DEALING A BAD HAND; MAGAZINE STOCK PICKS OFTEN FAIL TO PAY OFF.

Byline: Deborah Adamson Daily News Staff Writer

You see them at nearly every bookstore and corner newsstand: personal finance magazines touting the best investments or the hottest stocks.

With the subtlety of a 30-minute infomercial, the magazines scream to readers the promise of investment success.

``Best Mid-Year Investments'' declared a SmartMoney article in July 1997.

``Six Stocks Pegged to Earn 47%'' within the next year, promised Money magazine in June 1997.

But how good are these recommendations? Not very, based on a Daily News review.

The newspaper tracked the yearlong performance of 141 stocks recommended in 21 articles in issues of four popular personal finance publications. Seventy-three stocks out of the 141 - or 52 percent - lost money.

Forget earning 47 percent or even modest returns; more than half of the stocks recommended in some articles by some of the nation's most popular personal finance magazines cost their readers money.

The lesson to be learned is that readers ought to beware - even when the advice comes from some of the best known magazines.

The articles ran in the April 1997 to January 1998 editions and were selected randomly to gauge the yearlong performance of stocks through last year's bull market and this summer's bear.

``We know that not every investment recommendation we make will work out,'' admitted Bob Safian, managing editor at Money magazine in New York.

But he argued that even among professional investors ``if they have slightly more winners than losers, they are stars.''

The magazines' record is surprising, considering that most of the stock picks were made in a market that by almost every measure was hugely profitable. The findings are a cause for concern because millions of investors - through self-directed individual retirement accounts, 401(k) plans and personal accounts - have funneled billions into the stock market in recent years, relying on personal finance magazines like Money, SmartMoney, Kiplinger's and Worth for advice.

If those magazines' readers had bought into index funds that tracked the Standard & Poor's 500 Index on the first day of that month's issue instead of buying the magazines' picks, the investors would have made as much as 45.88 percent (before fund fees and without reinvesting dividends). If they had bought at the worst possible day during that time, they still would have made 3.24 percent.

Comparing the stock recommendations against five indexes (S&P 500, S&P Midcap 400, Russell 2000, MicroCap 50 and Wilshire 5000 indexes) that better reflect the market segments of these securities, the magazines did even worse. Eighty-two out of 141 stocks, or 58 percent, did not beat the market.

For Money magazine, 23 out of 39 stock picks - or 59 percent - did not beat their market segment. Seventy-four percent (20 out of 27 stocks) of SmartMoney's picks did not beat the appropriate indexes. Eleven out of 20 stocks (55 percent) touted by Kiplinger's lost to comparable indexes. As for Worth, 28 out of 55 stocks, or 51 percent, did not beat the market.

Let's assume you invested $1,000 in each stock recommended per article. If you took the average return, excluding dividends, and compared the result with a comparable index, 56 percent of Money magazine's articles did not beat the market. SmartMoney had a 75 percent miss, half of Worth's articles did not beat the indexes and none of Kiplinger's articles outpaced the market.

Not an easy feat

To be sure, it's not easy to beat the market. Most mutual fund managers don't do better than the S&P 500. Some of the stock picks in the articles performed well over 12 months but still didn't outpace the market.

Kiplinger's April 1997 issue recommended buying Chase Manhattan, which rose 42 percent in a year. But that didn't beat the S&P 500's 45.88 percent gain over the same period.

The results aren't much better even if the yardstick is simple profitability - whether a stock increased after a year (or, in the case of the January 1998 special issue, nine months).

Using this yardstick, 18 of 39 individual stocks recommended by Money from June to August 1997, or 46 percent, lost money.

Comparing the performance of all recommendations by article, three out of nine Money stories showed negative returns - a 33 percent miss.

However, Money made a good call in an August 1997 article, ``Don't Just Sit There . . . Sell Stock Now.'' Investors who acted on it would have avoided the October 1997 correction and the current bear market - providing they put the money in cash, money market accounts or bonds.

If someone followed the magazine's advice and bought stocks recommended in other articles in the same issue, the results would've been mixed.

For instance, $1,000 invested in each of five stocks recommended in ``Defend your portfolio with stocks that promise income and growth,'' would have made $1,345, or 28 percent, in a year.

But if someone bought $1,000 worth of each stock recommended as hedges against inflation that also was in the same issue, he would have lost $1,247 a year later, or 26 percent. Indeed, four out of the five picks were losers.

