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

by Travis Johnson, Stock Gumshoe | September 15, 2008 2:48 pm

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[1].

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[2], 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.


Endnotes:
  1. Google Spreadsheet is available here: http://spreadsheets.google.com/pub?key=pA1yY2BM8kfcrg3uKzqeBCA
  2. tracking spreadsheets for those stocks: http://www.stockgumshoe.com/tracking

Source URL: https://www.stockgumshoe.com/2008/09/not-just-the-newsletters-how-did-barrons-smart-money-and-fortune-do/


  1. womanwithportfolio
    Sep 15 2008, 04:36:13 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 perhaps in need of demolition. These guys, however, created their own perfect storm, with collateral damage to folks all around them. It’s almost biblical.

  2. Mark
    Sep 16 2008, 09:26:19 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. These high amplitude manias and crashes put a horrible strain on the economy and cause a lot of investment money to be grossly mismanaged from an economic perspective, not to mention the more mundane effect on peoples jobs and retirement plans. I don’t think this a good thing, and I think we need to clean up our act and start telling the truth. No pro-forma balance sheets, no off balance sheet “investments”, more regulation of the derivatives markets, and the recognition that excessive stock compensation at the executive level does not “align management with stockholders” but really encourages them to pump the stock price by exaggerating financial success with the latest in inventive crooked accounting practices. Perhaps we should just go back to old fashioned executive compensation–namely salaries–which are easy to track and show up nicely on the balance sheet.

    I have a background in finance and in the middle of last year I had gotten the strong indications that we were being led to slaughter with sugar-coated financial information, and this caused me to pull out of the market entirely and go to T-bills. It has turned out well so far, but one has to wonder as the US government accepts all kinds of questionable collateral, including mortgage backed securities in an attempt to ease the financial panic.

    I keep thinking it is time to move to Switzerland. Where are my lederhosen?

    Mark

  3. Wayne
    Sep 16 2008, 09:38:38 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 real probabilities for the future relating to the long term performance of those funds. And, I was under the impresion that the collection of funds and thier diversity of investment WAS a form of his Allocation Model.

    I would hope and expect that just being patient and riding out this storm will eventually restore everything. History, after all, shows that it usually does. Six months, a year or perhaps two, is presumably manageable. It would not be nice if it takes decades. Not for me, not for most of us.

  4. Wayne
    Sep 16 2008, 10:54:13 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.

  5. Lauder
    Sep 16 2008, 10:54:26 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.

  6. JohnnnyB
    Sep 16 2008, 11:15:03 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, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-bucked securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.”

    Astonishingly the article goes on to say that we are acting like an the emerging nations that went bankrupt in the 90’s, namely Russia, Brazil, Argentina, South Korea and so. Incredulously he discovered our country, even though we are the strongest economy in the world, looked liked the other emerging countries who went bankrupt.

    Maybe the worst part of all is that over 90 percent of the economists could not see a recession coming as early as two months before it happened.

    No one wants to hear that we are headed for a severe financial adjustment – we can’t be they say. We live in Camelot. As Americans we cannot tolerate bad news. It means we have to discipline ourselves and go on the diet. No one is willing to do that. And the news media will not tell it like it is even when you show them some proof of the problem.

    Thanks Gum Shoe for your excellent efforts as always and a forum that we are able to share these serious issues with others of similar thoughts and concerns.

  7. EYOUNG
    Sep 16 2008, 11:52:38 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???

  8. Pete Ewing
    Sep 16 2008, 12:27:22 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

  9. destry
    Sep 17 2008, 02:54:03 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 nothing more than really slick self-promotion),than in your good common sense.
    I subscribe to several investment letters, and learn from every one of them…But I only occasionally act on their ideas…I’ve missed every hot, can’t miss; No brainer that ever came down the pike…I watch a stock so long; That I’ve sometimes, out lived their officers…But the result has been overall, worth-it (Except a couple of notable times “I” thought “This deal no one could screw up”; And sure enough…).
    As much as I’ve tried to avoid mentioning it; Investments is what I do for a living…In my
    defense, I’m only doing it until I get a real job…I’m waiting to be called-up to catch for the Red Sox…I kid you not…I’ve been waiting 30 years; And I swear to Pete; If I don’t get a letter this year; I’m telling the Red Sox to “Stick-it” (“You” try coming up out of a catcher’s crouch at my age…And it’s usually too far to crawl to the back stop, to shinny up the
    fence.
    Still, It beats being a Texas border law-man,as I
    was before.
    The point of this blather, is that, This point in time is long in the making…However…I’m not worried…Mad yes…Worried..No.
    If you invest in only what you know enough about,
    and/or, understand…And stay away from investment styles you are not suited for, by temperment, intelligence, or risk aversion…Most of the time
    you’ll do okay…I don’t buy stocks…I buy a share of a business, which I’d own outright if I could…It’s that simple for me…And I invest my clients the same way…Are we down some?…Yup!
    What business isn’t from time to time?….
    And I’ve had virtually,no panicky calls from clients or friends…And a large number of those
    I’ve advised for 15, or 20 years…Or their kids, now…And in several cases, their grandkids.
    Warren Buffett does that…Except when he bought a ton of CMO’s…And lost his fanny.
    It doesn’t matter if you trade, speculate, or do long-term wealth- building…You have to learn the techniques to become good at it…No one can do more than give you the ideas and recommendations
    to be successful…The market is an emotional place.
    Often-times dominated by folks you wouldn’t let in your house, or date your sister.
    If you hang your hopes on those you don’t know, then whine when they let you down….You are guaranteed a pounding.
    That great American, O.D Cleaver (Not a half-bad gunfighter neither), used to say:
    No body’s ever been right twicet in a row.
    …He also said…We tend to take money too seriously…Except when we don’t take it seriously enough.
    The last thing O.D. Cleaver taught me was, in a gunfight…Take your time… fast!
    O.D. remembered the first part…Forgot the last…
    I still miss him…

  10. Piere Pienaar
    Sep 17 2008, 05:39:31 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.

What These Icons Mean