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It was an ordinary call on a stock, but it only stayed that way for 24 hours.
On my radio show MoneyLife last Wednesday, Bill Smead of Smead Value (SMVLX) — a fund with a superior track record that gets a five-star rating from Morningstar Inc. — was asked about Chevron Corp (CVX).
"We believe that the oil business is losing its moat," Smead said, "and since that is one of our key qualitative characteristics, we would avoid everything related to the production of oil for that reason."
It was a moment built for Twitter, built for fast headlines on a smartphone app, something like "Fund manager Smead says 'Sell Chevron'."
A day later, the same segment of the show featured Josh Peters, editor of the Morningstar Dividend Investor newsletter, which has its own stellar track record. Morningstar is a value shop — "value" being the same word that describes generally Smead's style — and it prizes "moat," or the competitive advantage that can make a company's business, like a castle, unassailable.
Yet there was Peters, praising Chevron's balance sheet, noting that the company "has both the means and opportunity to grow its base of production going forward…I will admit the fact that [Chevron's] strategy is riskier [than other oil companies'], but I like the fact that they are growing.…Management is very focused on the dividend, they know that's how they are going to reward shareholders, and the stock is trading at a pretty good price. I like the stock."
Headline that one, "Newsletter editor Peters says 'Buy Chevron.'"
There's no denying that disagreement makes a market, that there's a buyer for every seller (and vice versa). In fact, we frequently get this kind of disagreement from money managers on the show, though seldom in such a tight time frame and from experts who purportedly are on the same side of the growth/value tracks.
There's also no denying that I am in the news business, where distilling something down to its most bare essence makes it most impactful in a world where it shows up as one of a few lines on a small screen. But the way investors use this kind of information can be damaging and misleading, and the back-to-back recommendation dispute shows why.
On the show, money managers spend the bulk of their time discussing methodology and markets before moving to which stocks pass or fail their muster.
In the end, however, what most people remember is the simple buy-sell-hold recommendation.
There have long been services (for example, Validea.com) that tracked the recommendations of money managers in television, radio and print appearances trying to determine who is worth listening to, and there are now new services combing social media, so that if those two recommendations were put onto Twitter using $CVX for the ticker symbol, MarketProphit.com or others would be looking to see if the expert making the call is worth following.
Average investors aren't aggregating stock tips, or watching every headline. They might not even be listening to every interview on the show.
But they are listening for news they can use, advice that is actionable. They tell me so all the time.
It raises a real question on whether any tips have value at all, and the answer lies in how you use them and, of course, your results. People who have followed, say, Peters' newsletter or Smead's fund have some reason to think they are getting good advice. That doesn't mean that stock tips — even from respected investment pros — are worth acting on based on their own merits.
Victor Ricciardi, a professor at Goucher College and co-editor of the recent book "Investor Behavior: The Psychology of Financial Planning and Investing," said that investors who tune in to stock talk need to be concerned about "anchoring" and "familiarity bias."
Anchoring is when an investor has had a previous transaction turn out well, and so they assume similar transactions will have the same positive result; this is how a broker or stock jockey convinces a client by showing them one small trade that works out, luring them for further future trades that may not be so good.
Familiarity bias is simply seeing something in a positive light because we recognize it. Someone who is accustomed to seeing the Morningstar name out there, but who has not heard of Smead's fund might, therefore, hear the two stock calls and decide that Peters is right, simply because they view his firm as being distinguished.
As a result, buy, sell or hold are starting points, Ricciardi noted, a reason to dig deeper rather than a reason to act, no matter how famous the names uttering the words.
"Halfway educated investors have some philosophy that they are comfortable with, but they need to recognize what that philosophy really is," he said. "Here you have two value managers coming to opposite conclusions, so before you act you would want to dig in to find out what kind of value metric is being used.…If you get to the point where you say 'I agree with that investment philosophy,' only then does it really become a stock tip you might really be able to use."
Of course, in the case of Smead and Peters, the investment underpinnings they described on the show don't sound all that different, precisely because they both have their value tilt.
Truthfully, both could be right or wrong, albeit to varying degrees of success or failure and in a judgment that could play out over different time frames.
But for someone who wants to use technology and read stock recommendations, the moral of the story is that you either need to find the analysis you can get behind and support with your dollars, or you need to move on to other investments where you can develop the courage to make a choice and take a stand.
Said Ricciardi: "You need to remember that whatever recommendation you take on a stock, there's somebody else who feels strongly enough the other way to be on the other side of the trade.…That, right there, should give you reason not just to ask because some guy who the media says is an expert said to buy something."