Stock Advice So Bad It Will Make You Cringehttp://www.fool.com/investing/general/2011/02/17/stock-advice-so-bad-it-will-make-you-cringe.aspx Brian Richards
February 17, 2011
"Make money when the market is dropping or not moving at all."
It's an appealing pitch -- particularly when it was made on the heels of a massive recession and a plunge of more than 50% in the value of the S&P 500 -- the promise to learn how to prosper during unpredictable times.
We weren't the only ones eager for guidance. The invitation to the "Rich Dad Stock Success" workshop drew more than 100 eager people to a conference room at the Hilton hotel less than four miles from The Motley Fool offices. It was a cold, damp night in January 2010. It was the second workshop held that day.
For 90 minutes, attendees (including myself and my colleague Dayana Yochim) sat in rapt attention. We scribbled madly in our notebooks, taking in every detail of what we were being told. I took seven pages of notes -- filled with investing advice that every investor needs to hear.
The path to financial freedom is here -- we agree
Then he began with some refreshingly prudent advice. The audience was told, rightly so, that:
This message of knowledge-as-empowerment had us enthusiastically, if not physically, nodding our heads. Education, information, compounding, thinking in terms of assets and liabilities -- these were all basic beliefs upon which The Motley Fool was founded.
He had us at "get educated." Then he lost us with every subsequent click of the PowerPoint slideshow.
The man behind the curtain
On managing a 401(k): You should manage it based on what's going up or down. If six funds in your 401(k) are going up and four are going down, you should own the six going up.
On how to identify a good stock, part 1: Don't even worry about it. There's a shortcut answer to the "Is this a good stock?" question -- doesn't take longer than three seconds. See part 2.
On how to identify a good stock, part 2: Buy a software package called EduTrader. Type in a ticker symbol. A green (good), yellow (neutral), or red (bad) thumb will appear next to the ticker. The thumb tells you whether a company is good, neutral, or bad from a fundamentals perspective.
On when to buy: This, too, is simple. You want a stock "going in the right direction," which means you'll need the moving average convergence divergence test, also known as the MACD.
On the MACD: Buy when lines cross on the way up, sell when the lines cross on the way down. "Just go into the software and see where the lines cross."
Just to be clear, the cringe-worthy element of this experience was not being up-sold to a product or service. We do not begrudge anyone for charging for their research, teachings, or education. (The Motley Fool charges for its suite of premium services, after all.) This was a free seminar, and I knew going in there'd be an offer to purchase other things -- not unlike how the Fool offers 30-day free trials to our subscription products.
What was appalling was how actions and words so massively diverged. The earlier evangelizing about education was twisted into an unrecognizable form. This wasn't about education -- unless you count "learning how to read a green arrow and a line crossing another line on a chart" for knowing when to buy a stock.
The truth in the fine print
Still, I know a disaster when I see one. If you know someone considering one of these workshops, warn them that they won't learn much. Here's a direct quote I scribbled down: "I couldn't care less about why a stock goes up -- as long as it is." So much for education.
It wasn't just education that was glossed over. To give us an example of how this "make money no matter which way the market is going" strategy works, our emcee showed us the MACD strategy for DuPont in 2009. Over the course of a few months, the software would have generated buys or sells on DuPont -- cue Ed Rooney's voice here -- nine times. According to our emcee, DuPont lost 5% during the time frame used in our example, yet this MACD-fueled strategy would have returned 16%. But with one caveat: In order to use the software correctly, you need to be looking at it daily.
Oh, and another catch: That 16% doesn't include taxes or trading costs. In fact, not once did I hear trading costs, taxes, or any other frictional costs mentioned during the 90 mi