Behavioral Finance

A Stock-Picking Contest’s Evergreen Lessons

What long-term investors can learn from a four-month stock-picking contest.

As the year wraps up, many investors are likely reviewing their portfolio’s 2019 performance. In that spirit, we share an article by The Wall Street Journal’s Spencer Jakab: “For Investing Success, Buy Ugly Shoes, Sell Fake Meat.”[i] The article is a tremendously fun recap of the WSJ’s stock-picking contest—an enjoyable read, in our view, all the way around. But beyond entertainment value, we think this article has some salient and timeless lessons for investors. Not about stock picking, but rather, how to view your portfolio.

First lesson: It is normal that not every stock will rise during a bull market—especially over a short period. Seeing some red when broad stock indexes are up big for the year seems counterintuitive and may even be frustrating. Behaviorists note this frustration often stems from a bias known more fancily as “order preference.” Your mind prefers uniformity—all up. In practice, order preference leads many to fixate on down stocks, even if the positive ones vastly outweigh them. But the trouble this can cause is effectively twofold: One, seeing only winners isn’t realistic, especially in a globally diversified portfolio. Two, and more importantly: If every single holding is up big, you may be taking on a lot of risk—e.g., your portfolio is heavily concentrated in a hot sector or handful of securities. That sounds great when those stocks are in favor, but when leadership rotates, the decline will likely be greater. Moreover, during maturing bulls, market breadth tends to narrow—i.e., the percentage of stocks outperforming the broad market—goes down. As this record-long bull market continues climbing, we wouldn’t be shocked if the number of laggards rises too.

Another lesson: The totality of your portfolio matters more than what the high flyers and laggards are doing. Eyeballs tend to gravitate towards the best—and worst—performers, but these outliers usually cancel each other out. What matters more is how everything else is doing. Consider how the WSJ writers fared. Of their 24 buy/sell recommendations, only 11 had positive returns—and these “earned an average return, not including dividends, of just 3.8% over four months,” which lagged the S&P 500’s 8.6% over the same period. Despite the underperformance, though, this WSJ “portfolio” was still positive despite having more negative picks.

In our view, this reinforces the importance of taking a “top-down” investing approach. We believe a portfolio’s asset allocation—the mix of stocks, bonds, cash and other securities—determines the lion’s share of returns. This higher-level decision matters more than individual security choices, in our view. Hence, the fact the contributors chose 14 stocks to buy versus 10 sells shows a slight bias towards stocks in their allocation. No shock to us that this generated a low-but-positive return in a strong bull market stretch. Further highlighting this: “Four of the top five Heard picks were ‘buy’ recommendations while four of the five worst ones were ‘sells.’ Some 42% of Heard’s picks called for stocks to fall while only 21% of readers bet against stocks. That helps to explain readers’ superior results—an average profit of 5.1%, some 1.3 percentage points better than Heard’s scribes.”

As the WSJ piece also shows, the “consensus” view can be wrong pretty often. Don’t think you are immune to this—it affects everyone, and no one will be 100% correct with their picks all the time. At Fisher Investments, we sometimes call the market, “The Great Humiliator”—a reference stocks’ tendency to do something different than what the consensus expects, leaving investors with egg on their faces. Hence, have a “counterstrategy”—own some stocks in areas you don’t anticipate doing tremendously well. This is diversification in action. If you are right, it does mean some of your picks likely won’t do as well. But that is by design—a core risk management tool.

Critically, if your picks don’t work out right away, that doesn’t mean immediate change is necessary. As this article wryly notes, a four-month stock-picking contest with imaginary money means, “You either go big or go home.” A hot, sentiment-driven stretch can reward investors taking on big risk in the short term. But long-term, growth-oriented investors don’t have four-month time horizons. Review why you bought those stocks in the first place. Have the fundamental drivers—the economic, political and sentiment factors surrounding your decision—changed? If they haven’t, we think staying patient is prudent.

Finally, a friendly reminder: Investing fads take many forms, but they aren’t the key to long-term investing success. Two of the WSJ writers’ best picks were buying stock in an ugly shoe company and selling short a fake meat producer. These “trendy” types of investment opportunities abound. Do you think a mercurial electric automaker will short-circuit, or are its prospects shatterproof? Should you find a beverage maker that looks poised to balloon with alcoholic seltzer—or do you forecast a bubble popping? Is artificial intelligence (AI) the smart play, or is machine learning more hype than profit generator at this juncture? Trying to capitalize on the next big fad is a form of heat-chasing—a common investing mistake. “The next big thing” grabs attention, but finding it isn’t necessary for successful long-term investing. If your portfolio is properly diversified, any one security won’t make or break you, although it may complicate winning a four-month stock-picking contest with no actual money at stake.



[i] Friendly reminder: MarketMinder does not recommend individual securities, even if they involve beautiful shoes or real meat.


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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.