Mutual Funds For Dummies. Eric Tyson
asset freeze, against Steven M. Gallagher for allegedly committing securities fraud through a long running scheme to manipulate stocks using Twitter.
The SEC's complaint alleges that, since at least December 2019, Gallagher used his Twitter handle, @AlexDelarge6553, to make thousands of tweets encouraging his numerous followers to buy stocks in which Gallagher had secretly amassed holdings. As alleged, Gallagher would then sell those stocks at inflated prices, while he continued to recommend others buy them — never disclosing that he was selling the stocks.“The complaint alleges that Gallagher used his followers for his own financial gain, tweeting out false advice to pump up the price of stocks he owned, so he could sell for a profit,” said Richard Best, Director of the SEC's New York Regional Office. “This case is a reminder that investors should be wary of taking financial advice from unverified sources on Twitter and other social media platforms.”
As the SEC warns on their website, “… aggressive stock promotion is a red flag of potential fraud.” Indeed it is.
But what about the more believable performance claims, in the range of 20 and 30 percent, that can so easily dupe an investor into thinking they’re true — like the annualized return of 23.4 percent claimed by the Beardstown Ladies?
Turns out its claims were indeed bogus. Shane Tritsch, a reporter for Chicago magazine, wrote a piece titled “Bull Marketing” in which he exposed gross inaccuracies in how the Beardstown investment club calculated its stock market returns. Tritsch was tipped off to potential problems by a note that was added to the copyright page of the paperback edition of the Beardstown book that said that the club’s 23.4 percent annualized returns were determined “by calculating the increase in their total club balance over time. Because this increase includes the dues that the members pay regularly, this return may be different from the return that might be calculated for a mutual fund… .”
May be different? Indeed. Translated, the disclosure was saying that the 23-plus percent returns were being goosed by including new investment principal (regular dues payments). Using documents from the investment club that were provided by a Wall Street Journal reporter, a senior research analyst named Jim Raker, from mutual fund publisher Morningstar, told me that he calculates that the investment club earned a return of a mere 9 percent per year — a far cry from the 23-plus percent returns claimed by the club.
Even worse, though, is that the Beardstown investment club underperformed the market. For the decade in question, while the Beardstown club actually earned just 9 percent per year, the Standard & Poor’s 500 index — the widely followed index for the U.S. stock market — returned about 16 percent. In fact, if you’d invested in lower-risk bonds, you would’ve earned nearly 12 percent per year and still outperformed the stock picks of the Beardstown club!
In addition to claiming high returns, many stock pickers claim that racking up those attractive returns is relatively easy and simple to do. Even former veteran fund manager Peter Lynch claimed, “An amateur who devotes a small amount of study to companies in an industry he or she knows something about can outperform 95 percent of the paid experts who manage mutual funds, plus have fun in doing it.” I would respectfully disagree with the 95 percent aspect and while I agree it can be fun and even educational to pick some of your own stocks, plenty of people find it stressful and emotionally taxing, especially during down periods.
Widely regarded as one of the best mutual fund managers in his day, Lynch knows more than anyone how much hard work goes into beating the market. In fact, during the years that Lynch piloted Fidelity’s Magellan fund, he was known for his workaholic 70- and 80-hour workweeks. He stated publicly that the primary reason he retired early was to spend more time with his family. That leaves everyone else to question: He worked this hard to do something that he says amateurs can do with ease and that you, as an investor, don’t really need his skills for?
STOCK PICKING WITH JIM CRAMER
If you ever watch CNBC, you’ve likely come across Jim Cramer, a former hedge fund manager, who hosts an investment show at the network among other endeavors. If you’ve seen it, he yells and screams and jumps around while pounding on various sound-producing buttons.
Cramer rose to fame through his strongly opinionated buy-and-sell recommendations on regular CNBC stock market programming and his supposed extraordinary investment returns from his days running a hedge fund bearing his name. But there’s a problem: Despite repeated requests from me, Cramer’s former and current firms have been unable (and unwilling) to produce any independently audited tracking of Cramer’s claimed returns.
Compounding this lack of any proof is a uniformly poor to mediocre track record of his stock picks and pans in recent years. Several independent tracking services have found that his stock market predictions have underperformed the broad market averages. (See the “Guru Watch” section of my website, www.erictyson.com, for the details on Cramer and other investing pundits.)
Also, I had no trouble finding numerous folks who shelled out $400 yearly for his online newsletter and were greatly disappointed. One reader said, “I got caught up in watching his nightly show and then I paid for his Action Alerts service. That service sends email alerts every day telling you what to buy and sell. Well, after nine months, I lost a lot of money, and his portfolio is currently showing a 1.3 percent gain for the year to date (ever notice he doesn’t mention that on his shows!). I could’ve just purchased the S&P 500 and would be way ahead. His trading ideas do not work, and his recommendations to not use mechanical stop loss trades have resulted in huge losses in my portfolio.”
The notion that most average people and noninvestment professionals can invest in individual stocks with minimal effort and beat the best full-time, experienced money managers is, how should I say, ludicrous and absurd. But it does seem to appeal to some people’s egos — until the returns come in (or don’t come in, as the case may be).
Know the drawbacks of investing in individual securities
The stock-picking cheerleaders cite plenty of reasons and make hyped claims to get you to invest in individual stocks. But they’re loath to mention the drawbacks of selecting and trading individual securities. You won’t buy their books and newsletters or visit their websites if they can’t promise you effortless riches, so you may not openly get the following information from the “stock-picking-is-easy” writers:
Stock picking takes significant research time and expense. Before buying an individual security (stock or bond),