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How Much Should You Trust Trading Magazines' Tips?
D. A. - L. A. Daily News

You see them at nearly every newsstand: personal finance magazines touting the best investments or the hottest stocks. With all the subtlety of a 30-minute infomercial, they scream to readers the promise of investment success.

"Best Mid-Year Investments" SmartMoney declared in July 1997.

"Six Stocks Pegged to Earn 47%" within the next year, Money magazine promised in June 1997.

How good are these recommendations? Not very, based on a Daily News review.

The newspaper tracked the year-long performance of 141 stocks recommended in 21 articles in issues of four popular personal finance publications. Seventy-three stocks out of the 141 - or 52 percent - lost money.

Forget earning 47 percent or even modest returns; more than half of the stocks recommended in some articles by some of the nation's most popular personal finance magazines cost their readers' money. The lesson to be learned is that readers ought to beware - even when the advice comes from some of the best-known magazines.

The articles ran in the April 1997 to January 1998 editions and were selected randomly to gauge the year-long performance of stocks through last year's bull market and this summer's bear. But he said that if professional investors "have slightly more winners than losers, they are stars."

Magazines' record is surprising, considering that most of the stock picks were made in a market which by every measure was hugely profitable. The findings are a cause for concern because millions of investors - through individual retirement accounts, 401(k) plans and personal accounts - have funneled billions into stock market in recent years, relying on magazines like Money, SmartMoney, Kiplinger's and Worth for advice.

If those magazines' readers had bought into index funds that tracked the Standard & Poor's 500 Index on the first day of that month's issue instead of buying the magazines' picks, the investors would have made as much as 45.88 percent (before fund fees and without reinvesting dividends). If they had bought at the worst possible day during that time, they still would have made 3.24 percent.

Comparing the stock recommendations against five indexes (S&P 500, S&P Midcap 400, Russell 2000, MicroCap 50 and Wilshire 5000 indexes) that better reflect the market segments of these securities, the magazines did even worse. Eighty-two out of 141 stocks, or 58 percent, did not beat the market.

For Money magazine, 23 out of 39 stock picks - or 59 percent did not beat their market segment. Seventy-four percent (20 out of 27 stocks) of SmartMoney's picks did not beat the indexes. Eleven of 20 stocks (55 percent) touted by Kiplinger's lost to the indexes. As for Worth, 28 out of 55 stocks, or 51 percent, did not beat the market.

If you took the average return per article, excluding dividends, and compared the result with a comparable index, 56 percent of Money magazine's articles did not beat the market. SmartMoney had 75 percent miss, half of Worth's articles did not beat the indexes and none of Kiplinger's articles beat the market.

To be sure, it's not easy to beat the market. Most mutual fund managers don't do better than the S&P500. Some of the stock picks in the articles performed well over 12 months but still didn't outpace the market.

Kiplinger's April 1997 issue recommended buying Chase Manhattan, which rose 42 percent in a year. But that didn't beat the S&P 500's 45.88 percent gain over the same period.

The results aren't much better even if the yardstick is simple profitability - whether a stock increased after a year (or, in the case of the January 1998 special issue, nine months).

Using this yardstick, 19 of the 39 individual stocks recommended by Money from June to August 1997, or 46 percent, lost money.

Comparing the performance of all recommendations by articles, three of nine Money stories showed negative returns - 33% miss.

However, Money made a good call in an August 1997 article, "Don't Just Sit There . . . Sell Stock Now." Investors who acted on it would have avoided the October 1997 correction and the current bear market - providing they put the money in cash, money market accounts or bonds.

If someone followed the magazine's advice and bought stocks recommended in other articles in the same issue, the results would've been mixed.

For instance, $1,000 invested in each of the five stocks recommended in "Defend your Portfolio with stocks that promise income and growth," would have made $1,345, or 28 percent, in a year.

But if someone bought $1,000 worth of each stock recommended as hedges against inflation that also was in the same issue, he would have lost $1,247 a year later, or 26 percent. Indeed, four out of the five picks were losers.

As for SmartMoney, 16 Out of 27 stocks recommended in the May, July and October 1997 issues, or 59 percent, lost money. If each of the four articles examined was tallied separately, half-had declines.

In Kiplinger's April and August 1997 issues, our out of 20 stocks lost money - 20% miss. One out of four articles (25%) lost money. As for Worth's June and September 1997 and January 1998 issues, 35 out of 55 stocks lost (64%) and three out of four articles (75%) showed losses.

Jersey Gilbert, financial editor for SmartMoney in New York, contends that one year is not enough time to decide a stock 's success. If an investor waits at least 5-years, "75 to 80%" of SmartMoney's stock picks will make money, he said.

Kiplinger's "preaches long-term investing" of at least three to five years, said Manny Schiffres, senior associate editor in Washington. Many stories from these magazines remind readers that their recommendations are for the long-term.

Publications' Staffs Short on Credentials

Just what are readers buying? Finance magazines offer readers stock recommendations of Wall Street pundits, star mutual fund managers, plus investment picks from the magazine's editors and reporters. Then there are company profiles and interviews with executives, among others.

Experts of Wall Street featured in these publications have to possess a stellar investment record before any national magazine gives them ink. But that's not the case with the magazines' own journalists, who often step into the role of investment guru.

Editors at Money, SmartMoney and Kiplinger's said they and their staff carry years of financial reporting experience that equip them to make good recommendations. (Worth did not comment.) For an expert opinion, they also might bounce ideas off proven fund managers.

But most don't have either a formal education in finance, such as an MBA or college business degree, or credentials such as a certified financial planner designation.

"It's hard to say what qualifies a person to analyze stocks," said Jersey Gilbert, financial editor for SmartMoney magazine in New York. He argues a business degree does not guarantee great stock picking. Instead, SmartMoney recruits reporters with analytical skills and trains them, he said.

Manny Schiffres, senior associate editor at Kiplinger's magazine in Washington, said he's been writing about personal finance since the mid-1980s and feels "very comfortable with my abilities in this area" especially "in a world filled with 28-year-old fund managers." He also consults with mutual fund managers he holds in high regard, those with proven track records.

In contrast, Consumer Reports financial editor Lou Richman has an MBA and so does three of his four financial writers. The magazine is more a consumer advocacy publication than a traditional business news publication.

Still, Richman says that while it helps to have an MBA, journalists don't have to possess a business degree to do their jobs well.

Indeed, there are personal finance journalists who have been covering the industry for so long that they've learned a lot, said Barbara Levin, executive director of Forum for Investor Advice, a nonprofit group in Bethesda, Md.

However, "there's no guarantee these people know what they're talking about. They don't have to have a history of success," said Barbara Roper, director of investor protection at the Consumer Federation of America in Washington.

Jane Bryant Quinn of Newsweek, one of the most famous personal finance columnists in America, frowns on journalists becoming stock pickers.

"Some reporters today are . . . turning themselves into financial advisers by picking, or promoting, mutual funds and stocks in print - trading on their credibility as a disinterested source," she wrote in the March/April 1998 issue of the Columbia Journalism Review.

We justify it by saying, "Better us than a stock salesperson. Besides, look how our stocks or funds have soared," she wrote. "What kind of geniuses will we be when stocks go down?"

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