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Don’t be a (Motley) Fool.

Update: I stand by my assessment of the Motley Fool (that investors as a group would be better off without it and the rest of the stock newsletter industry). But I couldn’t have been more wrong about the contributions Brokamp would make to Get Rich Slowly. His articles have provided sound, helpful advice. Two examples:

Get Rich Slowly (the single largest personal finance blog, I believe) recently began hosting a regular column from a Motley Fool writer.

Score one for the bad guys.

But everybody loves the guys from The Motley Fool, right?

Spare me.

A few headlines to be found on Fool.com as I write this (5/7/09):

  • “5 Cold Stocks Heating Up”
  • “5 Stocks with a Bright Future”
  • “These Are the Market’s 10 Best Stocks”

Ugh. If those headlines aren’t a perfect example of a “get rich quick” philosophy, I don’t know what is.

They promote their newsletters’ performance with large green lettering: “Outperform by 40.05%.” To me, that sounds suspiciously like they’re indicating that you will outperform by that amount if you buy their newsletter. Am I the only one to whom this looks like a misleading use of past performance figures?

What The Fools do:

As far as I can tell, The Motley Fool’s entire business is built upon convincing people that it’s easy to beat the market.

Never mind the fact that only a handful of investors have ever done it for a sufficiently-extended period to give us any sort of confidence that it was due to anything other than luck.

Never mind the fact that every single trade is a negative-sum game due to transaction costs.

Never mind the fact that, in total, investors’ quest to beat the market is impossible by definition.

Never mind the fact that if we stopped paying newsletter publishers, stock selection services, active fund managers, and all the other charlatans who encourage us to engage in this fruitless endeavor, we’d be better off by $100 billion every year.

My complaint

My issue is not with the particular stock picks that they promote. My complaint is with their promotion of the idea that stock picking is a prudent form of investment.

To think that individual investors (Yes, that means you.) have any meaningful advantage over the institutional investors–i.e., the people with whom we’re trading when we buy or sell stocks–is nonsense.

If we could remove our emotions for a minute, it should be obvious that it’s rare for individual investors to know anything that the institutional investors don’t. We have less time to monitor our investments. Less access to research. Less analytical resources to use.

Both common sense and an enormous body of research tell us that our best bet is simply to stop trying and invest instead in low-cost, passively managed funds. If anybody tells you that it’s easy to beat the market by picking stocks, they’re probably either

  1. poorly informed, or
  2. about to sell you something.

Spend a couple minutes on the Fools’ website, and I think we can see which group they fall into.

The fools on index funds

Yes, I’m aware that they also promote index funds. But they do it in the most half-hearted, two-faced way possible. For every article on their site promoting index funds, there’s another article right next to it indicating that any investor with an ounce of intelligence can beat the market.

What do you think?

Am I wrong? Is it reasonable to listen to The Motley Fool? Or am I right that trying to beat the market is a fool’s errand?

Please let me know what you think in the comments.

To be clear, Robert Brokamp’s articles appear to be far more reasonable and well informed than much of the rest of the Motley Fool site. My complaint is not with him specifically, but with the principles espoused by Motley Fool in general.

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Comments

  1. When the Motley Fools arrived on the PF scene in the 1990′s, they were something new and different. They wanted to make personal finance, particularly the stock market, less scary for the average person.

    Today, we have a gazillion personal finance bloggers out there giving advice. It seems that the Motley Fool guys have had to push more “get rich quick” tactics to try to stand out from the crowd.

    I agree with you that trying to beat the market is not a good idea for most people. But that advice isn’t sexy enough to sell ads. :)

  2. This isn’t 100% related to your post (I think you know I sometimes foolishly buy individual stocks myself as well as my bigger ETF/tracker holdings with mixed consequences! ;) ) but what are your thoughts on what would happen if *everyone* tracked the market?

    I’ve been thinking about this a lot lately. Surely it would leave the market in the hands of just a few active institutions?

    Could the growth of trackers be one reason why we’ve seen such big swings in recent times?

  3. p.s. By ‘leave the market’ I mean the market’s direction. Obviously tracker investors would still benefit from the rises and falls.

  4. Hi, Monevator. I guess that depends what you mean by “everyone.”

    If literally everybody (including the institutional investors) did it, then we’d have very little volatility, as demand from month to month would be fairly constant.

    The only changes in demand would result from liquidity needs. (That is, the only reason people would be selling is because they need the cash, and the only reason people would be buying is because they have new money to invest.) As a result of fairly steady demand, returns would be pretty close to dividend yield + earnings growth each period.

