CAN YOU PICK INDIVIDUAL STOCKS?
You are told not to buy individual stocks (example) but use mutual funds instead. Yet you are confronted stock recommendations daily in the popular press (online or otherwise). A quick look at yahoo finances compositor page (https://finance.yahoo.com/) reveals dozens of recommendations. Certainly some stocks will do better than others and beat the indexes, right? It doesn't make sense for Bank of America or Investor Business Daily to recommend stocks which will underperform the S&P 500! Therefore:
PROPOSITION 1: Buying individual stocks recommended by reliable sources, selected at random, will produce a portfolio which will beat the S&P 500. Why would they recommend bad stocks?
Results: We performed two trials.
PROPOSITION 1: Buying individual stocks recommended by reliable sources, selected at random, will produce a portfolio which will beat the S&P 500. Why would they recommend bad stocks?
Results: We performed two trials.
The first was a rather unsystematic test of 66 stock recommendation articles from 2008 to 2017.
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Of the 66 recommendations, 29 beat the S&P500, 37 returned less than the S&P 500 after one year. Not encouraging.
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The second trial picks a new recommendation every day for a year, holds the stock for one year and records the results versus the S&P 500. This test is ongoing but...
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Of the 63 recommendations completing one year, 15 have beat the S&P500 while 48 returned less than the S&P 500. Again not encouraging.
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CONCLUSION TO PROPOSITION 1: WHILE IT DEFIES COMMON SENSE, STOCK RECOMMENDATIONS IN THE POPULAR PRESS TEND TO UNDERPERFORM THE AVERAGES. WE MUST ASSUME THE AUTHORS ARE MAKING SINCERE RECOMMENDATIONS SO IT IS NOT CLEAR WHY THE RESULTS ARE SO BAD. IF YOU ARE INVESTING IN INDIVIDUAL STOCKS, DON'T GET YOUR RECOMMENDATIONS FROM GENERAL FINANCIAL WEBSITES.
PROPOSITION 2: Buying stocks recommended by analysts with long successful track records will beat the S&P 500. We hope a documented successful track record will result in future success.
PROPOSITION 2: Buying stocks recommended by analysts with long successful track records will beat the S&P 500. We hope a documented successful track record will result in future success.
Trial A: We draw on TIPRANKS which monitors the results of dozens of analysts and ranks their long term records. We draw a 20 stock portfolio from their top 3 analysts (2019 ranking) and hold the stocks for a year.
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On 8/2/18 OI made the following hypothetical investments based on TIPRANKS best analysts last 20 recommendations and compared to the S&P 500 as measured by VFINX. We are pleased to report this portfolio delivered 16% return while the market as whole delivered 4%. Some symbols ended up on the buy list more than once and have multiple purchases in the portfolio.
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Trial B: This is also a TIPRANKS portfolio and is ongoing. The approach is slightly different. We start out with a stash in VFINX, wait for the next stock recommendation from one of TIPRANKS 3 top analysts, move a fixed amount from VFINX into the new stock and keep adding until we reach 20 stocks. This might be how a real investor would dabble in individual stocks and "hot off the press" recommendations may be better than year-old recommendations. Stocks in the portfolio are WDAY BIGC U AVLR AYX BILL HUBS GDDY FIS GPN FLT FISV PYPL WEX BKI SITM AMBA ALGM CAMT AMAT.
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Assume you have a baseline of $100,000 placed in VFINX on 5/1/20.
As of 3/17/21 we have the following results: 1. You left your money in VFINX. This portfolio has a value of $140,434.2. 2. You converted $5000 worth of VFINX into shares of the next stock recommended in TIPRANKS.This portfolio has a value of $138,243.8. Call it a draw for now. |
Trial C: We subscribe to a well-known newsletter and choose a 20 stock portfolio from their list of recently recommended stocks to compare with the S&P 500. We will hold for a year. |
We created our portfolio on December 2, 2020 and includes the following stocks: NICE NVTA DXCM ACN ZM SHOP ZM NOW GMED CRWD WEX CRWD ASML WIX JD FVRR BAND PINS ADSK FVRR. Some symbols ended up on the buy list more than once and have multiple purchases in the portfolio.
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Why do we think the above portfolio will beat the S&P 500?
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