It's that time of year again. Finance Magazines have begun publishing their “Stocks You Must Buy NOW!” lists along with their “Best Stocks to Own in 2012” articles. Every time you see one of these the question that should go through your mind is “What about last year's list?” Thanks to Google, that's pretty easy to do. Let's take a look at the list from a popular magazine/website CNN/Money/Fortune.
- Apple
- Caterpillar
- Enbridge Energy Partners
- Goodyear Tire
- Halliburton
- Intel
- Johnson Controls
- Lockheed Martin
- Microsoft
- Royal Bank of Canada
All large companies, and all but one are domestic, so it should be appropriate to compare to the S&P 500, an index of large US stocks. That's all well and good, but not very interesting unless you actually believe these guys have the ability to predict the future. In evaluating that question, let's take a look at exhibit A:
These are returns MINUS dividends (to make it easier on me) and we will compare them to the Dow Jones and the S&P 500, again MINUS dividends, which are appropriate indices given that they are all large cap stocks.
- Mosaic -33.96%
- Agrium -26.86%
- Dow Chemical -15.76%
- Transocean -44.77%
- Royal Dutch Shell 9.45%
- Lennar 4.80%
- East West Bancorp 1.02%
- Royal Caribbean -47.30%
- Entropic -57.70%
- Apple 25.56%
- Total of a portfolio divided 1/10th into each of the stocks -18.55
- Dow Jones Industrial Average 5.53%
- S&P 500: 0%
Well, what does this tell us? First, that Jon Birger can't pick stocks. He was the one that wrote the article a year ago. Guess who wrote the 2012 article? Yup, same guy.
Second, picking stocks is hard. I don't pretend I can, but for some reason I take just a little bit of pleasure in seeing that hardly anyone else can either. Think about it. If they could, they'd be running a hedge fund instead of writing for Money. Actually, it would probably be even more profitable to just keep quiet and invest their own money rather than run a hedge fund. I'm confident that if there really are people out there who can predict the future, they aren't telling anyone else about it.
Third, don't believe anything you read in the financial media, especially predictions of the future. This is financial porn at its best.
Last, stocks were a pretty crappy investment this year, but if you had to be in them, large growth stocks were the place to be. It's been a long time for these babies. They've been beaten down ever since the tech stock meltdown. Compare the Vanguard Growth Index Fund return of 1.87% to the Vanguard Small Value Index Fund return of -4.16%.
Predictions are a funny thing. I sometimes think I know what's going to happen. I've made it a habit to actually write these things down. I won't say I'm never right, but I'm definitely not right more than 50% of the time. I suggest you do the same. In fact, just for fun, why not post a prediction in the comments section? We'll drag it up next year at this time just to see how you did.
Great article! Always comforting to confirm the fact that when it comes to investing, being “average” by using an indexing strategy might outperform in the long run. Happy New Year.
A poster over at Bogleheads did a similar thing using Barron’s 2011 stock picks. They were only down 6%, much better than Money, but still far worse than just buying an index fund.
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=88209
If you could really beat the average from the s and p 500 over 30 years, your fee would be so high that the investors total return would come out to be no difference. The other issue is finding the talent who can beat the s and p 500 over 30 years. There is no criteria. I’ve never been able to see someone do that magical feat.
I say index it with the lowest fees, your age in a bond fund[50% tips, 50% nominals], and the rest in an index fund related to the s and p 500. Done. You will beat 99% of the experts without losing sleep.
I am very impressed with your website. I am a financial advisor, married to a fourth year medical student, and I’m really enjoying reading your insights. I will keep scrolling through the older posts, but I would love to see some information about personal finance for physicians and residents, more specifcally IBR, Public Service forgiveness, home ownership. (realistic DTIs, etc) Thanks for your work!
Dianna-
Most of those subjects have been covered recently.
IBR
PSLF
Debt Ratios
Personal Finance for Doctors
I was just messing around and it looks like his average rate of return last year was 1.3% if my calculation are correct. Once again the market wins.
Yes, I actually discussed it in the most recent monthly newsletter. You should subscribe!
oil goes to 60 – 70 in 2016 after dropping sub 40 in 2015. Fed raises interest rates .25 in September causing stocks to finish flat in 2015. A republican is elected in 2016. Stock Market goes into bear territory in 2016 due to week consumer spending and Global uncertainty.
This is your prediction for the future? It’ll be fun to come back and look at it in a year or two.
I just ran into this post (albeit several years later). Funny, the links to the best stocks are no longer working. Wouldn’t want to keep your predictions “out there” for people to see your track record, eh?
I like to embarrass people who write posts like these. They’re classic “financial porn.”
I’m a big fan and I can’t thank you enough! Looking forward to the online course in March. I think it’s fair to say you coined the term “financial porn”. Great read my husband is a stock picker and has done alright but it’s an “agree to disagree” topic. I hope this article helps me bring him over to the light side. Much thanks!
I’m not sure I can claim ownership to that term. I’m sure I heard it on the Bogleheads forum long before I ever used it myself. Here’s a pretty old thread about it: https://www.bogleheads.org/forum/viewtopic.php?t=6103
Taylor claims Jane Bryant Quinn coined the term.