    Though if by “everyone” you only mean the individual investors, then I guess it’s a different story. Though I’m still inclined to think that for each person who switches to a buy-and-hold, passive investing strategy, the short-term volatility in demand will be decreased.

    In short, I’d imagine that short-term market volatility and popularity of passive investing are inversely related.

  5. Mike,
    I think what Moneyvator means (and this has crossed my mind too) is what happens to a company’s accountability to shareholders if everyone were to own index funds? Or if 75% of a firm’s common stock was held in index funds? What motivation would its directors have to provide a nice dividend rather than exorbitant salaries for themselves?

  6. Well, my understanding is that it wouldn’t be that different from the current situation.

    Bogle’s been doing a lot of writing/speaking about this lately. Here’s the text to an excellent lecture he gave on April 1 at Columbia University:
    http://johncbogle.com/wordpress/wp-content/uploads/2009/04/columbia409.pdf

    At the moment, approximately 70% of corporate shares are held by institutions rather than by individual investors. And for the most part, they do a terrible job at bothering to vote their shares or play any sort of active role in corporate governance.

    And while I do that this is an issue that needs to be addressed, I have my doubts that the best way to do it is to encourage people to bother with owning shares of individual firms.

    I’d argue that a more effective approach would be to put some sort of regulations in place to ensure that fund managers actually live up to their fiduciary duties.

  7. I couldn’t agree more. I work for one of the large Investment Banks and these guys (yes, most are men) dedicate millions of dollars and tons of hours to researching stocks. An average, individual investor simply cannot compete with that; it’s not necessarily about intelligence, an individual investor simply does not have the resources and connections that these guys have — believe me. This is not to say that they are all beating the market, we know they aren’t, but that is because they ARE the market. You cannot read ten, twenty or however many more sales-y Motley Fool articles and think you will have an edge on the market (aka the Institutional Investors). But that is exactly what they lead you to believe at the Motley Fool. It’s a total scam.

  8. I have to agree with you whole-heartily. For long term wealth creation, I don’t think that following the Fools is the right philosophy for most savers. It is only for people who want to trade securities and really actively manage their funds. But, I really doubt those people will beat index funds too often.

  9. They all seem a bit smug and arrogant in their writing styles. I still on occasion read the Motley Fools, but I’ll still do my own research to verify their facts before following their advice. To do anything less would truly be foolish.

  10. “Is it reasonable to listen to The Motley Fool? Or am I right that trying to beat the market is a fool’s errand?”

    Even if you think that beating the market is possible over the long haul, it still is unreasonable to listen to the Motley Fool. Worst finance website ever.

  11. About the Fools, I think devil is right. Originally, they tried to be more “oblivious”, but eventually they just became “motley”.

    I’m guessing ads and money. Why do people always try to make money?!

    Jerks.

  12. The Motley Fool’s are a buncha idiots. I followed them through the tech bubble burst. They were classic momentum chasers back then; that is, picking individual stocks to outperform the broader market (so much for the “Rule Maker” and “Rule Breaker” portfolios). After the 2002 recession, they totally switched their game to become “index” guys. After a few years of under-performance by major US indicies relative to small caps and international, they started to emphasize those areas…again arriving late to the game. Then now that those momentum markets have collapsed in the past year, here comes the “index” talk from them again. I do not fault their efforts, they seems to speak to the average individual investor. However, their strategies result in gross under-performance and they really should just go away (I mean, seriously, how many times can you be SO wrong and still be allowed to stick around?!?). My two cents.

  13. I also have been following Motley Fool since the dotcom boom (not following their advice, mind you — just reading their garbage). They surprisingly still have some old articles on their servers, and Googling some fallen stocks bring up some of their past recommendations that are particularly laughable now. And, hey, if you can just drop losers from your model portfolios and add winners, and then measure the performance of your new composition (read their disclosures), you can keep on looking like a great stock picker.

    It isn’t hard to screen stocks until you find one that has been having a good run, yet is relatively thinly traded. You recommend it as if you have been following it for a long time. Your readers check out its chart and say “Wow! This stock HAS been doing well!” So, they think you know what you’re talking about. Another gimmick is to run an article where they list several stocks that have done great over the last 5 or 10 years (their “multi-baggers”), and then tell you they are finding stocks now that are performing JUST LIKE that. Never mind that they never recommended any of those particular stocks in the past, or told you to sell them years ago.

