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?
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 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
- poorly informed, or
- 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.
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: