Nine Months Later: Some Annual Predictions from the Financial Press 10 comments
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If you’re not an analyst or asset manager who specializes in the financial sector, and you don’t count on AIG (AIG), Lehman Brothers (LEH) , or their many near competitors for a paycheck, right now might be a good time to take a step back, breathe a little, and thank whatever deity or lucky totem you might carry, touch, or kiss for your good fortune.
It’s now September, the kids are back in school, Wall Street is in a shambles, and the last few folks who didn’t realize it are now quite aware that the responsibility for their financial futures lies only with themselves, and that risk is a real four-letter word, not just something that increases your returns.
So I thought it might be a good time to look back at the little article about financial media predictions that I wrote back in January, and see if any of them turned out to be right. After all, it’s not just the newsletters who tell us that they can pick stocks for you — pretty much every money-related magazine puts out prediction issues, especially in December and January, and tries to win your subscription dollars with some prescient or entertaining picks. So I took the “stocks for the year ahead” portfolios from Barron’s, SmartMoney, and Fortune, and went back to see what their performance was like. (No particular reason for choosing those specific magazines, I just happened to have them all at hand at the end of January.)
So what happened? Well, obviously it would have been a mistake to buy and hold any portfolio in January without reacting to the news that followed — it’s been perhaps an unusually “newsy” year, after all. But there are some surprising things to note.
First, let’s take another look at the three lists — all of them were chock full of stocks and themes that certainly looked interesting back in January, either because they were in the press a lot, or they were in hot markets or potentially hot markets, or because they had come down significantly from their highs.
Fortune
- Annaly Capital Management (NLY)
- Berkshire Hathaway (BRKB)
- Dick’s Sporting Goods (DKS)
- Electronic Arts (ERTS)
- Genentech (DNA)
- General Electric (GE)
- Jacobs Engineering (JEC)
- Merrill Lynch (MER)
- Petrobras Energia (PZE)
- St. Joe (JOE)
Barron’s “ready to bounce” stocks for the year ahead:
- American International Group (AIG)
- Bear Stearns (BSC)
- Comcast (CMCSA)
- Comerica (CMA)
- SunTrust (STI)
- Gannett (GCI)
- Kohl’s (KSS)
- Legg Mason (LM)
- Micron Technlogy (MU)
- Southwest Airlines (LUV)
- Starbucks (SBUX)
- Time Warner (TWX)
SmartMoney’s “Where to Invest 2008″
- Bunge (BG)
- Deere (DE)
- Diamond Offshore (DO)
- Ion Geophysical (IO)
- Central European Media ENt. (CETV)
- Erste Bank (EBKDY.PK)
- Phililppine Long Distance (PHI) (this was a Robert Hsu pick about six months ago)
- Telefonica (TEF)
- General Electric (GE)
- United Technologies (UTX)
- Genworth Financial (GNW)
- Wells Fargo (WFC)
So … can anyone guess how many of those 34 stocks are actually in positive territory (not counting dividends) for investors who bought them in January?
No, for you pessimists, it’s not Zero. Not that anyone would brag about this, but there were six stocks on that list that would have given you a positive return.
If we assume these are really buys for the beginning of the year, with a purchase on January 2 at the closing price for that day, Wells Fargo is the only one Smart Money picked that’s in positive territory. Barron’s got Kohl’s, Comcast, and Southwest Airlines. And Fortune picked winners St. Joe and Genentech. Genentech is by far the best performer with a 38% gain, thanks to the bid by part-owner Roche (RHHBY.PK) to buy the balance of the company. Barron’s picked the most winners, with three, but also had the worst average return thanks to the two near-90% losers they also picked.
On average, they all returned significantly less than the S&P 500 (as represented by the SPY ETF). The S&P since January 2 has lost about 16% (though that number is moving a lot even as I type) — the Fortune list came the closest to matching that, with a 17.8% loss. Both Smart Money and Barron’s came in with losses — of 25% and 28%, respectively. Even just looking for common themes wouldn’t have necessarily helped you much — the only stock on more than one list, GE, is down by about 30% (and that was a “bounce” pick, already down 25% or so since its highs of the previous Fall).
If you give them credit for a later date, since some of those magazines weren’t necessarily available to the public on January 2, the returns don’t improve all that much — January was a rough month for the S&P 500, so if we start from a January 28 date a few stock swings jiggle the percentages, but the lists still all significantly underperform the S&P’s 9.4% loss to date. The biggest difference among the lists if you jog those prices by four weeks is that Smart Money looks much better — this is almost entirely due to the huge dips in the two Eastern European picks during January (Erste Bank and CETV) that gave them better returns on those two stocks if you pick a late January price. If you want to check my assumptions and numbers, the Google Spreadsheet is available here.
