INVESTMENT ADVICE: GOOD, BAD AND INDIFFERENT

Today, we take a break from tech and survey the financial scene. Bob Schwabach is the author of two books on investing.

At the beginning of each year, Barron’s, a leading financial journal, publishes the picks of ten luminaries of the investment world. So just for the heck of it, I looked at how these leading lights did on last year’s picks.

Four out of the ten did not beat the S&P 500 index, which was up 13 percent for the year. An additional guru closely matched the index. So that means only half of those who are supposed to be the best investment advisors in America and Europe, were able to do better than simply buying the index. The other half did beat the index returns, but my recollection is that at least half of those who are supposed to be the best, have not beaten the index in any year.

What does it all mean? It means it’s a tough game, that’s for sure. It also means that paying for management is a very questionable decision.

Among the few experts who have beaten the index most of the time are Mario Gabelli and Bill Gross. Their approaches are almost directly opposite: Gabelli invests in many stocks, Gross is strictly a bond guy. On a risk-adjusted basis, Gross comes out way ahead. (Interestingly, he has only two selections for this year’s investments, while most of the experts have a half dozen or more. One had 15 for last year, and no, he did not beat the index.) A disadvantage of the bond approach is that much of the gain is in the form of interest earned, which is fully taxable.

This all raises an interesting point: While most advisors – and absolutely all mutual funds – tell you that your investments should be diversified, the results do not seem to justify the advice. I recall an amazingly successful manager of the Harvard endowment fund saying in an interview: You should invest in no more than three stocks – and most of the time, just one stock. He added later, that spreading your investment over many stocks struck him as counter-productive, saying: “Why would I want to invest in my tenth best idea?”

This echoes the view of Andrew Carnegie, founder of U.S. Steel, who said “You should put all your eggs in one basket – and then watch that basket.”

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