Mathew Emmert: Fool of Crap
At Motley Fool, bad information and skewed research are the topic of the day.
Good ol’ Mathew Emmert over at Motley fool posted an article this week, which you can read here, that states that “dividend stocks beat the market.” Whoopdie freakin’ doo. We’ve all heard this before, even some people here at Investor Geeks believe in the dividend stocks, which is fine, however, let me explain why this article is full of crap.
He quotes Jeremy Seigel’s book, “The Future of Investors” to make his claim, which states that “Siegel found that an investment in the 100 highest-yielding S&P 500 stocks would have beaten the index by more than 3 percentage points per year, returning more than 14% annually from 1957 to 2003.” Ok, what’s wrong with this picture?
Before I start ripping this, I’ll just state here in it’s own tidy paragraph that there is nothing wrong with dividend stocks and, depending on the company, they could be good investments. Now that the dividend loving crowd is happy, let’s start ripping this article to shreds, shall we?
First of all, using this theory, you need to be invested in 100 different stocks to pull this return (I’m not sure if you have to be equally invested in each or if it was weighted). You also need to reinvest every penny of dividends into all 100 stocks to get this return. More importantly, Peter Lynch was pulling in returns in the 20-24% range in his mutual fund and I have pulled in over 20% a year for the last 5 years running! So, I guess I beat the 100 best dividend stocks by at least 6% a year. I must be a freakin’ genius since, as Mathew said, “Dividend Stocks Beat the Market.” Maybe he should write an article next week titled, “Steve beats Dividend Stocks and the Market.”
Well, of course they beat the market! The market is massively over-diversified. It’s taking massive losses in some stocks that kill the massive gains of others. The market isn’t a good indicator at all in my opinion. It’s nice as a target to be beaten, but the huge diversification ensures a poor return.
This research also assumes that you aren’t trading at all, but rather just sitting in the market, year over year, essentially owning an index fund of the market. If that’s your investment strategy, you need to read more or fire your investment advisor. That’s a horrible strategy.
Needless to say, I should hope the 100 best paying dividend stocks could beat the un-traded market. it would be pretty pathetic if it didn’t. All of this wonderful research never takes into account that if you TRADE and take profits all year long and reinvest those profits you take, you can easily pass 14% returns. That’s a little over 1% a month. Heck, right now I see on Scottrade that you can get a 5% CD for 6 months and pull in 5% from the stock market in 6 months to make yourself 10% a year nearly risk free without spreading your money across 100 stocks, which is a horrible strategy any way you slice it.
Think about it, the article is saying that gaining 1.17% a month is an incredible return! That’s a whopping 23 cent gain on a $20 stock a month. If you can’t find that, you aren’t trying.
The entire basis of the article is what almost all articles and research do when it comes to the market. They take apples and oranges and compare them and do it all using hind sight. I could come up with 100 stocks that kill dividend stocks year over year if I sat down and did it. It’s easy looking backwards. Don’t let articles like this fool you. While it’s interesting, it’s also very unrealistic.
When reading articles, even mine, think about what is being said and think about what it means. Do the math in your head and figure out if it’s realistic. Figure out if someone is looking back at history and using their knowledge of what happened to rewrite history to prove their point. Make up your own mind without someone shoving their view down your throat with these little tricks that they use in their books and articles. Grab a calculator and do the math! A 12% gain is simply 1% a month (it’s even less than 1% if you reinvest your profits, it’s a 0.87% gain per month.) Take bits and pieces of lots of peoples strategies and make your own, but never take an article like the one on Motley Fool this week as fact because it’s usually just a bunch of crap wrapped in a nice package.
Invest in peace…
When he's not trading stocks, Steve is complaining about other things, playing guitar or hockey or working on websites and video games at his QA corporation, "The Testing Guys." He also has an on again, off again blog at www.undertrader.com where he really lets loose and doesn't hold back on the ridiculousness of Wall Street.
11 Comments Add your ownSubscribe
1. J Dawg | October 9th, 2006 at 9:37 am
There you go. Finally a article that says something on this page!
2. Steve | October 9th, 2006 at 10:24 am
I noticed a math boo-boo in my article, the 6 month CD pays 5%, but you’d only get 2 1/2% because it’s a yearly interest rate, but still you’d only need to be at risk 6 months of the year in the market and pull in the average 11% return to put you at 13 1/2%, one half percent behind the dividend funds with your money at risk half the time. Still showing that the 14% gain bragged about isn’t all it’s cracked up to be. It’s great for someone who doesn’t actively trade, but it’s horrible for someone who pays even the slightest attention to the market.