If you’re like me, your eyes naturally gravitate to that list of Barron’s picks — what kind of luck did it take to select Bear Stearns, AIG, and Legg Mason as your best buys in January? It’s a miracle that they didn’t also get Fannie Mae (FNM), Freddie Mac (FRE), or Lehman Brothers (LEH) in there. And I don’t point this out to have fun at Barron’s expense — I was thinking seriously about buying Legg Mason back then, too, and I was wondering a few months ago, when it got down to $30, whether AIG might be cheap enough to be interesting. Thankfully I didn’t end up buying either.
Who would have thought that Bill Miller at Legg Mason would get so many flat tires at the same time in Yahoo (YHOO), Crocs (CROX), Merrill (MER), Lehman, Freddie Mac and others, and in so doing play a big part in Legg Mason losing its sheen as an asset manager just when it needed that the most with the new funds it acquired from Citibank (C)?
And among the other huge losers, Bear Stearns and AIG were almost unassailable brand names in January — for BSC to disappear and AIG to be begging for help from Warren Buffett would have been almost unthinkable nine months ago.
And the really depressing thing? The returns would probably be just about the same if you just bought the picks that were actively teased and touted by expensive investment newsletters, since those stocks have, on average, performed truly awfully this year (though there have been a few winners). I have tracking spreadsheets for those stocks, though not from a single date and not compared to the S&P, and the average stock touted in January or February in one of the newsletter ads I write about lost about 20%.
The lesson is a simple one, even if it’s one that most of us, myself included, ignore on a regular basis: Most people aren’t smarter than the market, and no one can predict the future. Even those who have a huge audience can be very wrong, and it probably behooves most investors to take all tips with a grain of salt — whether they come from a cheap magazine, an expensive investment newsletter, or a drunk on a park bench.
We all need to take responsibility for our own investments, and we should never buy stock in a company that we don’t understand, or for which we lack an exit strategy (a point when the price will get high or low enough that you want to sell it). That doesn’t mean that any one strategy is right for everyone — some buy and hold forever and that can work out, if you choose wisely and have a strong stomach; others always cut their losses or take their gains at just a few percent and that also can work out, if you’re willing to trade a lot and your system works. Are you buying charts, stocks, or companies? What’s your time frame? How strong is your stomach? We shouldn’t buy anything until we know at least the answers to those questions.
And perhaps most importantly: diversification is the only real protection any of us have from surprises like AIG and Bear Stearns, and there’s no shame in being average. If you knew a stock picker that was able to beat the buy lists of Barron’s, Smart Money, Fortune, most mutual fund managers, and most investment newsletter editors, you’d jump on it. For most years, and for most longer time periods, that stock picker is Standard & Poors, and its buy list is the S&P 500 — sometimes the lazy and boring approach is the way to go. Even if it means an occasional loss of nearly 5% on crazy days like today.
Full disclosure: I do have money invested in an S&P 500 index fund, but I love stock research and I also take my chances at trying to beat that index (overall I have not done so this year — my portfolio, index funds and other mutual funds included, has almost exactly matched the S&P Index return since January, down around 16%). Currently, of the companies mentioned above I own shares of Berkshire Hathaway and Google (GOOG).
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This article has 10 comments:
In less than a year six widely held financial stocks have cost Buy and Hold investors more than $840 billion dollars. (Yes, that’s “billions” with a “B”).
$840 billion in losses is a number that might even get Warren Buffet’s attention. Think of all the retirement funds and college tuition money that got needlessly flushed down the drain in these few months. It’s a sad scenario but the saddest part is that the investors who lost all these billions could have avoided this disaster by simply using a “SmartStop” trailing exit.
Let’s look at the individual stocks and see what might have happened if some prudent stops were set rather than relying on a “buy and hold”. (You will notice that I did not refer to “buy and hold” as a strategy. It doesn’t qualify to be a strategy – its actually the absence of any intelligent exit strategy.)
Fannie Mae (FNM): The Sept/Oct 2007 high was $68.60 and FNM dropped to a recent low of $6.68. This 97% decline cost investors a total of $66 billion dollars. A SmartStop exit was triggered on Oct. 17, 2007 that would have limited the loss from the peak to less than 10%.
Freddie Mac (FRE): The Sept/Oct 2007 high was $65.88 and in less than 12 months FRE dropped all the way down to a pitiful 36 cents. When Freddie took that leap off the cliff it cost “buy and hold” investors $42 billion dollars. However a SmartStop exit was triggered on Oct. 16, 2007 at a price of $58.05 that might have preserved enough equity to get the grandkids through college.
