Clueless

(from Dan Solin's Huffington Post blog, 2/8/2011 - click here for the original post)

I'm sure Pat Dorsey is highly intelligent and very competent. He is the director of equity research for Morningstar, which is a big job that gives him access to vast resources about the stock and bond markets. As he noted in an article published January 17, 2010 in Money Magazine's Investor's Guide 2010 entitled "10 stocks that can keep running," the analysts he works with at Morningstar cover 2000 stocks. Wow.

With such an impressive background and extensive resources, I am sure many investors paid close attention to Mr. Dorsey's 2010 predictions about stock market trends.

His primary observation was that we were in the "first phase of a bull market" where "smaller and junkier stocks tend to lead the way." However, he confidently predicted that "...speculative frenzy eventually gives way to the fundamentals, and that should bring your focus back to high-quality blue-chip stocks this year."

He was very negative on "lower-quality small stocks" noting they could "get killed if reality falls short of high expectations."

Many investors no doubt dumped their small stocks and focused on blue chips. After all, Mr.
Dorsey is the director of equity research at Morningstar. Presumably he can accurately predict whether large or small stocks will outperform in a given year.

Not exactly.

In a thoughtful analysis not available to the investing public, Weston J. Wellington, vice president of Dimensional Fund Advisors noted that US small stocks had their best year since 2003. The S&P Small Cap 600 index was up 26.31%, compared to an increase of 15.06% in the S&P 500.

It gets worse.

Wellington did an analysis of the ten blue chip stocks recommended by Mr. Dorsey and found they had an average return of 6.3% , significantly under-performing the S&P 500 index.

Let' see if I got this right.

Mr. Dorsey was dead wrong in his prediction that blue-chips would outperform small stocks in 2010. His selection of blue-chips did not come close to the returns that were yours for the taking by investing in the comparable index.

Yet investors continue to rely on the financial media which features pundits of all stripes, confidently predicting the direction of the markets and advising you to buy this or that stock.

It's all errant nonsense, akin to voodoo, designed to separate you from your money and to continue the transfer of wealth from you to those who "manage" your money.

Mr. Dorsey, and his colleagues who pretend to be able to predict random, future events, may be clueless.

You don't have to be.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.