As for SmartMoney, 16 out of 27 stocks recommended in the May, July and October 1997 issues, or 59 percent, lost money. If each of the four articles examined was tallied separately, half had declines.

In Kiplinger's April and August 1997 issues, four out of 20 stocks lost money - a 20 percent miss. One out of four articles (25 percent) lost money. As for Worth's June 1997, September 1997 and January 1998 issues, 35 out of 55 stocks lost ground (64 percent) and three out of four articles (75 percent) showed losses.

Must wait 5 years

Jersey Gilbert, financial editor for SmartMoney in New York, contends that one year is not enough time to determine a stock's success. If an investor waits at least five years, ``75 to 80 percent'' of SmartMoney's stock picks will make money, he said.

Kiplinger's ``preaches long-term investing'' of at least three to five years, said Manny Schiffres, senior associate editor in Washington.

Many stories from his and other magazines remind readers about the long-term nature of their recommendations.

However, it's not always clear how long an investor has to wait before the investment produces a competitive return, noted Lou Richman, financial editor at Yonkers, N.Y.-based Consumer Reports magazine, which publishes a mutual fund issue once a year.

Peter Finch, executive editor of SmartMoney, believes readers understand that when his magazine writes about the ``best investments of 1998, we're certainly hoping they will be the best performing out there, but we don't have a crystal ball. We're selling you our best investment ideas.''

But when a story promises ``The Best Midyear Investments for 1998,'' as SmartMoney did, the implication is that readers will get results in six months, not six years.

Why would magazines whose editors believe in long-term investing use headlines that promise short-term gratification?

``The more immediate you make it, with more numbers, the more attractive it is,'' said Samir Husni, head of the magazine program at the University of Mississippi at Oxford who publishes a guide to new consumer magazines.

``The audience wants immediate recommendations: What should I buy now?''

Readers take 2.5 seconds to decide whether to pick up a magazine, he said, so publishers must grab attention.

Readers biting 

And readers are biting in droves. Money magazine has annual sales of 1.9 million issues, Kiplinger's has 1.1 million, SmartMoney commands 700,000 and Worth has 540,000.

Personal finance magazines have flourished. There are at least 20 publications now compared to fewer than six a decade ago, Husni said.

Despite the increasing competition, Money magazine recently chose to tone down under the leadership of Safian, its newly installed managing editor, beginning with its October issue.

``Those sorts of headlines are no longer in the magazine - (such as) `We'll make up to 67 percent this year,' '' he said. ``We're working hard not to promise things we can't deliver. We want readers to be realistic.''

Schiffres prefers more conservative headlines as well: ``In general, it's better not to build up expectations.''

Richman doesn't like blaring headlines and avoids them in Consumer Reports. ``We don't do it because we think it's irresponsible.''

SmartMoney's Gilbert said readers know headlines carry a certain exaggeration, balanced by a more conservative tone in the article. ``Readers understand that there's a certain hyperbole built in because the publication wants to catch your attention.''

Frederick Crippen, a 70-year-old animated-film producer who lives in Winnetka, disagrees. He bought four stocks two years ago that were recommended by an investment magazine and lost money on all. ``I thought they knew what they were doing. You figure that they are smarter than you are.''

Did he understand that hyperbole was built into the magazine?

``Why would I buy something if I thought they were exaggerating? I just want it straight. Don't play it up to get me to buy the magazine.''

All of which isn't to say personal finance magazines aren't useful.

They're good resources for checking out investment recommendations proffered by your financial adviser, said Barbara Roper, director of investor protection at the Consumer Federation of America in Washington. The publications also offer investment ideas that readers should further investigate themselves.

Readers benefit from research conducted by personal finance magazines, which have the time, resources and executive-level contacts most individual investors don't have in order to properly screen a company, said Safian of Money.

Readers don't need hyped headlines and magazines can succeed without them. Just look at Consumer Reports.

The magazine's annual mutual fund issue is one of the most popular covers among its 4.5 million subscribers. On the newsstands, it's also one of the best sellers, Richman said.

But headline hype isn't the cause. This year's spring issue was entitled ``Funds & Gains.'' Last year? ``Mutual Funds You Can Live With.''

CAPTION(S):

photo, box, 4 charts

Photo: (color) no caption (financial magazines fanned out like a deck of cards)

Box: For a complete list of the stocks touted by the four magazines and their results, check out the Daily News online at www.newschoice.com. Or America Online customers can go to Keyword: Daily News

Chart: How they rated

(1) Kiplinger's Personal Finance 

(2) Money

(3) Smartmoney

(4) Worth