Debunking Poor Advice in SmartMoney

Nicely done, SmartMoney!

It’s a shame this magazine has been so marginalized, you almost never hear or see anyone talking about something they read in SmartMoney anymore.  I used to love reading the print version back in the day.  If only they could find a clever financial blogger to drive traffic to their site…hmmmm.

Anyway, Jack Hough’s got a nice and simple debunking of some of the most tired and overused sayings pertaining to money or investing.  I hate when I hear maxims passing for advice and these are some of the most annoying ones out there.

Discussed in the piece are such over-generalized statements as:

• Renters throw money down the drain
• Education is the best investment you can make
• Buy the rumor, sell the news
• Bulls and bears make money, but pigs get slaughtered

But I especially liked Hough’s take on the old “Buy Best of Breed” chestnut:

Wall Street is overflowing with misleading proverbs. “Buy best of breed,” stock pickers often say. They mean we should buy shares of companies that are top performers in their industries. Such companies tend to have produced excellent stock returns on their way to becoming No. 1. The problem is, there’s little evidence to suggest they continue to outperform—and plenty of evidence to the contrary. One sign of company dominance is a high profit margin, or the percentage of sales that are left as profits after expenses are paid. Profit margins, studies have long shown, tend to mean-revert. That is, extraordinarily high margins tend to fall, since successful companies eventually lure competitors. Meager profit margins tend to rise, since investors will only suffer them for so long before demanding change. All this isn’t to say that top companies can’t provide handsome stock returns, but a modest valuation is a much better predictor than mere status.

BTW, guys, here are some non-Wall Street maxims that I’ve also found do not have much value:

• Never play cards with someone whose first name is the name of a city (which I learned from the coach in Teen Wolf, I think)
• Liquor Before Beer, In The Clear (yeah, ok…)
• The Early Bird Gets The Worm (think about it, what if the worm sleeps late, then the early bird will have spent all his energy looking for said worm while late-riser bird is fresh for gametime when the worm emerges from the ground)

OK, enough of that, here’s the rest of the article…

Sources:

Cute Sayings but Bad Advice (SM)