Watch out for 'experts'

Posted: Friday, November 09, 2001

NEW YORK (AP) -- Among the many lessons to be derived from the late and unlamented collapse of stocks: Investors should be discriminating in choosing among those so often referred to as experts.

There are many experts in medicine and the hard sciences, researchers who devote their lives pursuing goals that might advance learning and the general good, but there are relatively few in finance.

There are some, of course, such as Warren Buffet today, qualified by a lifetime of success, and Benjamin Graham of yesteryear, author with David Dodd of ''Security Analysis,'' but those are jewels among trinkets.

The damage in assigning ''expert'' status to so many is measured in numerous ways, most glaringly in losses incurred by investors following brokerage house ''buy'' ratings on stocks that lost 70 percent of value.

Lots of those advisers were commonly referred to as experts, and many still cling to that label in defiance of reality, as if it is earned not by erudition and performance in the past but in forecasting the future.

In the financial arena, expertise, so called, may be created by establishing a title or office and assigning an employee to fill it. Appearances count. Titles too. Experience and skill somewhat.

Self-proclaimed expertise is most evident in stock market newsletters proclaiming that if you had only listened, you would now be wealthy, and illustrated with percentages, bar graphs and testimonials.

The worst of newsletter offenses is the impressive chart of stocks that soared, the strong suggestion being that these stocks were chosen by the expert before they began their ascent. Often they were not.

Extreme claims are common. Writing in the AAII Journal, published by the American Association of Individual Investors, Mark Hulbert tells of the letter writer who advertised his outstanding results.

The letter-writer claimed multiple performance awards from Hulbert, whose Hulbert Financial Digest tracks performance. This, Hulbert wrote, ''was news to me.'' Hulbert found that over a one-year period the newsletter was outranked by 87 percent of letters in its category.

Expertise without credentials is widespread. Detailed retirement plans may turn out to be computer-formulated and prepared by a trainee -- impressive in appearance but unrealistic when applied to real life.

Conflict in expertise is inherent -- for example, as has been claimed, in brokerage house stock recommendations being tortured into conforming with business relations the brokerage house has with the company.

Advice, good as it might be, also can be tainted at the source. An insurance agent understandably has a bias toward recommending insurance. A mutual fund company offering retirement advice would like to sell funds.

Within the very specialized definition given to expertise in financial areas, yes, there are experts. There are brilliant practitioners of the financial arts, and also renegades who creates their own ''expert'' badges.

Where lies the fault? The answer can be debated endlessly, but it is difficult not to blame the buyer as well as the seller.

Caveat emptor.

Perhaps nowhere does it more aptly apply. And nowhere is it more ignored by a public accustomed to having others make financial choices for them.

The one answer is to become an expert of a sort yourself, if not in the intricacies of the marketplace, which may require total effort, then in scrutinizing the people and institutions whose advice you accept.

End Adv PMs Thursday, Nov. 8.

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