You can no more pick “the best” investment than you could pick “the best” food.
You can pick favorites, and you can tell someone why they might like–or dislike–a certain flavor or taste, but you run a real risk of being wrong. Your chosen taste might give someone else heartburn or trigger their gag reflex.
It’s that individual taste that investors have to be aware of when perusing financial magazines. From newsletters to magazines, a central theme in many first-quarter issues is the same, best exemplified by the cover story on the February issue of Smart Money, “The Seven Best Mutual Funds (for) 1997!”
These days, I no longer blanche at the sight of the headlines and magazine covers.
Investors are, in the words of folk singer Joni Mitchell, “crazy from too much choice.” The magazines merely reflect their audience; they serve up a platter of ready-made fund selections for people who find the choices too daunting.
People want microwave answers, they want to know the stock or bond or mutual fund to buy. The publications are giving people what they want, but it may not be what they need.
“When people read this stuff and act on it, they are really missing one thing: conviction,” says James P. Owen, managing director at NWQ Investment Management in Los Angeles. “You only get that strong feeling about an investment, the willingness to stick with it in good times and bad, when you have done some research yourself.”
It follows, therefore, that if an investor wants to use a newsletter or magazine–or their beautician, for that matter–as a tout for investments, they need to figure out how to develop that conviction in whatever investment they choose.
Here’s how to do that:
– Put the “best” choices on a short list, but don’t make them the entire list.
I once asked a fund manager to list his favorite stocks.
When I returned to the office, he had left a message. Bad news had come about one of his favorites, and a changed earnings estimate worried him about another, so he had dumped both.
When someone talks about the “best” investment, timing is everything. As that interview with the fund manager proved, the best thing worth buying over breakfast might not be the best come lunchtime.
If you are looking for, say, a growth mutual fund and find a few choices in a magazine you trust, make that the start of your search, adding in some choices you heard about elsewhere, always admired or talked about with your dry cleaner or whomever.
If your search leads you to prefer another fund, then you will have developed the conviction to live with your choice.
– Find out how the “best” investments were selected.
One interesting thing about these best lists–and some books of “best” investments for the year have already hit the shelves–is that there is so little crossover. Smart Money’s seven top funds, as listed in its February issue, are not on Money’s February list of “11 Superior Funds to Buy Now.”
The problem for readers is deciding which list to trust.
If the annointed stocks or funds were picked using the dartboard method, conviction is going to be a problem.
If the selections involved some analysis that you don’t understand, you are going to be confused.
Make sure that the methodology makes sense to you, that it sounds like the way you would approach making an investment selection if you were going to start from the very beginning (instead of relying on outside help to give you a leg up).
– Compare your objective to that of both the tipster and the individual investment.
I recently talked to an older woman who loves the Berger 100 fund. She knows that the fund may be, in her own words, “past its prime,” but doesn’t care.
Since 1992, Berger 100 has averaged a return of roughly 11.7 percent, ranking it in the bottom third of all stock funds.
“I was only hoping for 8 percent returns,” the woman said. “This has given me all I need, and then some.”
That’s not only a refreshing attitude but a healthy one.
If your objective is to make a safe, solid return, you probably don’t need the “superior fund to buy now.” You need a good fund to buy and hold for the next 5 or 10 years, which could be a completely different type of investment.
– Do enough work to independently arrive at the same conclusion as the person or publication offering the tip.
“It is not desireable for a magazine to pick funds for you because it is not their money,” says Kurt Brouwer of the San Francisco investment advisory firm, Brouwer & Janachowski. “It’s your money, and the sooner you start thinking for yourself, the better off you are going to be.”
It doesn’t hurt you to look or listen to anyone’s hot tips, but you need to come to the same conclusions on your own to truly believe in the fund and to have the nerve to stick with it if it doesn’t perform.
Smart Money, for example, noted that its best funds for 1996, all lagged the Standard & Poor’s 500 by at least 7 percentage points. If you invested for “the best” performance, you were disappointed; if you simply were looking for good funds, these could turn out to be good choices.
When you see something touting an investment, don’t stop reading when the article is over. Get a prospectus, some other independent analysis of the stock, bond or mutual fund and get enough information that you want to buy the investment because of everything that you have seen, and not just one piece.
– List your reasons for buying the investment, along with your expectations.
“There has to be a reason for buying a stock or a fund beyond `I read it in a magazine,’ ” says Judith A. Shine, who runs Shine Investment Advisory Services in Englewood, Colo. “That one doesn’t count, because the magazine will have a new choice next month, and if you don’t have a reason for buying this month’s hot fund, you don’t have a reason not to sell it when the magazine comes out with another choice every month for the rest of the year.”
If you know why you bought an investment, you can set realistic expectations for it, can frame the reasons why you would sell it and can make a choice that you can live with, rather than a choice that you give up the next time you see something about hot funds to buy now.
