Financial Pundits Are Less Accurate Than Meteorologists
Stock screener /ˈstŏk screen-erˈ/ noun: a search tool that helps investors find stocks that meet certain criteria based on the use of filters.
When we hear the quotation, “The loudest voice in the room seldom belongs to the most intelligent mind,” we think of a montage of financial media pundits.
Because when it comes to investment “pros,” it’s not just that they’re loud.
Or insufferable.
Or pontifical.
They’re often wrong. How often? Enough for the New Yorker to run an article in June titled, “Jim Cramer and the Art of Being Wrong.”
Just because someone’s on TV doesn’t mean you should unduly put your trust in them. Cramer, a former hedge fund manager and host of CNBC’s Mad Money, is infamous for his swings and misses:
- On March 10, he called First Republic a “very good bank.” From that date to when the bank announced its insolvency on April 26, shares plummeted 95%.
- In November 2012, he called Best Buy a sell. Six months later, shares were up 125%.
- And in 2010, when Tesla’s post-IPO shares were trading for $1.28, Cramer said the company wouldn’t succeed long term. Shares are up +17,000% since.
Cramer’s wrong so often, there’s an inverse fund designed to profit from doing the opposite of what he says.
And saying financial gurus are about as accurate as meteorologists is unfair to the latter. The accuracy of a 10-day weather forecast is 50%. But according to a 2020 report, 90% of actively managed investment funds fail to beat the market.
Hard Science vs. Social Science
The point here is that you can — and should — research your own investments. Expert guidance is helpful, but it comes with the caveat that you should “conduct your own due diligence.” That’s why it’s easier to just take their word for it. After all, they’re “experts.”
But the problem with financial punditry is that, unlike microbiologists, astrophysicists or neurosurgeons who’ve committed their entire academic and professional lives to developing expertise in a scientific field … neither finance nor economics are hard sciences.
They’re social sciences lacking testable hypotheses or general consensus, whereas hard science is indisputable:
- Two atoms of hydrogen and one atom of oxygen beget water.
- Radiocarbon dating proves Earth isn’t 6,000 years old.
- And anthropogenic CO2 emissions have resulted in atmospheric concentrations principally responsible for accelerating climate change.
Hard sciences don’t care if you deny these truths. The facts remain. H2O will always be water, Earth’s 4.5 billion years old and there’s 35% more CO2 in the atmosphere today than in 1940.
On the other hand:
- Economists have been bickering for two years about whether or not the inverted yield curve will result in a recession.
- The Federal Reserve’s interest-rate-hiking cycle was supposed to increase unemployment, but jobless claims are still the lowest since 1969.
- And gas prices are below $3/gallon in 12 states despite financial media parroting each other about how tapping into the U.S. Strategic Petroleum Reserve earlier this year would have “disastrous” effects.
As many of our unfiltered grandparents would state, pundits are full of sh*t.
DIY Research
You don’t need an economics degree from UPenn’s Wharton School to find quality investments. Our last president has one and his businesses have resulted in six bankruptcies. (He also thought injecting bleach could help fight COVID-19 … but we digress.)
Rather than an Ivy League degree, you just need to be comfortable with a stock screener, which is similar enough to using Airbnb to find the perfect getaway.
And if you ever fantasized about escaping to a beachfront rental during the height of the pandemic to help pacify the urge to choke your partner for growing a lumberjack’s beard, baking 100 loaves of sourdough or making you sanitize every inch of the groceries … then you’re already prepared to use a stock screener.
Anyone who’s used Airbnb is familiar with its search filters:
- The little button you press to ensure your four-legged life partner can travel with you.
- The sliding bar that helps display results in your price range.
- Or the integral “Entire place” box that ensures you’re not sharing the space with a digital nomad who cooks bacon in his underwear.
The same goes for filters you use with Zillow home searches, or the ones fantasy sports platforms feature so you can find the best running back over the past three weeks.
But with stock screeners, there’s often an inherent sense of intimidation attributable to the fact that most people were never shown how to use them.
How to Screen for Stocks
Step 1: Find one you’re comfortable with. Most are free, like those offered by Yahoo! Finance, finviz, Investing.com and TradingView. Some will offer more search filters. Some are visually more user-friendly. But all basically do the same thing.
Step 2: Next, determine what it is you’re looking for. Screeners use numerous filters, like the sector or industry in which the company operates, fundamental indicators (based on financial statements and ratios) and technical indicators (based on price action, price trends and volume).
These search filters can include market capitalization (total value of a company’s outstanding shares), price-to-earnings ratios (P/E, the valuation of stock prices relative to earnings per share), compound annual growth rate (CAGR), dividend yield (percentage of share price paid out) and moving averages (average price over a period of time indicating near- and long-term future performance).
Step 3: Finally, apply those filters. The more filters you’ve added, the fewer results you’ll see. For simplicity, we’ll be focusing on large cap companies paying better-than-average dividends in sectors known for inelastic demand.
Using Yahoo! Finance’s stock screener, filtering just for large cap companies produces 1,475 results. Adding a filter for companies in the energy sector shows 74. Adding a filter for a dividend yield greater than 4% gives us 43. Lastly, filtering for more than 10 consecutive years of dividend growth gives us one company.
account.
Enterprise Products Partners (EPD)
Until we ran the above stock screener, we’d never heard of EPD. From its average daily trading volume of 3.4 million, we’re guessing you haven’t, either (for context, 119 million shares of Tesla trade daily).
But since it’s the only company the stock screener populated, let’s take a closer look. The Houston-based natural gas and oil pipeline midstream was founded in 1968. And since you read our issue “Big Oil’s Big Comeback” four weeks ago, you already now know what a midstream energy company is, right?
EPD owns 51k miles of pipeline, 177 million barrels of storage capacity and 26 natural gas plants capable of processing 6.3 billion cubic feet daily. Only 1.27% of the stock’s float is sold short, meaning 98.73% of shareholders are long (bullish).
- Market cap: $56 billion
- Year-to-date gain: 7.26%
- Price/share: $25.99
- Wall Street Journal median one-year price target: $31.75 (22% upside potential)
- CAGR since 1988: 25.41%
- Dividend yield: 7.7%
- P/E ratio: 10.54
- Free cash flow: $6.2 billion
- Consecutive years of dividend increases: 26, making it a Dividend Aristocrat
Does this mean you should buy shares of EPD right now? Not if you learned anything from today’s issue. Don’t ask Jim Cramer, either. Conduct your own due diligence, research your screener findings and eventually you’ll feel comfortable and confident in your ability to discover worthwhile investments.
TL;DR
Pundits have a worse track record than meteorologists but are revered for it. Learning how to run a stock screener can help you discover companies worthy of your hard-earned money while eliminating the hype of financial media’s often incorrect pundits.
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