Stock lists and the biz media

Consultant Geoff Considine ponders the use of stock picks in various business publications and wonders what consumers actually do with such lists in a post on the Seeking Alpha web site.

Considine, who has a consulting firm in Colorado that helps portfolio managers, wrote, “I have always had something of an issue with stock pick lists that are published in various old and new media channels. The gist of these articles is typically that a business publication wants to publish a list of the best stocks for the coming year. The publication polls a series of experts— typically money managers. Forbes is no exception, and they have just come out with a series of stock picks for 2007 from a set of professional money managers.

“I do not have a problem with this type of exercise in general, but I always wonder what the publishers expect people to do with these picks. The problem with stock picking lists is that there are some perverse incentives for the experts who participate in the activity. Specifically, if someone asks you for a ‘stock pick’ and you know that you will be ranked as either a winner or an ‘also ran,’ you have a real incentive to pick a very volatile stock. Think of it like this. You know that a year from now you will get some positive attention if you pick a stock that shows enormous appreciation. If you pick a real dog, you can bet that the publication won’t be advertising the fact that they listed a big loser as a stock pick. If you pick a solid company that generates high returns relative to risk but still is not in the top performers, you won’t get much attention either. The way you get some good press in this type of exercise is to make a swing for the fences.

“I admit that I like to peruse these lists for ideas—there are plenty of very smart analysts and money managers who come up with great ideas. To account for the tendency of stock pickers to make highly volatile picks, I take these lists and see how they look from a quantitative perspective. I expect the picks to be volatile—more volatile than any index, in general.”

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