Treat television financial ‘experts’ with caution

Paul Kangas, host of the Nightly Business Report, was interviewing New York City investment adviser Todd Eberhard in December 2001:

Kangas:  “What should we be buying?”

Eberhard: “Well, we’re looking at some stocks which are coming out with very good numbers…  right now. Examples would be a General Electric, which is trading at about $41 a share.”

Kangas:  “And also a very high P/E ratio, wouldn’t you agree?”

Eberhard:  “Absolutely, but certainly the performance warrants those types of numbers from what we’re seeing and certainly from what they’re giving for the outward focus of their numbers.”

Like so many television talking heads who make market and investment calls, it all sounded well and reasoned at the time. Problem is, it didn’t pan out, like so many of these calls. GE was trading at about $34.50 at the midpoint of 2005, meaning that even with dividends paid over the last 3.5 years, it has lost money for investors. Meanwhile, the Standard & Poor’s 500 Stocks Index, which had a terrible 2002, has managed to post a total return of 11% over the same period of time. The obvious lesson is that we should pay little attention to these attention-grabbing investment “experts” who dominate the airwaves.

However, there is another side to the Eberhard story. He was a brash, 30-something, investment manager who managed over $2 billion and who often appeared on CNN, CNNfn, CNBC, Fox News, and the PBS Nightly Business Report. In 2003, the Securities & Exchange Commission and the National Association of Securities Dealers charged him with defrauding his investors out of $20 million. He was sentenced to almost 14 years in federal prison in June of this year.

Eberhard’s fraud was a classic case: he and his firm engaged in excessive trading in clients’ accounts in order to generate outsized commissions. Not satisfied with that, he looted several thousand client accounts by making unauthorized transfers to his own account. He then sent false account statements to his clients.  The fraud began in 1993 and continued while he became famous on television. Does this sound like someone you can trust for investment advice? Next time, turn off the TV.