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In September Fire Finance published at list of the Top 100 Personal Finance Blogs based on traffic. Based on data from Quantcast, Get Rich Slowly was ranked #1 with 51,095 visitors in the month of September. And Fire by 40 rounded out the list with about 2,000 visitors. (Interestingly, The Dough Roller wasn’t on the list even though based on the number of visitors it received it should have been, but I digress.) As I considered this list, it occurred to me that it can teach us a lot about the stock market and investing. It can also teach us about why some books make it to the bestseller list and others don’t, why some kids are popular in high school while others are not, and why some businesses succeed while others fail. Hmm, it can tell us all that, you ask. Read on.

To see what I mean, let’s conduct a short thought experiment with the stock market in mind. Let’s imagine that each blog on the list is a public company that we can invest in if we choose. Their traffic represents earnings and market capitalization. How would you answer the following “simple” questions:

Question #1: Get Rich Slowly has the most visitors of any PF Blog because [fill in the blank].

This seems like an important question. I imagine JD wants to know the answer so he can keep doing the good things that have brought him so much success. As an investor, we would want to know what the ingredients are for a successful blog. And for other bloggers, they would want to know what has worked in the past so that perhaps some day they are on the list, or in the top 10, or (forgive me JD) even in the #1 spot. So we could ask a similar question of My Money Blog (#2), The Simple Dollar (#3), or any of the other blogs on this list.

It turns out, though, that the question is next to impossible to answer. As soon as you identify some aspect of a top PF Blog that you like, or that you think helped contribute to its success, you realize that many PF Blogs with far less traffic have the same or similar feature. For example, you may enjoy the content and quality of JD’s articles (I do), but that’s true of many PF Blogs. Certainly the length of time a blog has been active is an important element, but many PF Blogs have been around as long as those in the Top 10. The point here is not that the top PF Blogs are no different that the rest. The point is that the differences are impossible to identify in any meaningful, useful way. So answering this “simple” question turns out not to be so simple. So let’s try a harder one–

Question #2: Could you have predicted the success enjoyed by the top PF Blogs based on a review of their first post?

It’s this question that really matters to investors. Can you, like Warren Buffett, spot a potential success before others do? I went back and looked at the oldest post I could find on some of the top PF Blogs. For JD the post was called Teens and Money, was published on April 9, 2006, and had 0 comments. At My Money Blog, the first post was called Hello World!, was published on December 6, 2004, has 0 comments and consists of the following:

Whew! I finally installed Movable Type. Now to get some sleep…

(My first post! December 6th, 2004.)

At Five Cent Nickel (#4 on the list), the first post was published on May 1, 2005 and called Welcome. If you ever wondered where the name of FCN came from, check out the first post.

The point is, it would have been impossible to predict the success of these PF Blogs, or any PF Blog, based on the first post or, more to the point, before the blog achieved at least some level of success. And as an investment, by then it would have been too late to make market beating returns on the stock. To underscore the difficulty in stock picking (or PF Blog picking), consider these two additional questions:

Question #3: Of the PF Blogs ranked 11 to 100, will any of them break into the Top 10 over the next year, and if so, which ones?

Question #4: Which PF Blog over the next year will enjoy the greatest increase in traffic on a percentage basis?

If you think you can answer correctly questions like these on a consistent basis, give Mr. Buffett a call. If you can’t, please continue reading.

So what’s an investor to do?

Buy an index fund. The difficulty in answering the above questions explains why index funds typically beat actively managed funds. If I were going to invest in the Top 100 PF Blogs, I’d buy shares of the F&F 100 Index Fund. If it worked like most index funds, it would be weighted by market capitalization. What that means is that my money would not be spread evenly across all 100 PF Blogs. Instead, shares of each blog would be purchased in proportion to the size of the blog as measured by traffic. For example, of $1,000 invested in the fund, about $95 would go to buy shares in Get Rich Slowly because it garnered about 9.5% of the total traffic. In contrast, about $3.75 would go to buy shares of the blogs at the bottom of the Top 100. $486 of the $1,000 invested would go to the top 10 blogs as they captured about 48.6% of the total traffic. These numbers are not unlike the S&P 500, where the top 10 holdings represent about 20% of the total market capitalization of the entire index.

So what about bestselling books and popularity contests in high school?

That gets me back to a book I’m reading now called The Black Swan: The Impact of the Highly Improbable. The short answer is that predicting these outcomes is next to impossible, and explaining them after the fact is equally impossible. We convince ourselves that we can explain them because it helps us feel like we can make sense of the world we live in. The problem is, as soon as we think we’ve landed on the correct explanation, we can find other books or other high school students who fit the same profile, but are not on the bestseller list or are not in the “popular” crowd. If only I would have bought an index fund in high school!

