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The media is atrociously bad at prediction and I’m sick of it

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[This is part of the IWillTeachYouToBeRich Week of Discontent.]

I’m so sick and tired of financial and business magazines that I could vomit. It’s absurd to see yet another “10 Stocks You Must Buy in 2007!” issue of a magazine. I just point, laugh, and walk by whenever I see these. This is a little ironic considering I was featured on MarketWatch.com and Yahoo Finance yesterday, but oh well.

Why do I ignore and mock the media for predictions about stocks and business?

1. They’re often wrong. These magazines are designed to sell magazines, not good financial advice. Take Fortune’s 10 Stocks to Last the Decade, a sexy-sounding article that truly goes the distance by including stocks like Broadcom, Nortel Networks, Enron, and Charles Schwab. Now look at the results.

There’s also a curiously amusing 2003 study by McKinsey, the top management-consulting firm in the world, which concluded that Google was not a serious threat:

Few at eBay initially saw reason to fear Google…in part because of a 2003 study it commissioned from McKinsey & Co. McKinsey concluded that Google wouldn’t use its search capabilities to break into e-commerce. That made Google a manageable threat, say people familiar with the study.

Oops.

Let’s not forget BusinessWeek’s accusatory 2001 article, in which it wrote: “Sorry Steve, Here’s Why Apple Stores Won’t Work.” TheStreet.com chimed in, writing, “It’s desperation time in Cupertino, Calif.,” and consultant David Goldstein predicted, “I give [Apple] two years before they’re turning out the lights on a very painful and expensive mistake.” Ironically, Fortune gleefully catalogued how wrong these predictions were while ignoring its own constant failures of prediction.

I’m not knocking the difficulty of prediction. It’s really hard. That’s why I don’t do it, and that’s why I scoff at magazines whose entire value proposition is “predicting” what will be hot next. They simply aren’t worth the $4.95/issue they charge.

2. They’re not accountable. The problem isn’t just being wrong, it’s not being accountable. These magazines will literally laud a CEO one year and then turn around and write a negative slam piece haranguing the same person immediately afterwards. Note BusinessWeek’s cover story of Bob Nardelli, CEO of Home Depot, in March 2006, where they gushed,

Skip the touchy-feely stuff. The big-box store is thriving under CEO Bob Nardelli’s military-style rule…Chief Executive Robert L. Nardelli is putting his stamp on what was long a decentralized, entrepreneurial business under founders Bernie Marcus and Arthur Blank. And if his company starts to look and feel like an army, that’s the point. Nardelli loves to hire soldiers. In fact, he seems to love almost everything about the armed services…It’s hard even for Nardelli critics, including ones he has fired, not to admire his unstinting determination to follow his makeover plan in the face of scores of naysayers. They describe being “in awe” of his command of minute details.

Riding a housing and home-improvement boom, Home Depot sales have soared, from $46 billion in 2000, the year Nardelli took over, to $81.5 billion in 2005, an average annual growth rate of 12%, according to results announced on Feb. 21. By squeezing more out of each orange box through centralized purchasing and a $1.1 billion investment in technology, such as self-checkout aisles and in-store Web kiosks, profits have more than doubled in Nardelli’s tenure, to $5.8 billion.

Really? That’s interesting, because 9 months later, in January 2007, BusinessWeek ran another cover story:

Out At Home Depot: Behind the flameout of controversial CEO Bob Nardelli. How convenient. As BusinessWeek noted in its carefully worded article,

The sudden fall of one of America’s best-known CEOs illustrates how perilous times have become for corporate leaders…During the current housing slowdown, however, the financials have eroded. In the third quarter of 2006, same-store sales at Home Depot’s 2,127 retail stores declined 5.1%.

Perhaps it illustrates how poor of a reporting job the magazine did, including its breathless, sycophantic writing and lack of accountability.

The flip-flopping goes on from the publication level down to the reporter level. Now, changing your mind is certainly ok–but not when you don’t acknowledge that you wrote something completely opposite less than 24 months prior. For example, in August 2005, a Fortune reporter wrote the following bombastic statement about Yahoo:

By figuring out how to make brand advertising work online, Terry Semel is on the verge of creating the 21st century’s first media giant.

In January 2007, the same reporter, this time writing for Wired, wrote an article of a decidedly different color:

How Yahoo blew it. Semel has been Yahoo’s CEO for nearly six years, yet he has never acquired an intuitive sense of the company’s plumbing.

