Why You Should Ignore Stock Market Predictions

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The Motley Fool used to be a great resource for investing, espousing index funds and low-cost investing, but it is gradually becoming just a factory that churns out stock tip newsletters. Last January, they made some Stock Predictions for 2006.

Read the predictions first, or at least skim the excerpts below. Which do you agree with?

#1: Shares of Google will fall in 2006

Wall Street didn’t want to buy into Google when it went public at $85, but now that the stock trades five times higher that that, bears are hard to come by. The humbled market mavens have responded with higher price targets, but gravity always seems to be just a disappointing quarter away.

#2: Both XM and Sirius will close out 2006 higher

Just as your cable bills creep higher every year, XM and Sirius will likely be charging more in the future. Tack on premium offerings and next-generation receivers that will blow the earnings potential through the roof — by allowing for everything from digital downloads to immediate responses to sponsored pitches — and I really believe that in five to 10 years, a lot of the bears will be licking their self-inflicted wounds for missing this obvious play into a promising duopoly.

#3: TiVo will bounce back

I’m expecting TiVo shares to bounce back dramatically, possibly even into the double digits. I still believe that TiVo — rich in brand, patents, and daydreams — will find a way to matter in a form that investors will find attractive. Cool companies never die without a fight.

#4: Six Flags will be one of the top stocks of 2006

With shares of Six Flags trading in the double digits for the first time in nearly four years, the market seems to be willing to give Dan Snyder and ESPN prodigy Mark Shapiro better than a fighting chance to turn the regional amusement-park operator around.

The stock may have tripled since bottoming out last year, but that doesn’t mean the value of the company has tripled. This is an important distinction to make. Because the company’s balance sheet is packing $2.1 billion in debt, the enterprise value of Six Flags has actually risen by just a little better than 50% to $3.5 billion. That’s the beauty of leverage in a turnaround situation: The stock can double here in 2006, growing sixfold in two years, yet the company’s enterprise value will have only doubled in that time.

Now, if you tracked these stocks this year you may already know which were right…

Fool Predictions Results:*

#1: Shares of Google will fall in 2006Wrong
Shares of Google (GOOG) actually rose 7.4% from $435.23 to $457.59.

#2: Both XM and Sirius will close out 2006 higherWrong x 2
Shares of XM Radio (XMSR) actually fell 46% from $28.15 to $15.21, while Sirius (SIRI) also fell 43% from $6.52 to $3.74. Ouch! Losing half your money has got to sting.

#3: TiVo will bounce backWrong
Shares of TiVo (TIVO) dipped 2% from $5.18 to $5.08. I just hope their software somehow ends up in all those DVR boxes. I love my TiVo, but I wouldn’t buy stock in it.

#4: Six Flags will be one of the top stocks of 2006Wrong
Six Flags changed their ticker from PKS to SIX, but that didn’t seem to help. Their share price still dropped 33% from $8.09 to $5.38. Considering the overall return of the US stock market was a ~16% gain, I don’t think that qualifies SIX as a top stock.

The important thing here is not just that they were wrong on all four points, they could have just as easily been right every time. What you should realize is that if you read the article a year ago, the reasoning behind the predictions would have sounded very logical and convincing.

Convincing… and 100% wrong. A good story means nothing! They each still have a 50% chance of being right or wrong. Sure, some will be right. Some have to be right. That doesn’t prove skill at all. As you start reading everyone’s predictions for 2007, I hope you’ll keep this in mind.

(For another view on this, see my post on the Anatomy of a Personal Finance Magazine Article. You may never look at one the same way ;))

* Prices are from 1/3/06 and 1/3/07 via Yahoo Finance.

For my overall thoughts on investing for beginners, please see my Rough Guide to Investing.

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  1. Wow, all wrong. I wish I had bought some GOOG when it debuted.

  2. I agree with your assessment. I have completely lost respect for TMF; for the last year, I have been sending their emails straight to the “Trash” folder without even reading them.

  3. One opinion from those fools does not mean that no one should listen to predictions, to follow them is a totally different matter. Having said that, Smartmoney’s annual stocks picks are doing great.

  4. I couldn’t agree with you more. When I first started investing, I used their website more than any other resource out there. It taught me a lot about low cost index funds and the IRA options that I had. Now, they are complete hypocrites by advocating ownership of individual stocks. Here’s a quote from their website:

    (Psst. There’s a reason that all these magazines don’t tell you how simple mutual fund investing really is. Scientific marketing surveys and focus group testing have determined that magazines with covers that read “Index Funds: Still The Best Choice!!!” every single month really wouldn’t sell as well as magazines that promise “Our BRAND NEW 10 Best Mutual Funds To Buy RIGHT NOW!” Sad, but true.)

    I guess they have fallen into the same trap that they warned us about. Funny, huh?

  5. As further illustration of how fickle the market is: XMSR, SIRI, TIVO, and SIX have all had a great first two weeks of 2007.

  6. Al,
    it’s hard for a portfolio to be bad considering the bull market that we are in.

    I agree with the TMF evaluation. They used to be a good learning resource. Now it’s just tips.


