Dangerous Advice From The WSJ's James Stewart

The Wall Street Journal employs a particularly inept and whiny investments writer named James B. Stewart, author of its "Common Sense" column.

I last wrote of Stewart's dubious credentials here, in August, in regard to his having fallen victim to the auction rate securities mess. In that post, I observed,

"Which brings me to a hilarious companion piece in the same WSJ edition.
It seems that James B. Stewart, a regular investment columnist who writes "Common Sense," lost his. He spent yesterday's column bitching about his lack of satisfaction as a 'victim' of the ARS mess.

But, back to Mr. Stewart. For someone so lofty as to write a column in the WSJ on investing, wouldn't you think he would know better than to offer an excuse like the above for purchasing ARS notes? Really- something for nothing, James?

Free extra returns, just for 'valuable clients?'

I have to laugh, because I've never bought any structured finance instrument in my life. The market-making assurances on these instruments are simply not to be believed.

Anyone with any experience in securities markets would know this.

Should James B. Stewart even be writing a weekly investing column for the WSJ, if he was taken in by such a simple ruse as the ARS game, and went for the old 'something for nothing' con?"

In yesterday's edition of the Journal, Stewart weighs in on those conned by Bernie Madoff. Here are some priceless gems from Stewart's attempt to excuse all those victims of any personal responsibility in the matter,

"Now that some of the dust is settling around the Bernard Madoff scandal, there has been a growing tendency in some quarters to blame the victims, at least in part. According to these theories, they should have recognized that annual returns of around 10% in both good times and bad were too good to be true. They should have been suspicious of Mr. Madoff's vague explanations of how he arrived at those results. And to the extent he described his strategy, which involved the simultaneous purchase of stock and sale of option contracts, they should have noticed that there wasn't sufficient volume in those options trades to account for the reported gains.

The lesson from such criticisms, I suppose, is that we should all turn ourselves into forensic accountants. I find that preposterous, not to mention distasteful, given that some of these people have lost their life savings. After all, consistent returns in good and bad markets are the selling point for nearly every hedge fund. There are plenty that have reported much larger annual returns without raising eyebrows. Indeed, Mr. Madoff's returns were good, but not so spectacular as to raise undue suspicion. As for his vague explanations, they were no vaguer than those of many other hedge-fund managers and even mutual-fund managers."

For someone writing a column entitled 'Common Sense,' it seems Stewart has decided that investors really shouldn't have to bring any to the table. Madoff's return weren't just consistent- they were practically constant and uniform! Big difference!

It's not forensic accounting to observe that returns are too steady in markets that fluctuate, and you can't get a straight, understandable and believable answer regarding how a manager is able to achieve such unwavering results for years on end.

What Stewart does recommend, later in his piece, are basically four things:

-a well-known manager should have a well-known accountant
-diversify your investments among different managers
-remember that above-average returns have above-average risk
-don't use middlemen to find a manager

The second and third points are basic investment truisms. The first is probably a good idea, but might cause you to avoid a credible manager. Everybody starts somewhere, and every accountant has to have a first client. That doesn't make him/her a criminal.

As to using middlemen, that's a tougher call. Some managers can't really be accessed any other way. Most retail investors don't have the time or knowledge to contact individual managers who will give them the time of day. That's why we have mutual funds. For most investors, either a private bank or pension fund offer a pre-screened selection of managers, i.e., they behave as middlemen.

Stewart's final recommendations are, for the most part, either harmless or obvious.

But his worst offense is in the opening paragraphs of his article, in which he effectively absolves investors from having to take responsibility for using common sense to assess the likelihood that an investment manager is engaging in real, verifiable, extraordinary investment strategies.

The Wall Street Journal shouldn't be publishing this dangerous nonsense, or, in my opinion, anything by James Stewart.