're trying to do for our readers we have simply felt we didn't have anything valuable to say to them about short-selling," said Gelman.

Short-selling advice by "experts" won't fare any better than standard stock picks.

And calculating the intangible benefits of taking short-selling tips requires psychological skills little known on Wall Street or elsewhere.

But the commendable restraint being exercised by the financial press means your short-sale friend won't be cheap.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoneytribune.com.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.