Or maybe it’s Jim Cramer’s TV show, which offers predictions that are sexy but no better than chance.

You can also find a delightful lack of accountability with all the pundits who predicted a housing boom or crash. Try digging around for the official spokesperson of the Realtors of America. Their words are comically positive no matter what the situation is. In another example, Robert Roubini, president of Roubini Global Economics and some pundit, predicted a 2007 recession, the likes of which we haven’t seen in over a decade: “By itself this slump is enough to trigger a U.S. recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession.” Hmm.

3. To avoid being wrong, many magazines write meaningless articles that don’t say anything. I’d rather have a reporter take a stand — whether he’s right or wrong — and acknowledge how accurate he was a year later. Instead, some reporters are afraid of being wrong, so they write articles that don’t say anything. Can’t be wrong if you can’t be pinned down! Here’s a great example of a meaningless article that says nothing.

4. They ask pundits who have no business talking. When I see John Doe of John Doe Capital quoted (as you see one paragraph above), I tend to get a little wary. Frankly, I get wary of any pundit making predictions. Here’s a hilarious video poking fun at Wall Street research by asking homeless people on “Wall Street” what their top 5 stock picks are. It’s well worth your time. Are the predictions by business magazines much different?

5. Finally, these articles about the next big investment are minutiae. Think about all of these articles on Hot Stocks or The Next Business Trend. Do they let you focus on what’s really important, or do they get you caught up in the hype of the day? Here, as one example, is a page with 82395423 different management theories. The funny thing is, this page isn’t even a joke.

Reading these magazine articles and watching CNBC is fun and entertaining, but if you’re really making your decisions exclusively from a glossy paged magazine, you are a humongous moron. The unfortunate result is a bunch of people buying stupid loaded funds and stocks they don’t understand. And, on the other side of the spectrum, you get people like this who are so intimidated by all the handwavy financial punditry that they simply opt out of investing altogether.

Investing for the long term isn’t hard. Yes, it takes work, and yes, it takes some common sense. It doesn’t take the hottest stock tip of the month. Whatever that magazine article says this year, it could literally say the opposite next year and you’d never know the difference. Take some time and do some god damn research on your own. Jesus.

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32 Comments

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  1. What I REALLY hate are CEO interviews. Do they really think a CEO is going to bare their soul and chat about all the grave concens he has for the future of his company? It’s nothing but an oportunity to generate publicity for him. If we listened to these interviews, we’d think 100% of companies were experiencing explosive growth all the time.

  2. We should studying Warren Buffett and the stocks he buys.
    What does China, India, and Brazil need as they grow? and Look for companies who are providing those services.

  3. Actually John, I get a bit out of CEO interviews. Don’t listen for what they say, listen for what they don’t say. For example: CEO’s always talk about revenue growth, product innovation, EBITDA growth, etc.

    Are any of those missing from the razzle dazzle? Then that’s where you should dig ’cause odds are, thats where there are problems.

  4. You should read “The Halo Effect” if you haven’t already.

  5. Agreed. But, this is just a rant unless you can provide some concrete advice on doing research. Many of us do not know where to start “doing research of our own”.

  6. Travis Hemphill Link to this comment

    This is one of the best posts I have seen on any blog in a long time. Great opinion, but the best part is all the evidence you used to support your statements. Keep up the good work!

  7. Anatta, it was a rant. But if you want a place to get started, check out 50 books I recommend.

  8. Excellent points, Ramit. Those magazines are the equivalent of Time and USNews: old, middle-of-the-road stories dressed up to sound exciting. I suspect that a lot of their content is very carefully managed by the interested parties. I believe they are just the mouthpiece for the powerful PR groups that most corporations have to project the most positive image of their company and financial standing (negative in the case of their competitors). And I wouldn’t be suprised if said collaboration was intentional. It’s like all the investment newsletter my dad reads, he will just never believe me that those small guys are probably being paid to prop up dying stocks.

    BTW, you have disproved my fears about the discontent being directed towards the commenters on the “limited amount of money” thread. These are great topics, thanks.

  9. Take some time and do some god damn research on your own. Jesus.

    Let no one ever say you’re not passionate, Ramit :). Good article.

  10. Using Business Week, Fortune, Forbes, etc. and their “10 Stocks You Must Own” as the basis for your investments is like having your doctor use Men’s Health to diagnose your illnesses. No thanks.

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