Lehman Brothers (LEH): The Sept/Oct 2007 high was $66.98 and now they have filed for bankruptcy and the shares recently closed at a value of 21 cents. This painful disaster cost LEH shareholders $46 billion from the referenced high. Where was the SmartStop exit on LEH? It was triggered on Oct. 19th at $57.47 a share. Those funds could have been reinvested and earning money toward a comfortable retirement. Where is all that money now?
American International Group (AIG): The Sept/Oct 2007 high was $70.13 and now the stock is trying to stabilize somewhere below $5 after hitting $3.50. For the unfortunate shareholders who still own AIG that’s a whopping loss of $179 billion (give or take a few dollars). How smart was the SmartStops exit? It was triggered on Oct. 15, 2007 at $66.41 and there have been 28 more SmartStops sell signals since then.
Washington Mutual (WM): The Sept/Oct 2007 high was $39.25 and the SmartStop exit was at $34.30 on Oct. 15th. WM hit a recent low of $1.75; not even enough to buy a Starbucks latte. In less than a year WM shareholders lost more than $63 billion. Maybe if they hold long enough WM will eventually recover. (Although it will require a gain of more than 2000% to make back that 95% loss.)
Bear Stearns (BSC): It’s hard to believe that the Sept/Oct 2007 high for this ancient and respected brokerage firm with over 3 billion shares outstanding was $133.20 a share. Now they are gone and even with the government assisted bailout their unfortunate shareholders have lost more than $440 billion in equity. This one can never recover. That’s $440 billion of hard earned savings that’s now gone forever. (In case you are wondering, the SmartStops exit was at $110.11 on October 24, 2007. There were 17 more SmartStops exit signals prior to the takeover.)
I wonder if the Bear Stearns account executives told their clients that the best way to invest was to buy and hold?
He always told the truth about the investment advice record of the big boys:
They are wrong more often than they are right, even in an up market. But that's a truth no one wants to hear.
Now I read on seekingalpha.com about FRE and FNM doing 100:01 leverage on their debt insurance.
Most investment banks were leveraged by a ratio of 30 to 1, and they were dealing with billions of dollars instead of thousands. Government sponsored mortgage giants Freddie (FRE) and Fannie were using leverage closer to 100 to 1, because of their supposedly stricter lending standards and implicit government backing.
seekingalpha.com/artic...
How can "we the people" know the root cause is being "fixed" if we don't know about the root cause. Most of the news is telling us the root cause is a lack of confidence about all those mortgages being paid as agreed.
And are we sure we understand what happens when 100:01 leverage is applied after the fractional banking reserve requirement is applied? Maybe if this subject needs a spotlight to get people's attention. Then maybe the "lack of confidence" could be better understood.
GrandfatherReport.Us
On Sep 17 01:17 PM kmca1989 wrote:
> yep - i'm getting spanked - having only invested @ august 1, i've
> still managed to catch up w/ the rest of the market's hideous downturn
> by being overly optimistic (and overweight) concerning financials.
WWW.GrandfatherReport....
Richard Fuld, CEO of LEH, admitted to 30x leverage contributing to the problem.
Now I read on seekingalpha.com about FRE and FNM doing 100:01 leverage on their debt insurance.
Most investment banks were leveraged by a ratio of 30 to 1, and they were dealing with billions of dollars instead of thousands. Government sponsored mortgage giants Freddie (FRE) and Fannie were using leverage closer to 100 to 1, because of their supposedly stricter lending standards and implicit government backing.
seekingalpha.com/artic...
How can "we the people" know the root cause is being "fixed" if we don't know about the root cause. Most of the news is telling us the root cause is a lack of confidence about all those mortgages being paid as agreed.
And are we sure we understand what happens when 100:01 leverage is applied after the fractional banking reserve requirement is applied? Maybe if this subject needs a spotlight to get people's attention. Then maybe the "lack of confidence" could be better understood.
GrandfatherReport.Us
WWW.GrandfatherReport....
Richard Fuld, CEO of LEH, admitted to 30x leverage contributing to the problem.
Now I read on seekingalpha.com about FRE and FNM doing 100:01 leverage on their debt insurance.
Most investment banks were leveraged by a ratio of 30 to 1, and they were dealing with billions of dollars instead of thousands. Government sponsored mortgage giants Freddie (FRE) and Fannie were using leverage closer to 100 to 1, because of their supposedly stricter lending standards and implicit government backing.
seekingalpha.com/artic...
How can "we the people" know the root cause is being "fixed" if we don't know about the root cause. Most of the news is telling us the root cause is a lack of confidence about all those mortgages being paid as agreed.
And are we sure we understand what happens when 100:01 leverage is applied after the fractional banking reserve requirement is applied? Maybe if this subject needs a spotlight to get people's attention. Then maybe the "lack of confidence" could be better understood.
GrandfatherReport.Us