Friday, August 26, 2011

Silliness of Professional Advice and Tools

Here is a great reason to do your own research. Now, by doing your own research, I don't mean that you can never take the advice of someone knowledgeble. What I mean is that when you choose to take someone's advice, you need to know how they came to their conclusion. You need to be able to verify their work. Someone who truly knows what they're doing will have well thought out, and correct reasoning. If they got lucky and gave you a good conclusion (like, buy Apple) but their reasoning was wrong, it's likely that other tips that they give you won't be so lucky. If you cannot verify someone's reasoning, you're better off taking advice from
 the monkey throwing darts.

This doesn't just go for a person's advice, but any tools as well. Have a look at the below. I was recently forced to switch to Charles Schwab brokerage in order to stay within compliance. Just out of curiosity, I decided to look at one of their stock rating tools because Apple was on my watchlist and it offered unsolicated advice. Apple was given a C rating, making rank at the 56th percentile of stocks. This absurdly suggests that out of all the stocks in the S&P 500 index, there are about 220 stocks more attractive than Apple.

We then see a nice little breakdown assigning D ratings to both Fundamentals and Valuation, which are clearly wrong. Apple have wonderful fundamentals. I have no idea what valuation and momentum measures in this case. Perhaps D is the quality of Schwab's  valuation of Apple.

People and programs make mistakes all the time. But when you make a mistake that is indisputable, you completely lose all credibility. I recommend that you use Schwab's rating tool for nothing more than comic relief.
Be careful when taking advice from a professional, or someone "in the know" as well. Professional is a funny word. I think of the professional gas attendant who doesn't turn the cap until it clicks 3 times. How about the professional toilet cleaner that leaves the toilet filthy? How about that professional food service personnel that screws up your orders and gets  your food late? These "professionals" are clearly not "in the know". And there are too many of them. Professional means that they get paid for what they do. It does not mean that they are good at what they do. Be sure that you can verify their work. I always check that my gas cap has been clicked 3 times. Otherwise, you as might as well plop your butt down on the poop rimmed toilet seat. If you able to admit to yourself that you are incapable of telling apart a good stock from a bad one, go with the monkey throwing darts and throw your money into a broad index fund.

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