Ian Wyatt is out with some ads touting “Forbidden Stocks” — stocks that are abandoned by Wall Street, sold off by mutual funds, and can only really be appreciated by discerning investors who subscribe to his Million Dollar Portfolio (currently $295/year). Shall we figure out what they are?
The spiel starts like this:
“Wall Street Can’t Touch These Moneymakers — But You Can!
“Off-limits to the big boys, a small group of ‘forbidden’ stocks is crushing the Dow and S&P 500…handing investors 485%, 513% and 1041% returns
“[“Forbidden” stocks] historically have generated far better returns than the overall stock market, and they continue to shine
So the basic premise isn’t ridiculous — he’s just touting spinoffs. Calling them “Forbidden stocks” perhaps helps to increase the allure, or to make you think that you couldn’t possibly navigate these murky waters without his guidance, but spinoffs can be a real and compelling investment opportunity and they have indeed brought market-beating returns, on average, according to several analysts and academics who have tracked the historical results.
And unlike some other strategies in investing, this one also has the added advantage of being logical, which makes me happy. If a company gets too big and complicated or has different divisions whose goals are not the same, splitting off some of their businesses into smaller, more focused and more easily understood companies should make it easier to see the value of those divisions and get rid of the “conglomerate discount” that is often applied to large, diversified companies with confusing reporting. And as we’ve seen over and over in the stock market, management matters and focus matters and having a plan matters — a small company with clear goals and a non-conflicted mission should do better, all else being equal, than one with lots of different goals and strategies.
Recent example number one for this point might be Facebook (FB) vs. Twitter (TWTR) — a visionary leader and a mission and rapid decisionmaking in a changing world (FB) works a lot better than a lack of strategy and a game of musical chairs in the CEO’s office (TWTR), and investors notice both the strategy and mission and the difference it makes, albeit sometimes gradually, to the income statement.
That doesn’t mean that spinoffs always work, of course, or that they’re always compelling investment ideas — but it does mean ...