By Thomas Kostigen
One of the most popular story formats that you will read in the financial media is a list, sometimes dubbed a ranking. ‘Top 10’ lists, ‘best of’ lists, ‘worst of’ lists, ‘biggest,’ ‘smallest’—all these formats are popular for a reason: people click on them. But are they useful beyond their click bait? In a word, no.
Investors shouldn’t be tempted to abide by popular list advice. After all, who is creating that list? Often, these are dreamed up by writers and editors who obviously have other motives than rigorous research produced to showcase results and sound investment advice; they want eyeballs to sell advertising. (Any doubters should watch the wonderful documentary “The Social Dilemma” on Netflix.) Even well-intentioned lists can be problematic for investors.
BP serially appeared on “most ethical companies” lists before and even after the Deepwater Horizon oil spill. “Best of” companies have been found to violate fair labor practices, sustainability protocols, and more.
Of course, lists extend beyond ESG—environmental, social and governance—issues and blur into “top” or “bottom” categories. What makes a top company? Often that is up to the publication putting forward the list. Many times, readers aren’t privy to what those guidelines—if any—are.
“Best companies to buy right now,” or “seven overlooked investment opportunities,” or the like, lack context and solid underpinnings. Vetting companies isn’t easy. Financial analysts spend their days and dedicate their careers to trying to validate and forecast company records for the benefit of investors. That’s why financial analysts, especially certified financial analysts conduct loads of due diligence.
Willy-nilly list-makers seek the provocative, not proofs of results.List-bait, let’s call it, has extended into financial planning, coaxing do-it-yourself investors to construct portfolios around ill-defined “best of” advice. That’s why it’s important to consult a professional investment advisor for objective planning recommendations based on your individual circumstance. Lists lack this context. They put investors into category “buckets” and relay allegedly smart asset management advice. They do so blindly. A company’s fundamentals should stand on its own and not be subject to the whims of a popular list as a determining factor for investors.
Peer analysis is different. Serious analysis is different. So are other codifying measures such as large cap, small cap, and objective classifications. The CFA Institute divides companies into classifications based on the principal type of economic activity the entity performs. This is based on the International Standard Industrial Classification of All Economic Activities (ISIC), which was adopted by the United Nations in 1948 and are composed of more than 400 classes, 233 groups, 88 divisions, 21 sections, and 11 categories. There are more ways, too: types of products supplied; business cycle sensitivities; statistical similarities; representative sectors (consumer staples, basic materials, healthcare etc.); and more.
What’s duly missing in these CFA analyses is a flavor du jour. That is most welcomed by financial news outlets and should be a warning sign, not a buy signal for investors.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.