How You Interpret the Data Makes All the Difference

By Larry Swedroe, Buckingham Asset Mangagement

Business Week is a highly regarded publication. Unfortunately, while its reporting of the business news is excellent, the value of its investment advice is often wrongheaded. The reason is that their objective is to sell magazines and gain advertising revenue.

Their interests are simply not aligned with those of their readers. What sells magazines and ads is the hype of active management. Passive management is not only boring, but once you have told your readers to buy and hold a globally diversified portfolio of passive asset class or index funds, what is left to say? You can't keep repeating the same story every week.

The preceding explains why despite the superior returns generated by passively managed funds, financial publications are dominated by forecasts and stock selections from so-called gurus and the latest hot fund managers. The following two quotations are good examples. The first is from the August 1995 edition of Money magazine. "Bogle (of the Vanguard group of funds, the largest provider of retail index funds) wins: index funds should be the core of most portfolios today." The headline for the cover story read: "The New Way to Make Money in Funds." The second is from the February 1996 edition of Worth magazine. "The index fund is a truly awesome invention. A cheap S & P 500 or a Wilshire 5000 Index fund ought to constitute at least half of your portfolio."

Despite these comments, for the reasons mentioned previously, the publications will not give passive management their wholehearted endorsements. Instead they print stories with such headlines as "Sell Stocks Now," or "Ten Stocks to Buy Now."

Returning to Business Week, one of its regular columns is called "Inside Wall Street," and consists of the stock selections of columnist Gene Marcial. The July 24, 2000 issue contained an analysis of his 1999 stock picks. The article concluded that Marcial's stock-picking results were "sensational." They came to this conclusion by showing that Marcial's picks trounced both the DJIA and the S & P 500 indices, while they only slightly trailed the Nasdaq.

Business Week measured the price performance of each stock recommended in Marcial's column during 1999 and compared their price performance against the S&P 500, DJIA, Russell 2000 and Nasdaq benchmarks. Price performance was measured against these indexes one day after the column was printed as well as 1 month, 3 months and 6 months after publication of the stock tips.
                                             Next >>

Printer Friendly Page E-Mail to a Friend