Stock Picking - Wise Investing or Fool’s Errand?

Recently, I received an email extolling the virtues and the “secrets” of stock picking and market timing.  I simply laughed as I read through the content and then promptly deleted it.  The concepts of stock picking and timing markets are actually one of the greatest lies perpetuated by the financial world.

As we all know, 2008 was not a good year for investors.  All 47 of the tracked markets posted negative returns, with 23 countries across the globe experiencing losses in excess of 50%.  The Unites States market finished 7^th best, with a total return of -37.6%, while the MSCI All-Country World Index finished the year with a return of -45.2%.

Consider the 2008 performance of the following American companies:

Bank of America          -65.9%

General Electric            -56.3%

Johnson & Johnson       -10.3%

Walmart                       +17.9%

AIG                             -97.3%

Citigroup                      -77.2%

Fannie Mae                  -98.1%

Merrill Lynch                -77.6%

Wachovia                     -85.4%

Because the financial meltdown was so extensive and well-advertised, it would be assumed that investment “experts” would have found it easy to pick stocks and out-perform the US market (-37.6%).  Here are a few examples of what the stock pickers predicted for 2008:

• A prominent money manager and self-described “contrarian” investor wrote in a January 2008 Forbes column: “You have to choose carefully here, since many financial stocks will not come back for a long time, if ever. . . . The safest plays are among the big banks.”

Outcome: Prices for the seven financial stocks mentioned in the column, including Citigroup, Freddie Mac, and Wachovia, declined an average of 74.0% in 2008.

(Dreman, David. “Seize the Day.” Forbes, January 8,2008. Wall Journal, New York Stock Exchange 2008             Summary, January 2, 2009.)

• A veteran market analyst favored stocks that had been “excessively punished” in the subprime-related meltdown: Nordstrom, Tiffany, J.Crew, and his favorite, American International Group (AIG).

Outcome:

American International Group (AIG)                 -97.3%

J. Crew Group (JCW)                                      -74.7%

Nordstrom (JWN)                                            -63.8%

Tiffany & Co. (TIF)                                          -48.7%

(Tergesen, Anne. “What the Pros Are Saying.” Business Week, December 31, 2007. Wall Street Journal, New York Stock Exchange 2008 Trading Summary, January 2, 2009.)

• The cover of Fortune’s Investment Guide 2008 issue offered a teaser: “Five Must-Have Foreign Stocks.”  After considering thousands of stocks to choose from across the globe and consulting with “top fund managers and analysts,” Fortune settled on the following picks:

• 1. Bank of Ireland (IRE) - “dirt cheap with a “7% dividend yield”
• 2. The iShares Brazil Index (EWZ) - “only Egypt has done better over the past five years”
• 3. Mobile Telesystems (MBT) - “more cell phone subscribers than AT&T”
• 4. Potash Corp of Saskatchewan (POT) - “earnings to soar more than 50%”
• 5. GlaxoSmithKline (GSX) - “strong cash flow, rich dividend yield”

Outcome:

• 1. Bank of Ireland - eliminated dividend amid rising loan losses (lost almost 92% of its value)
• 2. The iShares Brazil Index - finished 36^th out of 47 world stock markets (lost more than 57% of its value)
• 3. Mobile Telsystems - lost more than 73% of its value
• 4. Potash Corp of Saskatchewan - dropped with fertilizer prices and lost more than 44%
• 5. GlaxoSmithKline - actually out-performed the market (was down over 26%)

(Bank of Ireland. Bankofireland.com, accessed January 7, 2009.
MSCI. Mscibarra.com, accessed January 5, 2009.
Rosenberg, Yuval. “Harvesting the Top Foreign Stocks.” Fortune, December 24, 2007.
Wall Street Journal, New York Stock Exchange 2008 Trading Summary, January 2, 2009.)

If stock picking and market timing did not work in 2008, when will it work?  The only way to have consistent, long-term returns is with a globally diversified portfolio that is built upon the understanding of the capital markets, like the portfolios that we build and manage for our clients every day.

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