Not Just the Newsletters — how did Barron’s, Smart Money, and Fortune do?

By Travis Johnson, Stock Gumshoe, September 15, 2008

If you’re not an analyst or asset manager who specializes in the financial sector, and you don’t count on AIG, Lehman Brothers, 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 future 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)
* 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 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 it’s 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, Freddie Mac, or Lehman Brothers 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, Crox, Merrill, 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 they needed it most with the new funds they acquired from Citibank?

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 on 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 their 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.

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20 Comments on "Not Just the Newsletters — how did Barron’s, Smart Money, and Fortune do?"

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womanwithportfolio
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September 15, 2008 4:36 pm
Brilliant post, Gumshoe. I’ve been dealing with storms on two fronts. My extended family resides on the Gulf Coast, and they had to evacuate when it appeared they were directly in Ike’s path. There was a lot of damage, but it appears their houses all made it through the storm with only minor damage. I’ve been looking at pictures of piles of rubble where landmarks I knew well once stood. Very sad. And so I’m also looking at the ruined pilings of Lehman Brothers, with rubble strewn around the market, and all buildings with shaky foundations in serious trouble and… Read more »
Mark
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Mark
September 16, 2008 9:26 am
It seems to me that the main cause of the trouble in stock investing is that you can’t believe the financial information put out by companies in which you are trying to invest. The level of fudging and lying at the financial level has gotten much worse in the last 25 years, making it impossible to understand for sure whether a company or industry sector is sound, even by looking at its balance sheets. This leads to alternating speculative manias and crashes, which would happen anyway, but the lying/fudging factor doubles or triples the amplitude of these manias and crashes.… Read more »
Ed Morgan
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Ed Morgan
September 16, 2008 9:32 am

Forbes Guru – 23 stocks for the 2nd half of 2008. YTD, down 25%. Only 2, PG and HLIT, are positive.

Wayne
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Wayne
September 16, 2008 9:38 am
Yes, two storms. The hurricane brushed by just far enough away to lend a nice light wind for a day and a half, some intermittent rain for about a day. Since January the Market has done me wrong just like it has everyone else. Most of my loss is some of Oxford Club’s best loved funds. The dividends keep showing up in the mailbox but the value of the portfolio has fallen to nasty lows. Alex Green wrote an article yesterday talking about his Allocation Model which I see as an avoidance of the issue. He will not discuss the… Read more »
Wayne
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September 16, 2008 10:54 am

As a new investor, it would appear that this is a bad time to invest in the US. We are taking a economic and structual beating at the same time. But I will continue to watch the market and try to see through the dishonesty and crookedness.

Lauder
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Lauder
September 16, 2008 10:54 am

Great article Gumshoe. Personally I’d sooner get stock advice from the drunk on the park bench than listen to Fortune or Barrons.

75% of my stock allocation is in index ETFs and most years the indexes have beaten my stock picking.

BTW you may want to consider supplementing your SP 500 index with mid and small cap index ETFs (IJH/IJR, or IWM)and foreign index ETFs like EFA. The S&P 500 has sucked over the past 5 years, although its supposedly going to catch up.

JohnnnyB
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JohnnnyB
September 16, 2008 11:15 am
The New York times recently printed an article about Dr. Doom. I thought it might be appropriate in this instance to share the opening paragraph and other comments regarding the comments of Dr. Roubini as reminder of where we may still be headed. “On Sept. 1,2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and,… Read more »
EYOUNG
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EYOUNG
September 16, 2008 11:52 am

And still the Financial Consultants, brokers, et al charge us fees for investing services seemingly guaranteed to lose us money – they call it “commissions”,,,
Lotto or Powerball, anyone???

Pete Ewing
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Pete Ewing
September 16, 2008 12:27 pm

Well, I have been hunkering down in HSTRX and HSGFX for most of the year and Hussman has come through. He can sometimes underperform when the market is flying to the upside but he sure does manage money well on the downside. A great sleep well core holding.

~Pete

destry
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destry
September 17, 2008 2:54 am
I have a knack for drying up conversations, when I stick my oar in…This time won’t be any different, probably. If we were all as really smart as we pretend to be; We’d have taken our dust off the table, October last…We didn’t; I didn’t…Nor did my clients. I’ve been admonished, and educated, and I appreciate the give and take…I learn something useful from everyone…I hope I’ll always continue to do so…For the most part you people are so bright; You’re scary…But you still would rather place your full trust in “professionals” you know only by reputation (Sometimes that, being… Read more »
Piere Pienaar
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September 17, 2008 5:39 am

Yes, the biggies fall becuase they are greedy, and make the same mistakes over and over again. Spend money they don’t have, and that is the sam efor invesors and consumers.

Will we ever learn?

Hint: Check the Debt ratio of companies out, even Blue chips, befor you invest. Otherwise you won’t even have money to buy chips.

advance hair extensions
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July 1, 2010 8:23 am

brilliant website, i love your site

vicky caskey
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September 16, 2008 9:14 am

Yours too is a brilliant post!

Gravity Switch
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September 16, 2008 11:02 am
That’s true in some ways, though it’s also possible that the US is ahead of many other countries in the cycle and could recover from a potential global recession earlier than some countries. That big picture stuff has too many moving parts for me. I try to focus on buying companies I’m comfortable with (few and far between, sometimes), staying diversified and buying the market if no individual companies stand out, and not trying to predict when the market will go up or down — that only makes sense if you’ve got five years or more before you need to… Read more »
Gravity Switch
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September 16, 2008 11:06 am

Today that drunk on the park bench is probably a former Wall Street trader, so buyer beware!

And yes, I tend to mention indexing and the S&P as the basis, but clearly diversifying should mean getting out of just those big companies, too, and out of the US (even though a big portion of S&P earnings come from overseas in any given year), and even into bonds and possibly some “alternative” asset classes like timber and land or, if you want to give your heart a chance to skip a few beats, commodities.

womanwithportfolio
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September 16, 2008 1:20 pm

Thanks, Vicky. I’m lamenting the loss of most of Galveston, which I loved so much as a child. And I’m also lamenting the loss of Lehman Bros. as a former mentor. I learned a lot from them before they started to go astray.

Glads B
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Glads B
September 16, 2008 7:23 pm

Wow, I wished I knew of Nouriel Roubini then…

womanwithportfolio
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September 17, 2008 1:14 pm

Destry, you sound like a guy anybody would be glad to ride herd with. Say, was it you who was with O.D. when he found that hat in the sand dunes out in Monahans?

destry
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destry
September 18, 2008 12:11 am
“Know Monahan’s…Nice people…That wasn’t O.D. Cleaver,though…O.D got credit because the “O” in O.D. stands for “Odell”…Who it was, was Odell Roberts…Deputy Sheriff out of New Mexico, about a ton of years before I came to work out of the El Paso Sheriff’s office under Mike Sullivan.. He and his partner could clean out a cantina bar fight,slicker than scum off a Louisiana swamp… A pure pleasure to watch them at work. You must be a Monahan’s girl, or there abouts.Odessa-Midland, etc…..Pretty much only locals know the sand dunes… Besides…O.D. was down with his leg broken in two places, from trying… Read more »
womanwithportfolio
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September 18, 2008 7:29 am

Actually, I’m more of a Big Bend Ranch girl. I rode a camel there once, following the route of the Texas Camel Cavalry (pre Civil War). Also love Hueco Tanks, near your neck of the woods in El Paso.

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