January is a stressful month for stock investors. All sorts of pet theories emerge about what the first few days or weeks of trading might mean for the rest of the year. Experts tell you what they believe the coming year will look like and how to interpret what happened in the year just past. There's no shortage of investment advice, and it's daunting to sift through it all (see our past commentary, "Avoid Some Yearend Pitfalls").
We've got a simple piece of advice for deciding what's relevant and what's not amid the avalanche of predictions. Remember three simple letters:
T.G.H., or "The Great Humiliator"
Markets are mean. They want to embarrass you and rub your face in it afterward, and they certainly don't want to give up hefty gains to you easily. The simple fact is that most forecasters are right well under half the time, and even the best are only right about two-thirds of the time. How humiliating! Here's an article worth reading:
If You Don't Stay Humble, the Market Will Humble You
By Todd Harrison, MarketWatch
Knowing this, you can use the T.G.H. philosophy and see through a lot of forecasting hogwash easily by doing a few simple things. First, does the advice even make sense? We don't mean just trotting out a few data-mined statistics as proof. Is there a rational, logical basis in market theory and economic fundamentals for it? And if so…isn't it probably already priced in to stocks since it's being so widely read and discussed? If everyone knows about it, it's already reflected in asset prices.
Second, what's the track record of the person or strategy being pushed upon you? It's easy for someone to tell you what to do with your life savings in 750 words or less—but are they accountable for the advice? And have they ever even been right in the past about this stuff? It's a question worth asking (amazingly few people actually do), and one that will eliminate about 95% of what's out there from your purview.
Third, do these forecasters fear T.G.H.? If not, much like Darth Vader, they're overconfidence is likely their weakness. Anyone proscribing a strategy that doesn't feature diversification and counter-balances in your portfolio in case you turn out to be wrong is simply using the Dark Side of the Force for a perverse kind of investing Jedi mind trick.
Below are four commentaries from today's headlines. Using these rules as a guide, only one of them offers useful information. Can you guess which one? (Answer at the bottom.*)
1. To Find Hotter Funds, Go With The Winners – and the Losers
By Jonathan Clements, The Wall Street Journal (*Site requires registration)
2. Analysts Differ on Market's Slow Start
By Adam Shell, USA Today
3. Don't Buy the "10 Hot Stocks for 2007"
By Henry Blodget, Slate
4. Danger Ahead? Stocks' Early Warning Signal
By Alexandra Twin, CNN Money
*Answer: # 3