This post has been excerpted from Pound Foolish: Exposing the Dark Side of the Personal Finance Industry
by Helaine Olen by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright (c) Helaine Olen, 2013.At the World MoneyShow, an annual event that takes place in Orlando, Florida, every February, financial riches and opportunity are always just around the corner.
“This thing can be bought out for a billion dollars at any time,” I hear someone say as I stroll along the mobbed, football-field-sized exhibition floor.
At the booth for Best Choice Software, the pitchman, surrounded by a swarm of mostly elderly men, is yelling energetically, “I’ve made millions of dollars using this system!”
In the conference rooms of the Gaylord Hotel, discount offers on unlimited riches proliferate.
“Pontificators tell you what the market is going to do. I’m going to tell you what day it is going to happen,” says Mike Turner, a balding middle-aged man promoting CycleProphet, a tool he claims can help investors make gains of 70 per cent annually. “I know what silver is going to do next week and the week after.”
In another room I meet up with Oliver Velez, a day-trading guru peddling an $8,000 two-day seminar ($7,500 if purchased at the MoneyShow) designed to teach anyone to beat the markets. Velez tells the crowd he almost never makes a bad trade.
“A lot of people say ‘Oliver, can you tell us about any of your losers?’ I say, ‘No, I have no losers.’ I had one losing trade in 2010, and that was more of break even.”
Hundreds—if not thousands—of events designed to reach out to consumers interested in finding out more about investing opportunities are held around the country every year. They range from little known gatherings like the yearly Road to Personal Wealth in New Jersey to ones that appeal to the wealthy, like the Value Investing Congress, where, in return for several thousand dollars, an active investor can listen to prominent hedge funders such as David Einhorn of Greenlight Capital make a case for various shorts, such as his famous negative call on Lehman Brothers in the fall of 2007.
Others are virtual and constant, such as the daily barrage of tweets one can receive from StockTwits, an aggregator of 140-character investment tidbits, helmed by serial Internet entrepreneur Howard Lindzon.
But MoneyShow is one of the big kahunas—a multi-million-dollar empire devoted to all things supposedly useful to the individual investor, including stock-picking products and chances to buy into oil and gas partnerships.
In 2012, MoneyShow’s corporate arm (also called MoneyShow) put on twelve live events on four continents, in cities including New York, London, Las Vegas, and Shanghai. In Orlando, there are at least 275 speeches, educational seminars, and product presentations all adding up to a cacophony of competing theories and strategies.
But whether one can actually learn anything at the MoneyShow, at Value Investing Congress, or by paying close attention to StockTwits is subject to debate. Brad Barber and Terrance Odean are behavioural finance experts and business professors at the University of California—Barber at Berkeley, Odean 60-five miles down the road in Davis.
To read the combined opus of Barber and Odean is to plunge into an unexpected comedy of errors. In a series of papers, the two men have laid out the case that the vast majority of investors miss no opportunity to make a wrong call. They sell their winners too soon and their losing picks not soon enough. They perform less research than they think. They like to buy the same stocks over and over again, even if they have a history of loss with that stock.
Their investment thumbs are so black they enjoy “perverse security selection abilities,” a seemingly innate talent for buying “stocks that earn subpar returns” while selling “stocks that earn strong returns.” There are reams of research data to back up Barber and Odean.
In 1999, at the height of the dot-com bubble, the North American Securities Administrators Association discovered that 70 per cent of short-term traders lost money. Currency traders do no better: according to papers filed with the Commodity Futures Trading Commission, almost three out of four account holders at such popular foreign currency trading brokerages as FXCM, Inc. and Gain Capital Holdings lost money in every quarter of 2010.
Nor do the pros know the secret. The vast majority of managed mutual funds will perform worse than their benchmark. CXO Advisory Watch, which tracks the self-proclaimed experts, has found that with many, bluster beats actual performance time and time again, so much so that, in their view, astrologer Linda Schurman has a better accuracy rate than noted economist Abby Joseph Cohen.
The recent predictive record of the Ira Sohn Investor Conference, an annual gathering of hedge fund stars, is dismal, with the vast majority of 2011 pitches revealed as losers when analysed one year later.
Even Harvey Houtkin, the father of day trading, made his millions not from successful stock picks, but from convincing others that they had the ability to make such picks themselves, racking up millions in commissions from customers of his day-trading firm while losing hundreds of thousands of dollars on his own investments.
Individual stock trading is a loser’s game. So why do we bother? Because not everyone does badly. There’s Warren Buffett. Peter Lynch.
And maybe, just maybe, you.