In a previous post I showed the evolution of stock price for EADS and the target price calculated by an investment bank along 34 months. I already stated the misguided recommendations that they provided. A truly “Buy high and sell low”, the quickest way to lose all your savings.
There are many advertisements of investment funds using the term “active” (active management). That’s truly dangerous regarding investing. It not only implies more expenses paid in commissions, but also implies a manager who is acting more.
Imagine that the active fund manager was the same person who had produced the investment bank’s report of EADS that I showed in my previous post. If he had been as active as he recommended his clients to be, he would have bought shares in 6 different moments between 2005 and 2006 and sold them at the beginning of 2007 (*).
As an example, I made the calculation using around 1,000€ as the amount invested in each of those points in time (using the technique called “Dollar cost averaging“). You may see in the table below how many shares those 1,000€ afforded to. You may also see the amount it could cost in commissions (of course, professional brokerage firms would get lower fees – nevertheless, if you omit that commissions, the net result at the end would have been negative as well).
As you can see, after the 7 operations along 2 years, the manager would have lost 268€ on an investment of almost 6,000€, that is losing 4,4% or about 2% a year… It is much better then to leave your money in a savings account.
Nevertheless, what is more worrisome is the fact that in the period of 34 months, the bank produced 15 different target prices, changing its recommendation (i.e., from “buy” to “hold”, etc.) up to 5 times. This urge to produce new figures and even worse, to act upon those new figures is what makes most of professional investment fund managers a truly dangerous species. As Charlie T. Munger wisely says “Resist the natural human bias to act”.
(*) I would have loved to have performed the same analysis with a newer report, as the price of EADS stock went even below 9€ in the years that followed to reach over 24€ again in 2011… but the last report of EADS (or any other company) that I had with such detailed explanation of target prices was this one (and I’d never pay for such a paper).
Note 1: You may think that the negative figures reached with this example are due to the case selected. If you think that is the case, I invite you to take another example and share it with us. I do not have many such reports available, and as I already stated, such a report is not something I would be willing to pay for, I can find many more useful ways to spend money.
Note 2: If you think I was biased by using frequent buys of 1,000€ each one and selling everything at once, I made the same calculation imposing that the manager used the technique “dollar cost averaging” also at the time of selling, that is selling about 1,000€ each time the recommendation was “sell”. The result: at the end of the period he would have 2,962.5€ in cash and 2,114.6€ in stock, having lost this time nearly 16% of the invested amount, even worse than in the first case.