Friday, June 27, 2008

Investing with the Television Talking Heads

There is probably no worse investment decision you can make then one based on investment advice of the people you hear on CNBC or any of the other television networks. Almost all of the people they have on the TV giving you investment advice make a living from selling stocks. That should give you a big clue right there. These people make money from selling stocks; if you're not buying stocks they're not making money. Sometimes, as in the present circumstances when the market is terrible, the best thing you can do is not buy any stocks.

At a time like this people should be more concerned with capital preservation and capital gains. Unless you are willing to do a significant amount of homework you are better off sitting on the sidelines and watching the carnage from a safe distance. Today, while I was on the treadmill at the gym, I was listening to CNBC when they introduced two stock analysts. The first one began immediately by saying it was time to "buy the financials." I almost fell off the treadmill from astonishment. The savant's reason for buying financial stocks was that they were at a seven-year low and now was a time to begin accumulating them. The problem with this logic is that for the past eight months people on television have been telling us poor suckers at home that it is time to buy the financials because they have hit bottom. Well for the past eight months the financial stocks have found bottom after bottom after bottom.

This doesn't mean there aren't some stocks that shouldn’t be bought. These are ones that sold off significantly from their highs, but their fundamentals are very strong and will continue to be so throughout this bear market. There are very few such stocks, and one characteristic of the current market is that there are wave after wave of what is known as sector rotations. This means that a group of stocks that had been hot and going up, is suddenly sold leaving you holding a good stock at a bad price. So whenever you are watching television and someone tells you to buy a stock, the best thing you can do is turn on the comedy channel and you get a real laugh.

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