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Smart Advice for the HuffPost Investor: Bad Advice From HuffPost Investors

02/06/2008 11:10 am ET | Updated May 25, 2011

I am really pleased that my column has spawned such a spirited discussion about investing. Unfortunately, some readers, who are no doubt well intentioned, give advice with great confidence which is simply unfounded.

It is not unlike the advice of many brokers, financial advisors and TV talking heads that inundates investors with conflicting and ill-based views on a daily basis.

It is not surprising that investors are so confused. You have to wonder whether this advice -- which frequently advises trading of one kind or another -- is motivated by the fact that the securities industry is estimated to make $500 million a day in commissions and related fees. If there was a steady drumbeat advising investors to buy and hold a globally diversified portfolio of index funds, not only would ratings go down, but fees would fall as well.

Only investors would benefit!

Please continue to add your questions and observations as Comments to this blog.

Question From: Halsey (extracted):

If you see a headline on Time or Newsweek..saying "recession"...get that money invested... When they put a BULL on the cover.. sell...

Halsey,

You are recommending a form of market timing, e.g. sell on good news and buy on bad news.

There is no data to support this advice.

There are many studies indicating that market timing does not work. One study of 25 market timing newsletters, as reported by Business Week, concluded that none of them beat the markets. Investors who followed the advice of these professional market timers significantly underperformed the S & P 500 and the Wilshire 5000. The newsletters studied included some of the best known and most popular ones.

Surely, these "professional" forecasters were aware of the very simple formula you recommend, and much more sophisticated ones.

The bottom line was stated by Charles D. Ellis, author of Winning the Loser's Game: "Market Timing is a wicked idea. Don't try it --- ever."

Question From: realitytrumpsbull (extracted)

If you want to win on the stock market, invest in:
oil(duh)
drugs
Health insurance companies
Health supplies
defense companies.

realitytrumpsbull,

You are recommending stock picking. A premise of your recommendation is that stocks in the sectors you list are underpriced. Why do think this would be the case since all relevant information about these stocks is in the public domain in plain view of millions of traders, many of them professionals?

There are many studies demonstrating the poor track record of "professional" stock pickers, let alone amateurs.

One study looked at the performance of 71 mutual funds whose investment styles roughly paralleled the S & P 500 over a 10 year period. Only two of these funds beat the index.

In another study, Vanguard founder John Bogle found that only nine out of 355 equity funds beat their benchmark over a period of 30 years.

There are many similar studies.

Stock picking is a loser's game for most investors.

Question From: LammertMacroeconomics

31 January 08 -Two Cents About the Ubiquitous Nature of Macroeconomic Saturation Quantum Fractals.
New Century has had remarkable growth in the last 22 trading days, rising from 0.7 pennies to 2 cents, a nearly 200 per cent increase. By comparison the average share of the Wilshire at 1378.55 has loss substantial dollar trading power in the last 22 trading days. This odd couple of great entity and vanishing small entity share the end effects of malinvestment valuation and inherent valuation fractal decay patterns. Both New century and the Wilshire will see a change of fortunes over the next 6 trading days. For New Century from 23 August 2007 the decay fractal pattern is 15-16/38-40/38-40 days with 11 days of the third decay fractal forming the base for its ..next decay fractal sequence: 11/22 of 28/ 25-28 days; for the Wilshire: 10/19 of 25/25 days. Nonstichastic causality is everywhere .... and inescapable.

LammertMacroeconomics,

I understand the psychological allure of penny stocks: You can own a large number of shares for little money. There is the possibility of huge gains.

Unfortunately, for most investors in these stocks, they are economic suicide.

Studies have shown that penny stocks have worse performance than the markets, but greater volatility. Kind of a perfect storm for financial disaster.

They are also more prone to stock manipulation which may cause a temporary spike in the price of these stocks, followed by a precipitous decline.

The Securities and Exchange Commission warns that penny stocks can be "very risky" and that "investors in penny stocks often are unable to sell stock back to the dealer that sold them the stock."

Investors would be well advised to avoid penny stocks and to view with great skepticism justification offered for them based on purported technical analysis.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.