What would you think of a Doctor who gave you a clean bill of health just days before you arrived at the ICU, or a car salesman telling you to buy a Chrysler while the company is still around? How about a travel agent who recommends Afghanistan as a destination for honeymooners?

The answers are way too obvious – they don’t know what they’re talking about. A mean-spirited person, (or simply a victim of such bad advice), might consider them a quack.

Quackery has its origin in the medical field and is defined as a misrepresentation of the ability to prevent or cure a disease. A financial quack could be defined as someone who misrepresents themselves as a financial analyst, when in fact their analysis and forecasts have no merit at all. Have there been cases of financial quackery?

Can you trust Wall Street Analysts?

In June, July, and August 2008, Citigroup, Bank of America, and UBS upgraded AIG from “hold”, or “neutral”, to “buy.” Over the next ten months, AIG shareholders lost over 94% of their money. At the beginning of 2009, not a single Wall Street analyst had AIG rated as a “sell!”

On July 18, 2008, Deutsche Bank upgraded Citigroup. At that time, there was only one “sell” rating on Citigroup (Punk, Ziegel & Co.), which was upgraded to a “buy” previously on November 27, 2007. Citigroup has dropped from $30 to $3.50 a share since.

Non-conforming to Wall Street, yet brief and accurate, the ETF Profit Strategy Newsletter identified the financial sector as a “downward spiral with no stop-loss protection” in September 2008. At the time, it recommended short ETFs such as the UltraShort Financial ProShares (NYSEArca: SKF) and UltraShort S&P 500 ProShares (NYSEArca: SDS).

Can you trust the media?

Many investors make the mistake of “putting their money where their (the media’s) mouth is.” In general, the media covers the news. News tends to be good at the top and bad at the bottom. As such, news based forecasts tend to draw investors into the market before it tops, and out of the market as it bottoms.

Take for example a front page article featured on March 9th (the day the market bottomed) in the Wall Street Journal. The Journal is a great source for financial news, however, the article titled “Dow 5,000? There is a case for it”, is a classic example of a mistaken news-based forecast. By the time the market’s downtrend was identified, it had already exhausted itself.

Of course this section would not be complete without mentioning Jim Cramer’s faux pas. On October 31st, 2007, Jim Cramer encouraged viewers: “You should be buying things and accept that they’re overvalued, but accept that they’re going higher. I know this sounds irresponsible but that’s how you make money.” At the time, the Dow Jones (NYSEArca: DIA) was at 13,930. On June 13th, 2008, Cramer claimed: “Very simply, I believe it’s time to buy, buy, buy.”  The S&P 500 (NYSEArca: SPY) has dropped another 35% since.

Jon Steward, the comedian who became (more) famous for grilling the financial media, summarized it as follows: “The financial media missed this entire storm. It’s like the weather channel interviewing Hurricane Katrina and saying, there are reports that you have high winds and flooding, and Katrina says, ‘No, no, no I’m sunny’.” How unfortunate that investors have to rely on a comedian to expose Wall Street.

Can you trust publicly traded companies?

By now we know that we often cannot trust what CEOs are saying. The demise of Lehman Brothers, Bear Stearns, AIG, Citigroup, Bank of America, and many others caught even their own CEOs by surprise (at least officially).

But how about their actions? Should you follow the “don’t do as I say but follow what I do?” principle?

You would think that huge, international corporations have a handle on the overall markets and economic outlook. The Wall Street Journal reported the following about Toyota, the world’s largest car manufacturer and distributer: “A belief in ever-growing demand led the auto maker to expand production capacity just before the market collapsed.” As a result, Toyota placed a Mississippi production plant on hold and idled a production line in Texas.

Private equity giant Blackstone Group, a company that should know the ins and outs of the financial market, bought Hilton Hotels for $20 billion at the top of the market in 2007. Blackstone’s real estate portfolio has since declined by about 30%.

As you can see, Wall Street analysts, the media, and even the biggest corporations follow the prevailing trend for better and often for worse.

How to protect yourself from financial quackery

Successful investors need to be able to pull their heads out of the sand even though everyone else prefers to have their head stuck in the sand.  As Wayne Gretzky put it, “I skate to where the puck is going to be, not where it has been." (More about where it will be in just a moment)

Often, this will make you the oddball out, but that’s not bad as long as you’re able to protect and grow your wealth. Just as the nerdy kids from school often ended up with the best jobs, contrarian investors often end up with the best investment decisions.

Decades, even millenniums worth of data shows that trend followers are the ones that lose big eventually. Prior incidences where investors, (or "wanna be" investors), got caught up and hurt by bubbles include the tulip mania in 1637, the South Sea Bubble in 1720, the Great Depression in 1929, and the Tech Bubble in 2000.

The Tech or Dot.com Bubble, which drove the Technology Select Sector SPDRs (NYSEArca: XLK) and Nasdaq (Nasdaq: QQQQ) to all-time highs, turned out to be a selective bubble of smaller degree. While technology stocks lost about 40% in 2000, the Financial Select Sector SPDRs (NYSEArca: XLF), Consumer Staples Select Sector SPDRs (NYSEArca: XLP), Industrial Select Sector SPDRs (NYSEArca: XLI), and Energy Select Sector SPDRs (NYSEArca: XLE) gained between 20 and 40%.

The decline over the past 20 months is much deeper than any other bear market seen in 75 years. If you are looking for parallels, historic guidance and future forecasts, those can only be drawn from the Great Depression.

If you think that the government’s aggressive and unprecedented interventions will protect the economy from what’s in store, make sure to read the May and June issue of the ETF Profit Strategy Newsletter (it uncovers the powerful, yet little known flaws that will render the bailouts, Public Private Investment Program, and stress test provisions worthless).

Just as diagnosing a patient in person is much more effective than a phone diagnoses, indicators that originate from the stock market are much more reliable than obscure parallels or forecasts based on mere projections.

Such internal indicators include P/E ratios and dividend yields. These indicators point towards a continuation of the bear market. Why? An analysis of historic bear markets shows that the market simply does not bottom unless P/E ratios and dividend yields clock in at rock bottom levels (just like the body is not healthy unless the temperature stays above 98.6 degrees).

Another indicator is the Dow Jones measured in real money – gold (NYSEArca: GLD). The Dow as we know it ,(currently at 8,300), is measured in inflated dollars. This provides no true guidance, just as a broken compass won’t point to the true north. The Dow measured in gold is a front-running indicator, as such it has already mapped out the market’s direction.

The March issue of the ETF Profit Strategy Newsletter contains a detailed analysis of P/E ratios, dividend yields, and the Dow measured in gold along with target levels for the ultimate market bottom. It’s time to build a portfolio based on wholesome financial nutrition, not junk food.