Tuesday, July 24, 2007

Why I Don't Buy Recommended Stocks From Articles

We've all seen the articles such as Ten Stocks For 2007 and Beyond, Fortune 40: Stocks to Retire On, 50 Stocks To Pump Up Your Portfolio, 10 Top Rated Stocks Under $10 and Ten Great Dividend-Paying Stocks. The lists have excellent stocks, great rationales, and terrific potential. In the past, I have looked forward to such lists with great anticipation of finding one or two outstanding investments.

However, I have been typically disappointed with my results when buying these stocks. Here's typical sequence of events for me:

Excitement. The articles seem to be sharing opportunities to purchase sure wins. The recommendations are often published in respected periodicals (e.g. Money, Kiplinger, Forbes) or on respected sites (e.g. MSN Money, Yahoo! Finance). The analysis and rationales are good, and recent market data is supportive. Often, the stocks are one's I have considered, confirming my ability as a investor :-)

Decision challenge. My biggest challenge is to decide which one to three stocks to purchase. Will it be the turnaround, dividend, top rated or retirement stocks? While stock recommendation articles seem limitless, my funds to invest are not. So many recommendations and so little funds. To buy all the recommendations, I would need to have the wealth of a Bill Gates and Warren Buffet or more :-)

Narrow the choices. After more in depth reading of the articles, I would "judge" two to three stocks to be good buys, based on P/E, business potential or multiple recommendations by different articles. I would buy 50 to 200 shares depending on the price and my perception of the stock quality.

Eventual disappointment. Inevitably, my cherry-picked stock purchases would lose money. Examples of stock picks which have been eventual disappointments are: Globalstar (before bankruptcy), Loral, Southmark, and Richton International. In fact, I can't remember any picks that made money for me.

I have concluded the reasons for my poor results are:
  1. Buying a larger portion of the recommended list is needed have a positive return. As with any recommendations, the stocks may go up or down. Purchasing only two to three stocks is not sufficient to reduce individual stock risk.
  2. I'm a poor cherry picker:-) Seriously, my criteria for choosing stocks to buy was a poor predictor of future price performance.

Thus, a few years ago, I stopped using recommended stock buy lists.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC


Shifting Sands said...

Yes, it's one of the fundamental rules of investing in stocks - don't listen to 'hot tips' from any sources, research the companies you plan to invest in thoroughly and only then invest your money. There are many people in the markets who are interested in promoting certain stocks (because their own money is invested in these stocks) once the prices rise enough they sell and move on to promote other stocks...

Adventures In Money Making said...

i've given up reading these stupid articles and mostly the magazines that publish them. by the time they cover a story, its waay too late.

read the economist, wsj and create your own investment ideas.