Wringing Profits from Magazines

By Dr. Steve Sjuggerud, President, Investment U
Tuesday, July 8, 2003: Issue #254

Time Magazine.

We all recognize its red-bound cover immediately. Could Time Magazine (or any other major mainstream magazine) possibly be of any use to us as investors? Absolutely Yes! The results of using magazine covers to inform our investing can be so astounding, you must consider them when you’re making new investment decisions

Cover stories about the stock market tend to occur at points near maximum momentum on the upside or the downside. So, simply put, when you see all the talk about making money in stocks on the mainstream magazine covers, it’s time to sell. And when you see pictures of bears and other horror stories about the stock market on mainstream covers, it’s likely time to buy.

Let me show it to you in practice, considering 80 years of Time Magazine covers For the first 30 days after stock market cover stories, your investments would have actually INCREASED at an average annual rate of 30% a year if you paid attention to the magazine’s advice. However, the next 11 months would have been disastrous according to Ned Davis in his book Being Right or Making Money:

“By acting contrary to the magazine covers after 30 days, you would have beaten the equivalent buy-and-hold return by about five times over the next 11 months.”

It’s not just Time Magazine. Newsweek and BusinessWeek are in the same boat

In late 1974, near the end of the 1973-1974 bear market (the worst since the Depression), Newsweek ran a cover story called “The Big Bad Bear.” The cover depicted an angry bear with NYSE pillars crumbling on each side him, and a sign showing Wall Street as a one-way street heading straight down. Stocks rose from there – about 50% in two-years’ time.

In late 1979, BusinessWeek ran it’s now famous “The Death of Equities” cover, practically predicting the end of Wall Street as we knew it. But an investor who spent the ensuing 20 years doing the exact opposite of what that cover suggested would’ve gotten rich.

Why This Works

Bernie Schaeffer explains this phenomenon best in his book The Option Advisor: “Only when a trend has been in place long enough to become widely known and almost universally accepted will it be featured on a magazine cover, as magazine editors are focused on selling their product on the newsstands.”

But we know that when an investment thought becomes nearly universally accepted, it’s nearly always past its prime. Corroborating Ned Davis’ long-term research, Schaeffer offers a similar short-term picture.

Studying magazines since 1998, Schaeffer looked at cover stories on stocks. He found that when a cover was bearish, the stocks were up an average of 5% three months later. And when a cover about a stock was bullish, on average the stock was down by 7% three months later.

The bottom line is, when a major trend in the market or in an individual stock has hit the mainstream newsstands, the move in that investment is already over. Chances are it has peaked and is about to reverse.

It appears that the real way to wring profits from financial magazines is not to take their advice. Rather it may be best to do exactly the opposite of it.

The next time you’re at the newsstand, scan the financial-magazine covers. If you see a unanimous theme, DON’T follow that advice. Instead, consider doing the opposite. Based on a number of studies, you’ll end up making a lot more money that way.

Good Investing,

Steve

Today’s Investment U Cribsheet

• Both of the above books make great reading and should be considered for inclusion in your investment library. You can buy them online by clicking here for The Option Advisor or clicking here for Being Right or Making Money.

• When Losing 11% is Winning
• Stock Market Investment Advice: Beware Wall Street’s “Tower of Babble”
• Bear Markets: How to Uncover Profit Opportunities When Selloffs Emerge

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