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Bill Virgin: Take all that investment advice with a big grain of salt

The readers always write, and that’s to the good. Since we are neither omniscient nor omnipresent, we rely on readers to clue us in on what’s going on in the real world.

On occasion, hard as it may be to believe, readers scold, chastise, remonstrate, upbraid and take us to task for what they perceive as faulty, misguided and unhelpful perspective.

Such was the case with an email from reader Mike in Tacoma, commenting on a late August column about the preceding week’s worrisome performance by global stock markets, and how misleading dramatic market moves can be in predicting economic trends.

“Over the years I’ve read a multitude of financial advice columns, and yours includes the same fatal flaw as the vast majority,” reader Mike said.

Mike takes exception to a sentence in that earlier column about the 2000 dot-com meltdown, that it “wasn’t a shock to many Americans who had long scoffed at the values assigned to even the flimsiest dotcoms, and who were proven right.”

Our correspondent says he got out of the market in the summer of 2000, then got back in after reading a Time magazine piece in which its board of economists proclaimed sunny prospects ahead. “And so I put my money back into the market. Bad move. And patiently waited for the downturn to pass. Worse move.

“So when you cluck-cluck at us fools who lost our money, remember that your wisdom is only in hindsight. In 2000, you didn’t know the market would drop so dramatically, any more than the Time economists knew that it would continue to grow.”

In that instance, a lot of us were writing that things weren’t going to end well. We saw the earnings releases with elaborate schemes of pro-forma income reporting obscuring the lack of actual income; we fielded the calls from readers wanting to throw their money at anything with a dot-com label on it, no matter how little they knew about it.

But that’s a single example. Even a stopped clock beats that record for accuracy, twice a day at least. There are plenty of others in which those of us in the punditry got it wrong as to the direction or severity of a downturn. This columnist wrote in early 2009 that the recession could be sharp but short. Only one of those calls proved correct.

The column closed by advising investors to be prepared, which reader Mike found to be a useless piece of counsel.

“WHAT preparation? What exactly do you expect me to do? Pull out of the market? Stay in the market? Shift my distributions? What??? Am I a fool if I keep my money in the market and lose a significant amount in a major downturn? Am I a fool if I make preparations and pull out of the market and lose the benefit of the upswing? This is the intellectual bankruptcy of so many of these articles. You tell us to prepare in case something bad happens, but you guys NEVER actually say anything that actually proposes a concrete action...

“There is of course the standard advice to diversify, which is really just a way to say it’s the market’s fault and not the adviser’s fault if the investor loses money. If you really want to help investors, please write an article advising how to know when to listen to the pundits and when not to. Write articles that are actual advice, with actual recommendations for courses of action.”

The reason I’m letting reader Mike write so much of this column is that he raises important questions and reminders about investing strategy and advice. The sagest piece of advice we can offer in response is a quote from screenwriter William Goldman about the movie business: “Nobody knows anything.”

We certainly don’t, at least when it comes to specific investment decisions. We are not stock touts. At any time when a reader would call in for a stock tip, the standard response was, “Sir or Madam, if I really knew, would I have this job?”

Nor do other supposed experts. Individual stock selection doesn’t work for all but a select few. If it did, mutual fund and portfolio managers would consistently beat the market. Timing doesn’t work either, as Mike can attest from painful personal experience.

A lot of investors have figured that out, which is why so much money has gone into index funds.

We don’t dabble much in the realm of investment writing, because for most people the most beneficial, efficient and worry-reducing approach doesn’t change over time, especially the importance of diversification (sorry, Mike).

Between the time that first column was written and now, the Dow gained nearly 8 percent, but its not back to its highs of earlier this year. Read what you like into that, about individual investing, the market, the economy. Nobody knows anything but that won’t stop everyone from telling them you do.

Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at bill.virgin@yahoo.com.

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