Don’t Pick Stocks This Way!

a1Everyone has a favorite way of picking stocks, even people who don’t know much about the stock market. There are some methods that even sound reasonable—looking at past performance of the stock, for example. And then there are some that seem less reasonable, based on items like the phase of the moon, what movies happen to be playing locally or online, or the first name of your favorite sports figure. People pick stocks on what are sometimes the most ridiculous of reasons.

Does any of it make sense?

a1 Ric Edelman of Edelman Financial Services has seen it all. A lot of people he encounters look for patterns, which is smart as far as it goes, but as Edelman says, if you look hard enough, you can see patterns in almost anything. Sometimes they’re really there. Sometimes they’re not.

In fact, he’s seen some patently ridiculous ways of predicting the movement and pattern of the stock market. Think that pop music doesn’t have anything to do with the stock market? You’d be in disagreement with those who saw a crash following the Beatles’ breakup. Think that the news doesn’t impact stocks? Well, it often does, but not to the extent of the person who saw the rise and fall in the rise and fall of newspaper headlines. And then there’s the fashion theory: if skirt hems are up, so’s the market; if they droop below the knee, watch out for a falling market. And the same for high-heeled shoes versus flats. It’s amazing what people will believe.

Or you could look to Hollywood for your stock tips: why not? Some people watch the upcoming movies: if a lot of them are horror films or negative in tone, then the stock market will be reflecting that dismal outlook. Don’t like movies? If you’re a sports fan, there’s a ridiculous method for you, too. Some fans think that the market rises when a certain team wins the NFL Superbowl, or the hockey Stanley Cup, or the MLB World Series… you get the idea.

a2 Like to be multicultural in your predictions? Certain stocks are said to do particularly well during the Chinese Year of the Pig, but not so good in the Year of the Monkey. Casting Scandinavian rune-stones can give you some hot tips, or you can turn to the classic ancient Tarot cards to give you the information you need.

Who believes this stuff?

Here’s the really crazy part of the story: not all of these options came from people who don’t know better: we expect that from them. If you aren’t educated in a certain area, especially financial areas, then you’re more inclined to act based on belief rather than on facts.

What the experts believe

But for those who are educated, who work in the field, one really expects a little more. Yet many of Edelman’s examples came from media researchers, people who study stocks every day and report on them to the public. Some of these wild theories were actually reported as news!

That’s where it becomes a real problem. We live in a credulous culture: people believe what they see on television, what they read in the newspapers. They believe what they hear, and they act on it. Should they? Probably not; but the reality is that they do.

a3 And it’s not just the media who espouse crazy investing theories. Edelman says that experts—he calls them “so-called experts”—can do it as well. And some of them are right. Why? Because with thousands and thousands of people making financial predictions at any given time, someone is bound to be right, even if they’re not right for the correct reasons. They may have accidentally happened on the right prediction. It happens.

Edelman gives an example: one analyst who had a reputation as a “top strategist” made a bad prediction—stocks did the opposite of what he said they’d do. People were shocked.

Be informed!

Why? We’re not surprised when meteorologists get it wrong. We expect sportswriters to make errors. Yet we somehow believe that financial advisors will always be right? That’s ridiculous, claims Edelman, who believes that any “system” you can use to pick stocks will be wrong. No matter what these predictive systems are called, they’re still going to be inaccurate. Don’t be fooled!