The oracles at CNBC: good stock advice doesn’t come from TV; Stock market superstars and pundit prognosticators may have loud and lucky forecasts, but they don’t have any crystal ball

The oracles at CNBC: good stock advice doesn’t come from TV

Stock market superstars and pundit prognosticators may have loud and lucky forecasts, but they don’t have any crystal ball

Suzanne McGee

theguardian.com, Thursday 24 October 2013 13.59 BST

CNBC’s Jim Cramer’s forecasts are only right 46.8% of the time, according to CXO. Photograph: Lisa Carpenter

Turn off the television. Put down the remote control. Back away from the streaming CNBC content. Turn off the noise. By noise, I don’t mean only the literal noise of market veterans talking across each other and interrupting as the debate of just how many billions of dollars the recent government shutdown will end up costing the American economy. That’s important, of course – but at this stage in the game, one person’s educated guess isn’t going to be much better than someone else’s. And while every winning streak that makes a money manager or investment strategist a superstar is some combination of skill and luck, it’s also just one lucky call away from turning into a losing streak.This year, we have seen most market pundits fall short, in one way or another. Almost no one predicted the government shutdown would happen. Few went out on a limb to forecast how strong stocks would be this year, but most were predicting a big increase in earnings this fall – a stat that has so far remained noticeably absent. We also witnessed the fall from grace of three big market presences.

Bond-fund king Bill Gross of Pimco lost his crown after boosting his holdings of Treasury bonds to nearly 40% of his entire portfolio – just in time for the big bond market sell-off over the summer. The result? Whileother bond funds are struggling, losses at Gross’ Pimco Total Return (2.72% to date) are significantly larger.

More recently, Meredith Whitney shut down her brokerage companyamid reports that clients have decided her advice isn’t worth big bucks any more. Whitney earned pundit status by being one of a tiny handful to predict the mortgage crisis would become a financial crisis. She went on to forecast, on 60 Minutes, no less, that US states and municipalities were about to default – massively – on interest payments to investors. Detroit and a handful of other examples aside, it hasn’t happened.

Then there’s Bill Ackman. The hedge fund manager made billions for his investors over the years, and has even landed a profile in Vanity Fair.  But as his disastrous attempt to turn around JC Penney has shown, he’s far from infallible.

When it comes to anything that’s complex – especially when we feel we don’t have all the same information that we think a pundit has – it’s tempting to rely on the guidance of high-profile gurus. Some of them have earned their crowns by outperforming in tough times, or by making big contrarian calls that turned out to be right on the money. If CNBC thinks they deserve the spotlight, who are we to quibble?

But I haven’t met one pundit yet who owns perfect crystal ball. Eventually the luck runs out, and if we’ve fallen into the habit of treating that pundit’s market opinions as gospel truth, we’re heading for trouble.

Even the best-informed pundits get it wrong. Back in the 1990s, when Alan Greenspan headed the Federal Reserve, the market was so sensitive to his most minor utterance that Wall Street joked the poor man had been banned by Congress from even answering when anyone asked, “How’re you feeling today, Alan?”

When Greenspan used his bully pulpit to warn in December 1996 that the stock market was frothy, full of “irrational exuberance”, he triggered a panicky sell-off. But it was only a self-fulfilling prophecy: only three years later and several thousand points higher on the Dow Jones Industrial Average did the dot.com bubble finally burst. Anyone who acted in response to Greenspan’s gripes gave away a lot of upside.

Studies show that even the best market gurus are right only about two-thirds of the time, and most get it right about half the time. CXO Advisory Group found that only 24 of the 68 individuals tracked between 2006 and 2012 got forecasts right more than half the time. (CNBC’s Jim Cramer came in with a 46.8% accuracy rating, prompting a very entertaining exchange of letters between him and CXO.)

When it comes to investing, pundits can be tremendously entertaining. Some of them have become social media hounds, like economist Nouriel Roubini, aka “Dr Doom”.

Sometimes they can even be useful, but it’s rarely when they’re offering up tweets or sound bites. It’s usually when they’re forcing us to think like contrarians, as Bill Gross likes to do in his letters to investors. Gross’ performance may not be astonishing right now, but he remains a smart guy whose letters don’t revolve around market bets but focus instead onways to think about market trends.

We may be tempted to follow smooth-talking pundits slavishly. But just as we don’t have to succumb to the urge to order that massive sundae featuring chocolate chunks, marshmallows, maple walnuts and whipped cream on top of the usual hot fudge sauce, we don’t need to fall for the sweetly spun words on TV.