Stock Gumshoe

This is one of my rare “not unveiling a stock teaser” posts, so for those of you only interested in a name, you can move on and I’ll be writing again in a day or two … you won’t hurt my feelings.

For the rest, I’ve been thinking — as I’m sure most of you are — about rebalancing and portfolio planning and generally preparing myself for the new year ahead. Clearly, this is a popular time for that kind of thinking, as evidenced by the huge pile of annual investment guides and the various newsletters that are teasing us with their best picks for 2008.

And actually, I’m planning in the coming days to share a digest of some of that information with you — I’m going to take a look at some of the more popular investment magazines and similar publications and break down their 2008 picks a little bit, to see what kind of commonalities there are, and what that might mean for our investing future in the year ahead.

But first, I want to share a few tips from Jason Zweig that play off of investor psychology — I hope they’ll help as we all try to decide what to do in the long term, which is what really matters, but more importantly perhaps they’ll provide some guidance as we all freak out about the fact that this is the worst beginning to a year in the stock market since 1932. (Seriously — three days, and already we’re seeing articles about how it’s the worst year ever. Sometimes paying attention to daily market gyrations is really bad for your psyche.)

Zweig is certainly a journalist who focuses on value investing, so that might not be for everyone (though I think he’s a luminary in this area — he did the new edition of Ben Graham’s book a few years ago). He often writes about neuroeconomics and investor psychology, which is probably the most valuable part of investing that individual investors often ignore: We can’t see our behavior with any kind of perspective, so we don’t work to understand ourselves nearly as much as we work to understand stocks or other investments.

He wrote an article in the 2008 annual investment issue for Fortune that is called “Train Your Brain to Win Big: Ten Tricks for Better Investing” — and a few of them have relevance for the kind of stuff I write about here every day so I thought I’d share.

“Investigate, Then Invest”

This is just a reminder that a stock “is not just a price, it’s a piece of a living corporate organism” He recommends studying up on the company, reading their reports, understanding their financial statements … all stuff the Gumshoe heartily applauds. And to some extent, what I hope to help you get started on with some of the writeups I do.

And more importantly, for the Gumshoe faithful who are barraged with a deluge of investment ads and teasers, I have two favorites from his ten tips:

First is, “Weigh What They Say.”

I’ll quote, because this is the essence of evaluating anyone who tries to sell you a stock idea:

“The easiest way to silence a market prognosticator is to ask for the complete track record of all his or her predictions. If you can’t get a complete list, don’t listen.”

I know that many newsletters do publicize their actual performance against a benchmark, as the Motley Fool does, but it’s far from the norm. You can always check with the Hulbert folks at Marketwatch to see what a newsletter’s performance has been over time (they’ll charge you for the report, and they only cover a couple hundred letters), but otherwise if the newsletter doesn’t provide a real, trustworthy accounting of their own performance, subscribing to that newsletter is a complete act of faith.

Most newsletter teaser ads give some kind of bona fides for the expertise of the newsletter editor, and often that includes mentioning a few hugely successful stock picks. Do keep in mind that any newsletter editor of any experience is going to have a few picks that go up more than 100% — the real test is how many of his picks are beating the market, and how would an investor do with those picks compared to a much lower risk strategy (like an index fund, or a bond, for example).

Next time you’re tempted to subscribe based on an ad, see if they say anywhere whether their portfolio performance beat the S&P over a year, or three or five years. And see if there’s someway to verify that. Every newsletter has had great picks, the really good ones are consistent in making good picks and avoiding horrendous ones.

And the other Zweig tip that seemed especially relevant to Gumshoe readers?

“If it sounds too good to be true, it probably is.”

Duh, right? But who among us doesn’t believe, with just a tiny part of our mind, that we really are the special few who are going to recognize that amazing deal that no one else saw, with a guaranteed 10,000% return in six months? That’s the essence of the newsletter ad, and the thing I hope most to illuminate in my Gumshoe writeups — I’m not against newsletters at all, and I think they’re valuable for many people, but deciding to subscribe to one based on outsize claims and not much evidence is like buying a car because the commercial had beautiful people in it.

I’ll close with the rest of that tip from Zweig, since I think that gets to the point better than I’m likely to:

“More precisely, if it sounds too good to be true, it absolutely is. Anyone who offers a high return at a low risk in a short time is probably a fraud. Anyone who listens is definitely a fool.”

Happy investing, everyone, and look forward to more wit and wisdom from your favorite Gumshoe soon.

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The author will always disclose any direct long or short equity, debt or option position in any stocks written about as of the day of publication, and will not trade in any stocks mentioned for three days (72 hours) after publication. Full disclaimer is at the bottom of the page.