Mainline magazines–including NEWSWEEK’S monthly section Focus: ON YOUR MONEY–rarely descend to hard-core porn. That’s what you get from the greedy gurus on cable TV or the cruising shysters of the Internet. Sen. James Exon is wasting his talents trying to vaporize Internet sex. Let him go after the schmucks who molest your pocketbook by hyping stocks online.
We of the quality-media crowd specialize in soft-core porn, which means that we tease you without quite going all the way. Take the latest Money magazine, tabloid-headed THE NEW WAY TO MAKE MONEY IN FUNDS TODAY. What’s “new” turns out to be index funds spiced up with some sexier funds on the side (owning an index fund is like taking the missionary position). “What’s a headline?” says Money managing editor Frank Lalli with a shrug. “It’s a shouted message down a crowded bar.” (My own column on index funds shouted, FOR WINNERS ONLY.) The porn test isn’t the headline, Lalli argues, but whether the story is anchored in reality.
But even by this test, the anchor isn’t holding firm. Personal-finance publications are crowding the field–Smart Money, Worth, special newspaper sections. Kiplinger’s venerable Changing Times reinvented itself as Kiplinger’s Personal Finance Magazine. In this tough and competitive marketplace, publications thai merely dispense information will see their readers melt away. Investors want action and timely advice. Even if they’re not buying stocks or mutual funds right now, they want to peep.
So journalists are increasingly making specific investment recommendations. Instead of “analyst Bigdome picks stocks,” it’s “Money picks” or “Smart Money picks.” Instead of just listing the performance of mutual funds, some magazines rate them with up or down arrows or letter grades. The grades merely highlight past performance adjusted for risk or market conditions. But they’re often used as investment guides.
How good are the journalists’ tips? Smart Money’s latest issue crows that the 10 stocks picked by writer James Stewart in April 1992 have risen by an average of 150 percent. Lalli boasts that Money’s chief investment strategist, Michael Sivy, “has called market turns with remarkable accuracy.” At Kiplinger’s, editor Ted Miller touts his annual feature, “Best Funds for Your Goals” – solid funds, he says, you can buy and hold. The same names tend to stay on the list from year to year.
But no systematic work has been done on how readers might fare if they rely on magazines for investment advice. A couple of small studies by stockbrokers with axes to grind have asked some interesting questions about journalistic research. One, published in a trade magazine called Registered Representative, looked at the ratings that some magazines give to mutual funds and concluded that they didn’t predict how the funds would do. An internal study by the Smith Barney Consulting Group looked at the stock picks in four of Money’s forecast stories; in the next year, they underperformed.
These studies have problems. Money magazine preaches long-term investing, not quick sales after one year; the Registered Rep piece glossed over some serious measurement issues. But the questions they raise deserved to be answered. If journalists join the stock-picking circus, they have to expect their recommendations to be tested for results. That’s going to be hard on such story staples as DOUBLE YOUR MONEY IN THREE YEARS!
The verdict is already in for viewers who seek quick profits from “Wall Street Week,” Louis Rukeyser’s popular Friday-night broadcast. A study by Norman Fosback, editor of Market Logic in Ft. Lauderdale, Fla., found that the stocks recommended by Rukeyser’s guests tend to rise in the two weeks before the show. They spike up on the following Monday (the day you buy), hover there for a week and then drop back to the market trend. Some of the tips do well Fosback says, but you don’t know which ones they’re going to be. (Fosback also runs an investor magazine called Mutual Funds. Last its cover story featured 25 BEST FUNDS TO BUY TODAY.)
I don’t do stock tips. My taste runs to index funds, bought and held, and mutual funds in any market that just crashed. But NEWSWEEK FOCUS gives you tips the old-fashioned way: without dirtying its hands. Focus interviews money managers and lets them tout their favorite stocks.
Although tip sheets may be the most obvious form of financial porn, they’re not necessarily the most promiscuous. For that, I’d nominate the wanton prediction of superhigh investment gains. Last month, for example, BusinessWeek ran a long story on building retirement savings. It included an eye-popping sample of stock-and-bond portfolios projected to yield 11 percent to 13.3 percent over the next 10 to 40 years. Those are the historical market returns embedded in a planning program called Prosper, developed by the accounting firm Ernst & Young.
What BusinessWeek and its readers didn’t know is that Prosper uses a calculation for projecting market returns different from the compounded average that you’re used to. Restated in the traditional way, U.S. stocks should be forecast at 10.2 percent, bonds at 4.8 percent and foreign stocks at 13.2 percent. Conservative planners like Janet Briaud in Bryan, Texas, postulate roughly 8 percent for balanced stock-and-bond portfolios. If you count on unusually high yields and they don’t come through, you’ll have sabotaged yourself.
The press also indulges in a popular money illusion. In last month’s Kiplinger’s, for example, a story called BIG IDEAS FOR A LITTLE MONEY featured a teenager who invested nearly $1,000 in five blue-chip stocks. If he sticks to his plan, he ought to be worth “well north of a million” when he retires at 65, Kiplinger’s learned from Ken Corba, the former manager of SteinRoe’s Young Investor Fund. Mmmmm, put that at “well south.” With $1,000 a year, earning the market’s typical 10 percent return, this boy will amass around $792,000. His actual purchasing power, however, will drop to $263,000 in current dollars, assuming inflation at 8.5 percent. Not bad but not $1 million, either. Almost every investment projection you see comes in nominal dollars, which tells you nothing about the standard of living that money will support.
Financial magazines have a lot of investment smarts. They’re wonderful teachers. You’ll find new ideas and good suggestions for correcting your course. But readers who keep buying the hot funds that are profiled each month are showing more fund envy than common sense. Once you set up a program, plan to keep it for several years. There are other things besides Smart Money to take to bed.
