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Chapter 13. Follow the Experts

Chapter 13. Follow the Experts

In Search of a Guru

Stanley had been searching for enlightenment all his life. He tried new religions and new diets with equal enthusiasm, convinced that all he had to do to was follow the right advice to become happy. When he started investing, he watched CNBC and read books by financial experts on how to get rich. He was sure that only they had the key to success in investing and that all he had to do was imitate them. When the portfolio manager of one of America's largest mutual funds listed his top ten stocks to buy in Barron's, Stanley followed along and bought every single one. After all, this portfolio manager had access not only to the best minds and the best data on Wall Street but also to the managers of these companies. In the months that followed, Stanley was deeply disappointed. While a couple of stocks on the list did reasonably well, his portfolio badly underperformed the market. Trying to figure out what had gone wrong, Stanley looked for any news he could find about the portfolio manager whose advice he had followed and found a news item that he had been fired because the mutual fund he had run for a decade had done so badly. Stanley sold all his stocks and bought a book on surviving financial crises by an expert on bankruptcy.

Moral: Smart people don't always pick good stocks.


There are investors who seem to know more than others and claim to do much better on their investments than the rest of the market. If you could follow these “expert” investors and copy their investment decisions, you may be able to piggyback on their successes. It is this belief that leads investors to read investment newsletters and to watch television shows on the stock market. It is also this belief that allows investment experts—equity research analysts, investment advisors and portfolio managers—to have as much influence as they do in financial markets. In this chapter, you will examine whether these experts do better on their investments than the rest of the market and whether following the advice they provide pays off in higher returns.


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