    To pg, they can be wrong over and over again, but there are always new people who are starting to make money and wanting to get into the market, and those people have never heard of the Motley Fool — “there’s a sucker born every minute.”

  14. I am a recovering former member of the Motley Fool Hidden Gems newsletter. MF is like a cult, with the brothers Gardner being the cults of personality. I really tried to give them the benefit of the doubt, but in the end I decided they really weren’t any better at picking stocks than I am. Weren’t these guys English majors in college? I let English majors tell me how to invest?

    I remember, back in the day, when they used to tout their Foolish Four mechanical investing strategy. Then they admitted it was fallacious and abandoned it. They also used to pick on the “investing establishment” and how you didn’t need to pay them to manage your portfolio when trained monkeys do just as well. Now they Fools are part of the “investing establishment” that they used to mock.

    Hidden Gems was my last experience with the Motley Fool. Many of their picks were down. In order to get good returns you had to get lucky and not miss their few that flew high. The last straws for me were when Tom Gardner pretty much disappeared from HG without telling subscribers until they called him on it and he admitted that he had become the MF CEO which was consuming all his time. This was going on when his most precious pick (SCSS) was falling apart. The silence and lack of guidance were deafening. So Tom Gardner bailed on the service and then, when the market totally crashed (and HG), Bill Mann suddenly had better career opportunities calling him.

    I was a sucker for too long.

  15. The Fool drives me nuts now. As one of the original writers it was a great experience to live through the bubble in a tech company after 15 years in the City. Now, I have no idea what its business model is.
    As a passive fund manager it actually suits us to have a lot of dumb money rushing around the market that we can exploit by doing nothing. But it saddens me that the site is still attracting fools to the idea that they can beat the market.

  16. Thanks for your posts. I almost became one of the fools. I was considering signing up for their Income Investment newsletter. Thanks Slim & Jason for your words of wisdom.

  17. I was a ‘fool’ long ago, starting when they had a newspaper column and were on AOL. I lost BIG on CSCO. (Nobody at Fool made me buy anything, I know) But that did it. I took the remnants of my money and got mutual funds at Vanguard. But I still have a Motley Fool Visa at BOA – and boy do I feel foolish (typical definition) using it.

    I sleep a lot better now. The roller coaster isn’t for me.

  18. I like index ETFs and some cheap MER index funds, especially in areas I’m not familiar with. But I buy individual stocks too. I think I’m a contrarian, though, or a stock hobbyist, because I don’t think I’m trying to beat any market or know “more” than institutional investors. I guess I just don’t see it in the same terms. I probably just come from a different perspective. I like to study the companies, I listen to what different analysts cover on the companies (I find it interesting)(I guess some call that praying at the alter of CNBC, though). I don’t see roller coasters and roulette wheels. I don’t buy a stock just because it’s mentioned on the Fool (though if they give me something to think about, I might check it out). I guess the issue just isn’t a divisive one for me. I use both strategies. I also have certain ethical reasons for not investing in many index funds because I don’t agree with some of the companies that get swept into the basket and don’t want my money supporting them.

  19. MoneyEnergy: I have absolutely no problem with people picking stocks. If that’s what you want to do (for any reason), then go for it. And good luck to you!

    My issue is simply with businesses that:

    1. promote stock picking as a reliable way to improve investment returns, and
    2. make money regardless of whether or not you do.
  20. I definitely agree re: not giving any more of my money over to a company/business/broker when I don’t need to. This is one thing I love about certain DRIPs, since you really can invest for no cost (a fraction of the DRIP plans have no commissions or reinvestment fees whatsoever).

    As to buying individual stocks, I consider it more in terms of purchasing the underlying businesses. I don’t really view it in the whole context of the monkey throwing darts at a dartboard. But I also don’t buy just for pure growth prospects, which seems to be where a lot of the market greed comes in anyway. I guess I’m a modest but assertive stock investor – conservative choices mostly, though I have made a few speculative mistakes which I learned really quickly from!

  21. My letter to Motley Fool:

    Dear Misters Gardner:

    I am writing to follow up on my decision to cancel my subscription to Stock Advisor, after cancelling Rule Breakers last year.

    I thought it possible you might be interested in why, if this letter manages to not be weeded out by assistants because it is not complementary.

    The proliferation of your newsletters has increased from one to how many now? Over 20 at least.