A Final Question

To conclude this thought experiment, consider this fifth and final question:

Question #5: Could any of the Top 10 PF Blogs shut down their blog, start a new one under a different name without disclosing their previous, successful blog, and make it back into the top 10?

If you’d like to hazard a response to any of these questions, leave a comment.

P.S.: No PF Blogs were harmed in the making of this post.

You’re not half as smart as you think you are. That’s the message in Nassim Nicholas Taleb’s book, The Black Swan: The Impact of the Highly Improbable. I sure wish Robert Kiyosaki (famed author of the Rich Dad Poor Dad never-ending series of books) would read The Black Swan. For our purposes today, Taleb argues that we convince ourselves that the world is more orderly and coherent than it really is. We look back at historical events and mistakenly believe we can make sense out of it all, that we can fill in the right causes for all the effects we see. The problem is, we can’t. And for those really unexpected events, he calls them Black Swans, from the once long held belief that since all observable swans are white, Black Swans don’t exist. Trouble is, they do.

Well Kiyosaki takes all this to a new level. In his most recent column published in Yahoo! Finance, he showcased himself as the greatest prophet of our time, or as I like to say, The Great Black Swan Hunter. His article, When the Squeeze is On, Bargains Abound, is here, but please allow me to deconstruct his article for you. And there is a point to all of this (several actually), and I’ll return to them at end of the post.

I Told You So

First, Rich Dad tells us that he told us so:

I know it’s not polite to say “I told you so,” but early this year I wrote two columns here predicting that what happened in August [market "mini-crash"] might be coming. Well, it did, and I told you so.

At first I thought who cares; so he predicted that something might happen. That’s not a prediction, it’s a truism. But never to disappoint, he followed up later in his article with his clear prediction: “The August stock market mini-crash I predicted. . . .” Ok, so there it is. Early in 2007, Rich Dad predicted the stock market “mini-crash” in August. Now my first reaction was, “What, the market crashed in August! This I gotta see!”

So off to the charts I went. It turns out, though, that the markets were UP in August, not down. On July 31, 2007, the S&P500 closed at 1455.27, and at the end of August, it closed up for the month at 1473.99, for a monthly GAIN of more than 1%. So what is Rich Dad talking about?!!? Then I realized both my mistake and Rich Dad’s brilliance all at once. He didn’t just predict a mini-crash in August, he predicted it in “early August.” And sure enough, over a seven day period, the market was down about 6%. That’s not even a correction, so I’m not sure why he calls it a “mini-crash” or even what a mini-crash is, but at least now I’m tracking his great prediction.

So now let’s go back to the articles in early 2007 in which Robert Kiyosaki predicted that in early August of 2007 the stock market would experience a “mini-crash.”

Two Articles with Zero Predictions

The two articles he links to were written in February and March. The first was entitled, Throwing Good Money After Bad, and the second article was entitled Rich Today, Poor Tomorrow. I read both articles very carefully and here is the upshot–NEITHER PREDICTS A MARKET MINI-CRASH or EVEN DISCUSSES A MARKET MINI-CRASH. In fact, both articles are about deflation, and in one, he predicts that due to what he calls a “short squeeze,” the market will go UP:

Suddenly, all the other traders who shorted the stock need to buy shares of XYZ in order to return them. As more short tranders begin buying XYZ, the price of the stock goes up and up–from $150 to $160 to $170, for instance. This is a short squeeze in stocks. The traders who thought the price of the stock would go down are squeezed into becoming the ones who drive the price up.

So what’s going on here? Well with respect to Mr. Kiyosaki, I have no idea. I’ll leave it to you to read his articles (if you care to ) and decide for yourself. But there are several key lessons to be learned here:

1. Question Everything: Whether its a Rich Dad article, Hillary Clinton’s health care reform plan, or an article on The Dough Roller, question everything.
2. Don’t Predict Future Prices: One of my concerns from articles like Rich Dad’s is that he may actually convince people that he can predict future markets. He can’t. Even worse, he may convince unsuspecting folks that predicting future markets is key to successful investing. It isn’t.
3. Embrace Uncertainty: I’m convinced that certainty is overrated. The fact is, we live in an uncertain, unpredictable world. The sooner we realize that, the more certain our world will become.

Message to Yahoo! Finance

Hey Yahoo! Finance, when your contract with Mr. Kiyosaki expires, drop me a line.