- Invest in peace…
3. James Atkins | October 9th, 2006 at 4:13 pm
I agree completely with your article. There is a lot of misinformation out there and to the naked eye it sounds great. When the average investor looks at it they get excited and then upset at their current investments, if they are not doing as well as the articles tells them they could be doing. THe average investor one does not have the means to invest in as many stocks as suggested, two does not have the discipline to sit still for a year or longer. Too many people invest with emotion. Websites like that are good for getting information, but not investment theory. That has to be honed by the individual themselves. Whats good for the goose may not be good for the gander.
4. Vince | October 9th, 2006 at 9:35 pm
I’ll absolutely agree with hindsight being 20 / 20 and that studies are there are nothing more than that… people do put too much stock into “hypothetical models” based on past data.
Kudos for coming with this angle.
5. Beardstown | October 10th, 2006 at 12:39 am
Steve, how about a correction to your correction? If you are earning 2 1/2% on that CD over the course of six months, you are only averaging a 5 1/2% return on the other six months that you are in the market (with that annualized 11% return). So come clean and admit you messed up. It’s 8%.
8% over 14%? I know what I would take. The Beardstown Ladies are calling. They want to know if you can keep their books as they look into your claim of 20% annual returns over the past five years.
Just ribbing you on that last point but do take better care of your number crunching when you’re dissing professor Jeremy Siegel. The guy’s a legend.
6. Steve | October 10th, 2006 at 7:37 am
While I do agree with your point Beardstown, my wording was poor, but if you had read my other articles, my goal is 2% a month gain, so to get 11% in 6 months to me is pretty easy. I’ll be more careful next time to be more specific about those things in the future.
Either way, an active trader should be killing a non-active trader in the market, but I’ll get into that more in future articles. Thanks for the comments.
-Steve
7. mark | October 10th, 2006 at 5:45 pm
Steve - Where do you post your net worth and your gains and losses? Surely someone that consistenly beats the market would put their numbers up where we can see them.
I didn’t see the numbers on your regular blog - linked above - but I did see your post about Wendy’s. In it, you claimed that Buy & Hold was dumb because Wendy’s stock dropped from $65 to $32.
If someone had a stop-loss in place, you argued, you could have gottten out at $60 with a small loss, and avoided most of the carnage.
Did you notice that the stock closed at 66 on Oct. 1 and opened at 32.25 the next morning?
A stop loss order would not have sold in the middle of the night to a non-existant buyer at 60. It would have sold the next morning at opening - at 32.25.
So, yeah, I’m really interested in your net worth, and how you’ll do going forward.
8. Vince | October 12th, 2006 at 5:40 pm
I looked back at the article where the first sentence said “… bad information and skewed research are the topic of the day.”
So far, I’ve seen “miscalculations”, “corrections” being much of the topic in the comments. =)
I was hoping to hear an answer to Mark’s concern and questions in comment #7. Especially about stop losses being the magical cure-all for avoiding losses. Thanks for the Wendy’s example Mark! Any answers forthcoming, Steve?
9. Steve | October 12th, 2006 at 6:26 pm
Wendy’s may have been a bad example, however there are a gazillion examples of where a stop-loss would have saved you tons of money. XM Satellite at $30, AOL at $120, Sirius at $7 after the Howard Stern announcement. All examples of stop losses working.
A stop-loss doesn’t always work, especially on a huge drop, however you wouldn’t necessarily get $32.25 at the open, as stated in the above example, because the displayed stock price isn’t the actual trade price, the Bid and the Ask are and it would depend what open orders were available when your order came in.
I’m sorry, but I don’t post my net worth on the Net. I wouldn’t expect anyone to, but I will start posting my trades if it makes you happy. I got into Wendy’s today at $34.25 and I sold off Opsware yesterday for $8.74 and I had purchased it a few weeks ago at $6.94.
Happy everyone? Thanks for the support Vince.
- Invest in peace….
10. Steve | October 13th, 2006 at 11:48 am
Just thought I’d point out I’m up 2.6% on Wendy’s in less than one day, so yes, it’s easy to find stocks that go up 2% quickly.
- Invest in peace…
11. Felix Krull | December 27th, 2006 at 12:33 pm
20% over the past 5 years running, huh?!!!! Care to qualify that statement a bit, Steve? If that were indeed true you would be one of those “suits”, whom you disparage, running money on Wall Street. That kind of return would place you in the top 10% of hedge fund managers across the globe. So please forgive me if I am, ahem, somewhat skeptical of your stellar results. Of course, on the internet every one is the next Benjamin Graham. Oh, incidentally, I am eagerly awaiting to see how well you do in the next bear market. I doubt it will be so “easy” to find stocks that go up 2% “quickly.”
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