Dear Readers,
Have you ever been burned by following the advice of a financial pundit on television? If so, you're not alone. It seems that the willingness of financial television shows to bring back telegenic pundits who aren't very good at picking stocks seems almost endless. Viewers nursing losses in their brokerage accounts aren't always as forgiving.
In the past, investors either learned their lesson or sought out a new guru. However, now investors are being offered the chance to actively bet on one-time stars' comeuppance through purpose-designed funds. But are these funds really a good idea?
Matthew Tuttle, CEO of Tuttle Capital Management, has created two such funds: the Inverse Cramer Tracker ETF and the ARK Innovation ETF. Both bets against well-known financial gurus and their popularity are inversely related to their subjects' reputations. However, betting against these experts may not be the best idea, as the reversion to the mean is the most reliable bet in financial markets.
While it's true that Mr. Cramer's accuracy was just 46.8%, or slightly worse than a coin flip, it's not that much worse than other financial pundits. CXO Advisory Group tracked several pundits between 2005 and 2012 and graded their accuracy. In other words, people who dole out advice might as well pick stocks at random.
In the long run, giving your money to an active manager is probably worse than simply following the advice of a guru from TV or the internet in your discount brokerage account because it costs money. Even top fund managers have a hard time beating the market. Millions of investors still seem to believe that stock-picking talent does exist and can be identified, though. If so then there must be such a thing as anti-talent too.
While Mr. Tuttle thinks he has found it in Mr. Cramer and Cathie Wood, their ineptitude appears mild and streaky. As with mutual funds, charging a fee for the privilege could erode any outperformance compared with a low-cost index fund. For those and other reasons, the inverse funds aren't something that interests CXO Managing Member Steve LeCompte, but he wrote in an email interview that a guru he might be tempted to tactically bet against is one like Mr. Cramer since he has such a large audience and stocks tend to have temporary moves when he recommends buying or selling them.
In the end, the decision to follow expert advice or not is up to each individual investor. However, it's important to remember that no one can predict the market with complete accuracy. "Don't hire the best expert, hire the cheapest expert," advises Dr. J. Scott Armstrong. So, before you make any investment decisions, it's always a good idea to do your own research and consult with a financial advisor.