by Archie M. Richards, Jr., CFP^®
August 12, 2002

Televised business programs seldom help investors make profits. Here are reasons why:

1. Market commentators are terrific at explaining why the market made a certain move. Let's say that after a week of selling, the market has a good day. A commentator says, "Given the decidedly negative action during the last week, the market was certainly due for some type of bounce."

   Yeah? How come the guy didn't tell us about the bounce the day before?

   He didn't, because he didn't know. The comment makes him appear informed. And certainly he is informed - about the past. But about the future he knows no more than the rest of us.

   It's possible to predict trends five and ten years in the future. But commentators shy away from venturing out so far. Short-term projections they do make - or at least hint at. But these are no more reliable than flipping a coin.

2. In recent weeks, when concerns about the market were high, television business commentators were prone to say, "With all the volatility, the market is giving no signal about where it's headed."

   They're looking in vain. The market never reliably signals where it's headed.

   Let's say the market did reveal in advance that it was going to rise. Even then, buyers couldn't take advantage. Sellers would spot the signal just as clearly as the buyers. They'd stop selling at the prices prevailing before the signal. But with buyers crowding in, prices would rise immediately to where sellers would again offer stock. The buyers would pay higher prices than expected and obtain no advantage.

   Market signals you can profit from are no more likely than pots of gold at the end of rainbows. You're wasting your time looking for them. Just buy and hold.

3. Market letter writers purport to spot market signals, but they have a hard time finding them. The Hulbert Financial Digest studied the market-timing systems of 72 newsletters for the ten years ending June 30, 2001.

   Only 5 of the newsletters beat the broadest index of the U.S. stock market, the Wilshire 5000 Index. That was 5, mind you, out of 72 - only 7 percent.

   The primary purpose of the business media and market letters is to attract listeners and readers, not to make money for you. They usually focus on the short term. If you pay close attention, you'll trade too often. Frequent trading is a marvelous way to suffer frequent losses.

Too many investors try to follow the investment style that worked best during the recent past.

In the late-1990s, mutual fund manager James D. McCall was one of the nation's top stock pickers, specializing in big, technology growth stocks. Merrill Lynch paid a great deal of money to acquire his services. The company created a new fund, called Merrill Lynch Focus Twenty, and raised over $1.5 billion for McCall to invest.

Whoops, the fund's price per share fell from over $10 a share to $1.48 at the low.

There's a lesson there: Stay away from the latest investment rage.

The stock market is more responsive to government policies on international trade than most people think.

On March 5, 2002, when the Dow Jones Average was about 10,500, President Bush announced his decision to raise steel tariffs by 30 percent. This made it harder for foreign nations to sell steel in the U.S.

Two months later, the Dow was 500 points lower.

On May 13, the Farm Bill was signed, supplying absurdly high subsidies to wealthy farmers. It increases the supply of U.S. farm products and makes it harder for foreign nations to sell agricultural products in the U.S.

About two months later, the Dow was 2700 points lower.

On Saturday, July 27, the U.S. House passed the Trade Promotion Authority, increasing the likelihood that U.S. tariffs will generally be lowered. This will make it easier for foreign nations to sell products in the U.S.

The next day, the Dow rose by 447 points.

I doubt that these market reactions are coincidental. If the U.S. repealed all its tariffs and agricultural subsidies, the Dow would probably rise thousands of points.

Don't we all wish.