Mornigstar Confusing Luck With Skill

Morningstar Confusing Luck With Skill

                                                                                                                                By: Brendan Magee

As I am going through my e-mail this morning, I come across an message from Morningstar Inc. Most investors are familiar with Morningstar in the role of research provider. They are touted as an unbiased research tool for investors. In other words they are not trying to get you to buy investment products. In that regard an investor could feel good about the integrity behind the research. This was not the case when it comes to the solicitation I received this morning.

The e-mail I saw was promoting their StockInvestor newsletter. They were beating the drums of their stock picking insights as evidenced by their 10 year cumulative portfolio return of 103% compared to the S&P 500’s 34%. They proudly state that “Market-beating consistency starts with a subscription to Morningstar StockInvestor.” For the special low introductory rate of $36.95, investors will get access to this brilliance. Makes you wonder why the portfolio manager wouldn’t just stay in the portfolio management business and keep the profits for themselves?

The problem when you move from the purely research business to the sales business is this, the integrity of the information gets compromised. 10 years of returns proves nothing in terms of their stock picking skills. Academic research shows that you need at least 30 to 40 year period of time to validate these types of claims. History shows, time and time again above market returns do not persist. Routinely, they fall below market levels, something that Morningstar doesn’t mention in their e-mail.

Morningstar also blurs the lines between gambling and investing. They talk about how they buy  high-quality household names with wide economic moats like Coca Cola and Master Card. It’s clever phrasing, but what the heck is an economic moat? They will only buy these types of companies when they are trading at a price below their value. In other words, Morningstar can identify in advance which companies six billion people weren’t smart enough to price correctly. Morningstar will buy these companies and then when the rest of the world has caught up to them, they’ll sell the company at what they know is the right price. This is the source of their superior returns.

What Morningstar fails to mention is, that it doesn’t matter whether or not they think  a stock is mispriced or not. Should Morningstar buy a particular company today at wha t they believe is selling below its value, they are going to have to wait until they can convince the someone to pay significantly  more than what the market says (6 billion people) is the correct price before they can cash in on their profits. Try selling your house at 30% more than what the market says your home is worth. Try to find that person willing to pay that much more for your property. See if you can convince them you are right and the market price is not.

What Morningstar is trying to get investors to engage in is not investing at all it is gambling and speculation. They are trying to convince people that they know in advance how 6 billion people are going to think and react. Markets, 6 billion people, set prices based on all the knowable and predictable information available.  It is only the unknowable and unpredictable that will change what the market, six billion people, believe what a stock or security is worth. What Morningstar is not telling investors is that they are engaged in the forecasting/guessing business. Yeah, I might be right in that endeavor for a while, but that doesn’t mean I can do it forever, or that you had any skill in the first place.

Eventually, I will be wrong and when I am wrong I lose money. History has shown that no one is so gifted as to be able to predict market movements with any consistency. That means the market will catch up to and surpass the forecaster. Anyone who thinks they can consistently out-perform and out- smart 6 billion people is only kidding themselves.

Morningstar doesn’t mention any of this in their StockInvestor promotion.

Brendan Magee is the founder and president of the Inevitable Wealth Coaching in Drexel Hill, Pa. With questions, comments, or suggestions, call 610-446-4322 or e-mail Brendan@coachgee.com