Gumshoe Weekend: Know Thyself, Tips for Investors

By Travis Johnson, Stock Gumshoe, January 5, 2008

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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7 Comments on "Gumshoe Weekend: Know Thyself, Tips for Investors"

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Dividends4Life
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Dividends4Life
January 5, 2008 4:20 pm

We dividend investors are “near-kin” to value investors. I have made note of Zweig’s new edition of Ben Graham’s book. Your post was a good read, thanks for sharing it!

Best Wishes,
Dividends4Life

Anonymous
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Anonymous
January 6, 2008 3:34 pm

(AIB)long term for 2008. tell me what you think.

Anonymous
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Anonymous
January 6, 2008 8:59 pm

The fundamentals for the US going into 2008 are looking precarious. Most of the indices got whacked last friday. This has a somber affect on the general markets and the overall psycology is cautious if not recessionary for the US markets.I am personaly avoiding any upside expectations until the subprime debacle is over and the unemployment rate recovers. The short side of the market has many possibilities.

sniper
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sniper
January 6, 2008 11:51 pm

As a former Marine, I really appreciate how you cut to the chase w/o the proverbial b….s…
Thanks for your insight and comments. Greatly appreciated.

Semper Fi

Anonymous
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Anonymous
January 7, 2008 5:27 am
I would like to hear from others. Happy New Year to all!Now, would someone please tell me why we are so worried about the economy and jobs, added? For one thing the jobs they say haven’t been added, so what? We have baby boomers dying everyday, along with the young. Less to pay out in ss checks? Job opens up. Why do we worry about this when the govt is trying to get foreigners here to work jobs? That to me makes no sense. One other point to ponder why do we keep aborting babies that will someday be the… Read more »
Guest worker
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Guest worker
January 17, 2008 6:58 pm
It is not the case that the govt want foreign workers because there are not enough American workers. Foreign workers are given visas with the name of the company printed on their visas. They can only work for that particular employer. If they leave, they are out of status and required to return home. If they sue their employer, they are simply not hired the following season (once they leave the United States, what rights do they have?). In addition they often work for much less than an equivalent American worker. Given the above, it is no wonder foreign workers… Read more »
Rosalle
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Rosalle
January 22, 2008 1:34 pm
I am a recent reader of your website and am finding it fascinating as I receive many of these ‘tantalizing newsletter promotions’ in my mailbox and have subscribed to quite a few only to find that they are not all that they promised to be. There is a new one that I, as a Canadian. am really curious about since it is directed to US customers – Tom Dyson’s Monthly Income from Canada’s Oil & Gas Prosperity Plan. He carefully omits mentioning the Federal Government’s plans to tax Energy Income Trusts beginning in 2011. I would be interested in reading… Read more »
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