  7. Agree, Motley Fool has totally sold out. I don’t even visit their site anymore, their info is worthless.

  8. InspectorFox says

    Jim Cramer’s pick are mostly reliable. Motley Fools have always disappointed me with and all their mails now go straight to my Junk folder

  9. CreditShack says

    Motley Fool is such a sad story. Their site used to be one of the best out there. Their articles used to be helpful. Now EVERY article is a blatant advertisement for their stock picking service.

    If their predictions are consistently 100% wrong, why not short them? 🙂

  10. I found this web site which analyzes the “gurus”. TMF is not on here but all of the other talking heads are.

  11. Thanks for this great evaluation. I’ve been wondering how good TMF is, and you just made it easy!


  12. RE: Jim Cramer

    He’s very entertaining, but I wouldn’t invest according to his picks either. You have seen the website that puts his picks up against a monkey throwing darts, right?


  13. An important point to make. A lot of people spend a great deal of time trading stocks based on market predictions. If making market predictions were easy or useful, then there would a lot more millionaires.

    I think its best to ignore prognostication, and instead buy ownership shares in good quality companies.



  14. You’re right on target with TMF. I stopped visiting their site months ago for many of the reasons stated above. I think we all agree that the Motley has become the Motley Droll.

    As for their picks, I think #4 has the potential to become truth in 2007.

    They have sold off some parks to help pay off their outstanding debt, and their reputation as a junky amusement park is starting to wear off.

    I think SIX can be a $15 stock by the end of 2007. I’m not saying “go out and buy it” like they are. I just think it’s worth looking into as a possible speculative stock.

  15. Well this is amusing, I took a look at SIX on Yahoo Financial, and there was a recent motley fool article that mentions it. Lets see what they say about it:

    “It’s why one great investor after another buys cash-rich companies and avoids those with mountains of debt. With $2 billion in debt, Six Flags (NYSE: SIX) lacks the resources to truly reward its investors. The stock has lost nearly two-thirds of its value since 1997 — Ouch!”


    Thats quite a change of tune on SIX they had in a year!

  16. I, too, used to have some respect for MF, but I’ve noticed that all they do now is pitch overhyped stocks that have already had their run.

    The kicker for me was the MF caps rating system. It seemed like a great idea until I realized that they don’t count dividends as part of a stock’s return when ranking how well their members have done against the market. Gee, guys, I guess dividends just don’t count for anything anymore. Pfffff!!!! Just another couple of hustlers.

  17. It’s been a while since I’ve had a chance to read your blog. I’m impressed with how much you’ve grown as an investor and personal finance thinker. Great job!

    Seems like you’re solidly on the Bernstein path in regards to investing. Love the criticism of the financial press.

    Regards, makingourway

  18. Awesome. I LOVE these types of articles. And I love the comments too. I read all of Fool’s “intro to…” articles about two years ago. They all said “you can’t predict the market… buy index, buy index!.” Then, as soon as I finish reading that, I get BOMBARDED with “BUY OUR NEWSLETTER FOR THE BEST STOCK TIPS!!” Honestly, I was really disappointed. With that said though, I STILL think their “intro to…” type articles are good. Anyone else?

  19. I have some qualms with this assessment. Note that I don’t argue with any of the facts, just with their meaning as well as the expectations about information you get from TMF (or any other person/group/service/whatever).

    1) In the TMF article, the guy admits right at the top that he has a meager 2-out-of-5 record (with the possibility of 3-out-of-5) from the previous year. If you chose to buy stocks based on that record, you’re a dumbass.

    2) TMF consistently says: Evaluate things on your own. They provide newsletters and informational articles as _places to start looking_, not as “take our word for it and don’t question anything yourself.” If you simply take someone’s word for it, whether it’s TMF’s word or somebody else’s, you’re a dumbass.

    3) GOOG _was_ down most of 2006. It shot up at the end of Oct. and finished up 7% in the year. But now, it is back down to below it’s 2006 high. In fact, the close price on Jan. 18, 2006 (the TMF article date), was $444.91 — yesterday’s close price was $440.95 (though, the close price on Jan. 18, 2007, was $487.83 – a 9.6% increase). Goes to show that timing is everything, and that Google’s price over the last year is flat at best.

    4) XMSR and SIRI, TIVO, and SIX — Yes, the TMF guy was way off on these. But then, remember his record wasn’t good to start with. If you were buying these stocks only on his recommendation, then you deserved to get burned. Use recommendations like these as a starting point, but do your own research. That’s one of the first things TMF teaches.

    Don’t get me wrong, I find the constant badgering with ads annoying, and I’ve definitely decreased my intake of TMF learning. But I’ve never read from TMF that you should take their word verbatim. In fact, I’ve seen them explicitly state, many times, that you should do your own research and don’t rely on anyone else’s predictions, including theirs. (Even their newsletters, of which I’ve tried about 5, say that you should do your own research — they are just there to help.)

  20. Linda Brogley says

    Does anyone out there have any RECENT comments, suggestions or experiences about Motley Fool. All of the info here is old. 2007. I will try to subscribe to the new articles as noted below.

  21. Charles Serrell says

    Motley Fool should post a “CAUTION” on its website for bad advise on what stocks to buy and when to buy, much less sell. Facts are Facts, i.e my experience says it all using their Million Dollar Portfolio: CGA -28.9%; INFN -22.2%; TLK -11.8%; YONG -22.7%; WMT -4.0% Need I say more how dissapointed I am taking their sold call EXPERT Advise!

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