THE BLOG
12/24/2013 10:38 am ET Updated Feb 23, 2014

Beware of Investment 'Pros'

The financial media love to interview and write about the views of "investment pros." Here's one of many examples: On December 17, Forbes featured an article titled "The Pros Pick Three Green Income Stocks for 2014." The article set forth the stock picks of Jan Schalkwijk, a portfolio manager at JPS Global Investments, and Shawn Kravetz, president of Esplanade Capital LLC.

The inference is that those anointed as investment "pros" have some special insight into future prices of stocks and that investors should give their "picks" some deference.

The reality is quite different.

Michael Boskin certainly qualifies as a "pro." He was the chairman of President George H.W. Bush's Council of Economic Advisers. Bokin wrote an article in The Wall Street Journal dated March 6, 2009, that carried a headline of "Obama's Radicalism Is Killing the Dow." The article's subhead: "A financial crisis is the worst time to change the foundations of American capitalism." According to Yahoo Finance, on March 6, 2009, the Dow Jones industrial average closed at 6,626.90. On December 20, 2013, it closed at 16,221.14!

Few will quarrel with the investment expertise of The Economist. It was established in 1843 and has a venerable history. Its current circulation is more than 1.4 million. It is on most people's list of highly respected financial publications. Many would regard the editors at The Economist as the quintessential "investment pros."

On January 5, The Economist published a blog post titled "Hope Springs Eternal" with a subhead of "Investors are optimistic but 2013 is unlikely to be a bumper year." The author noted the "consensus view" that investors will be tempted to buy equities in 2013, but warned of these caveats:

1. Sharp rallies are often followed by slumps, noting the dismal experience of Japan's stock market post-1989. The author theorized: "Perhaps the rest of the developed world is following the same script."

2. Shares of U.S. stocks were trading well above their historical average, quoting the "strategy team" at Morgan Stanley and Robert Shiller, a professor at Yale University who was subsequently awarded the Nobel Prize in Economic Sciences.

The author concluded that "... it is still hard to believe this will be a bumper year for returns."

If you ignored this advice and invested in the Vanguard Total Stock Market Index Fund (VTSMX), which is designed to provide investors with exposure to the entire U.S. equity market at a very low cost, your one-year return as of November 30 would have been 31.48 percent.

Sometimes predictions are right. When they are, it is often attributed more to luck than skill. One study looked at the stock-picking performance of 2,076 mutual fund managers over a 32-year period. It concluded that the stock-picking skill of these managers was statistically indistinguishable from zero.

This is the time of year when the "pros" come out in droves, full of themselves, and offer the rest of us their predictions for the coming year. It is counterintuitive to appreciate the fact that they are emperors with no clothes, pretending to have an expertise that doesn't exist.

If you are relying on their views, you are not investing intelligently or responsibly.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.