    There is no way I am getting the best advice; you must spread the best stock picks out among all these products in ever-increasing divisions of categories. Yet, that is not what an investor needs or can benefit by; an investor wants the benefit of your insight and analysis to put together a reasonable portfolio, no matter what the category, and a limited number of stocks.

    Furthermore, your incessant publication of memos for so many stocks, often with contrary messages, illustrates the confusion and lack of message.

    For example, a recommendation of yours, Gamestop. You encouraged me to buy and hold repeatedly. Yet, I saw one letter that advised it may be time to dump Gamestop, published on Yahoo financial, on the day that earnings showed a 20% increase. This helped tumble the price. So, publicly you publish contrary advice to the public that you give the paying customers. When I posted a complaint to your company and on the forum, I heard no reply except one that stated you have so many people writing opinions that no one has control over the content. You abrogated your own advice.

    You advise that it is foolish to trade in options; now you have an options strategy that one can follow for a fee. Finally, after ranting forever about mutual funds, that they have too expensive hidden fees, and one can pick better for him or her self, you are now, lo and behold, coming out with your own mutual fund.

    It seems that no advice is to stand if you can make more money be constantly watering down or defying what you have previously said, by coming out with yet another category of investing newsletter that now proposes to advise one in the categories you previously dismissed as unsound.

    Motley Fool has simply turned into a churn and burn advice mill, no matter whether one hand states the opposite of the other, we are supposed to swallow it all.
    Your policy (for us) of buy and hold does not work in the medium run; balancing your portfolio, recommended by most CFP professionals, does. Your silly assertions after the crash last year of 60% that you can still make it back because the market averages 10% per year on average is also not based in reality; you have to cherry-pick your time frames to include great declines in the market to achieve the growth rates you average; the typical investor loses in that calculation. While the stock market has gained 60% this year, that does not restore the losses from last year. A loss of 60% from a $100 investment that recovers 60% only results in only $64, yet the average of those gains looks like, well, no loss at all! In reality, you have still lost 36%.

    I am disappointed in my experience and the sheer number of releases you publish continuously. I can look at a stock on Yahoo and find 7 or 8 Fool releases on one day underneath, touting the stock as it sinks, or vice versa.

    In short, the only recipe for success is the sheer number of newsletters you can sell, and going against your own advice for your own portfolios. You tout your numbers, but unless you timed your investments when you did, they are not attainable, nor are your current numbers that great. Your strategies, when followed, simply lose more money than gains for your naïve readers, as I once was.

    Your partial advice is more damaging then helpful, and you are misleading investors, who won’t get the true picture until they spend thousands to buy all the newsletters. Indeed, you have to now have the million dollar portfolio nonsense to allow yourselves to build from all your myriad stock picks. You would not be able to achieve that by sticking to any one category that you have a newsletter for.

    So, I have decided $200 a year for 1/20th of the best stocks you would buy, is not a bargain at best, and dangerous to the individual. While you pick among the whole basket for yourselves, you leave us with little help in building a well-balanced money increasing portfolio by spreading out the advice way too thin. I think you are losing more money for your participants than you are making, if you tried to find out.

  22. Alvin Landis says:

    Thank you, ” what do you think ”
    I am a 62 year old man who has lost his job. With a 7 th grade education. My reading, and computer skills are poor to say the least. Sitting here trying to learn, I must have a dictionary at hand, to even begin to understand.

    Have been contributing to a conventional IRA since 1999, ( maximum amount ). In 2004, I confronted my broker, about the fact the only time my account grew was once a year when I funded it.

    As the market plummet 2008, I was visiting with one of my brothers, ( who is educated ” DR. ” ) who thought I should manage my own account. Well to say the least I was not to sure about that. He advised that he had a contact that was in the business of managing other peoples money, and with his advise, he ( my brother ) had done very well for the past 8 years.
    So here I am about 1 year later, and I to, have done well, but only due to his help.

    I would like to get out from under his wing. Am wondering if there is anyone out there that can put in their 2 cents worth. I am completely open to ideas or advice, pro or con.

    Al

  23. Hi Alvin.

    I’d suggest getting a ground-level education in investing before making any dramatic changes to your portfolio. I’d start with a book or two on the topic. Some of the ones I’d recommend would include:

    The Bogleheads’ Guide to Investing,
    The Investor’s Manifesto,
    The New Coffeehouse Investor,
    or my latest, Investing Made Simple.

    They’re each pretty easily readable while containing good information.

    Hope that helps.
    -Mike

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