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Who’s doing best, the experts or the market?

January 5, 2014

Published in ‘New Europe’ Print & Digital Editions

Expert or MarketsOn December 22, 2008, only two months after Lehman Brothers filed for bankruptcy, Fortune Magazine, one of the most respectable financial publications, gave investors its annual expert advice on which stocks to pick in order to protect their wealth and to maximize profits. That was “amid a historic financial mess and record volatility.” (*) In fact, at that time, markets had tumbled and lost, in many cases, more than 50 percent of their value, so it appeared to be the perfect moment to buy, at least to the medium or long term investor.

The magazine gathered five of the best fund managers at the time, and asked them to pick the most promising stocks. Those included: Bob Rodriguez of First Pacific Advisors; Susan Byrne of Westwood Holdings Group; Leslie Christian of Portfolio 21 Investments; Tom Forester of the Forester Value fund; and Jeremy Grantham, chairman of asset manager GMO. In an adjacent article, the magazine’s own experts suggest “Ten promising stocks” for the next year, a sort of diversified portfolio of major stocks.

Without having any claim of scientific accuracy, I thought it amusing to see what these ‘expert’ portfolios would have yielded if held over the past five years, and compare these results with the stock market indices (Dow Jones or, preferably, SP 500). Of course, there may be several objections to this logic, as one might claim that expert management would have taken several buy-and-sell decisions over this period, or altered the weights of each stock in the portfolios, or even picked new stocks every year, according to renewed expert advice. Despite these criticisms, a layman may well have bought and held the proposed portfolios over the five-year period based on the magazine’s expert advice.

Technically, to compute the portfolios’ yields, approximations had to be made given that some companies have changed ownership structure over the time. For example, Dell Computers was withdrawn from the stock exchange and became private on October 2013; thus, its last quotation was used for the purpose of this paper. Also, BJ Services was absorbed by Baker Hughes in April 2010, and thus the latter’s stock price was retained. Same thing for Medco Health , which was absorbed by Express Scripts. Although these approximations are a bit arbitrary, their adoption doesn’t significantly affect the results of the study. Finally, closing market quotations of December 27, 2013 were used as the end-of-period prices, while foreign stock prices were converted to US dollars at that day’s rates.

So, we have here six mini-portfolios of ‘best stocks,’ proposed at the trough of the crisis and their value today, to compare against a broad market index such as the Standard and Poor’s 500; the latter increased by 106.9 percent over the five-year period. The striking thing is that with the exception of only one portfolio, all other do at best as good as the market, and in most cases worse than the market! The renewable energy sector (included in Christian’s stocks)  performed particularly poorly, with practically all of the stocks showing negative returns. The portfolio is only somewhat ‘saved’ by the second choices of its author, which consisted of diversified stocks.

The magazine’s own suggestions as well as Grantham’s picks, mostly large consumer and distribution companies, also performed very poorly over the period—around half of the average market return. Christian, Bryne, and Forester’s picks on the other hand performed on average close to the market index, yielding between 82 and 119 percent.

The only real exception is Rodriguez’s suggestions which were heavily centered on traditional energy (Oil and Gas exploration) and electronics. This ‘portfolio’ really beats the market and shows a five year cumulative yield of 361 percent, more than three-fold the market index yield. Either this fund manager is exceptional, or he was lucky enough to choose the right sector…

All in all, the average person who would have invested in the New York Stock Exchange over the last five years without any knowledge of specific companies, and subsequently would have sat on his portfolio, would have done at least as well as those highly-paid experts in five out of six cases. Interesting, isn’t it?




From → Views & Opinions

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