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What George Costanza can teach us about investing

(MoneyWatch) One of my favorite "Seinfeld" episodes is "The Opposite," in which George Costanza realizes that every instinct he has ever had has been wrong. He starts doing the opposite of what his instincts tell him, and his luck changes. He gets a girlfriend and a job with the Yankees and moves out of his parents' house.

It turns out that doing the opposite of your instincts also works when it comes to following the recommendations of Wall Street analysts. The conventional wisdom, at least as far as Wall Street would want you to believe, is that the stocks with the highest ratings should outperform the market easily. And they certainly should far outperform the stocks with the lowest ratings. If not, then what are the analysts being paid those big salaries for? So let's take a look at how analysts' picks have performed.

Thomson Reuters monitors the recommendations of stock analysts and tracks the performance of the most and least popular stocks. Over the five years ending in 2012, buying the 10 most popular stocks each year would have caused total losses of 11 percent. However, doing the same with the 10 least popular stocks each year would have returned 16 percent.

There's plenty of evidence that most investors would be better off doing the opposite of what their instincts tell them. For example, it's estimated that only about 15 percent of individual investor assets are indexed. Most of the remaining 85 percent would have done better to ignore their instincts and act in contrast to them. Similarly, while the markets rebounded from hitting bottom on March 6, 2009, investors pulled billions of dollars out of stocks. Their instincts told them to sell, but they would have been better off buying. This pattern of making mistakes is well documented, although time after time it has been shown that investors tend to underperform the very funds in which they invest.

If you've been following the recommendations of analysts or financial publications, using actively managed funds or trying to time the market, you should consider whether you too would be better off doing the opposite of what your instincts tell you to do.

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