There was a peculiar exchange on CNBC the other day between Mark Haines and a guest touting Abbott Labs (ABT) as a value stock. Haines asked why anyone would want to buy such a stinker of a stock noting that it has lagged badly since the March 2009 low. It is essentially flat since then versus a 43% lift for the Healthcare Sector SPDR (XLV) and an 88% lift for the S&P 500.
The guest was making a value case for the name and simply concluded that he thinks the market will recognize the value in the name at some point and that they will be rewarded for the pick. Later in the day another analyst said he liked Cisco (CSCO) for the valuation. Cisco seemed to be capturing the effect off of the March low, actually outperforming the Tech Sector SPDR (XLK) until a few months ago when it started to rollover and lag before blowing up with an almost 20% drop in mid November. Over the last ten years it has lagged XLK most of the time and is down 43% from where it was ten years ago versus a 21% decline for XLK in that same time period. Maybe Haines would call this one a stinker too?
I don't really know anything about Abbott and I know a little about Cisco but both create a point of understanding about the potential folly of stock picking. I am a big believer, obviously, of including individual stocks in a diversified portfolio but clearly some picks work out and some do not. Picks can work or not work for a multitude of reasons many of which are not foreseeable. Buying a stock primarily because it is a compelling value is a very difficult thing to do. It is easy to understand that a stock is "cheap" by some objective measure but the difficult part is assessing when the value gets recognized. It can also be difficult to discern why a stock is cheap. Cisco and Intel have been cheap for a long time. Are they value stocks or value traps? You may have an opinion but it is a reasonable question.
The above tends to be more of a bottoms up process for stock selection. The way I pick stocks is from the top down. Top down picks frequently come from country or theme selection. If you correctly pick a country that then goes up 50% it will be very likely that a large cap stock (still properly researched) with a large weight in the benchmark index for that country will go up a similar percent. There can be no guarantee of course but you have a pretty easy to understand tailwind. Conversely, are you willing to bet that you can find some stock in Portugal that will do well for the next year or two? I certainly would have no reason to think I can find a stock that does well if Portugal goes down a lot this year.
As I believe in top down I would obviously make that sound more compelling but plenty of investors do very well with bottom up stock picking but I think this is the more difficult path. The more top down tailwinds you can correctly isolate the easier time you will have with your portfolio and perhaps even more importantly the more headwinds you can correctly isolate the easier time you will have with your portfolio.
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5 comments:
Regarding most pickers on CNBC, I'd rather take my chance with the chimp on the Robitussin commercial.
T
Roger, can't we extend the logic of your argument against picking stocks to picking countries? How do we know when a country is going to take off? No matter what entity is selected for investment, it does seem that the same old dichotomy between value and growth investor persists.
Hal,
Well it certainly could. My reply would be that my primary goal of foreign investing is to own individual countries with attributes that are least like the US. Additionally, I personally target top down themes that create what I believe are tailwinds for future success. I view this as being different from buying EWJ (just an example) because it appears cheap by some series of statistical metrics.
I think that is different but maybe not.
Thank you, I get it. As a new follower, I think I need to look at your old posts to get a feel for the strategy.
Semi-OT but IndexUniverse has an interesting article at http://tinyurl.com/4cu6ejb on the continuing effort to develop a contango-resistant ETP with the latest offering from Van Eck. As one would hope, instruments are becoming more refined and better targeted which helps both top-down and bottom-up investing approaches in turn.
The article also has some kind words to say about ETN commodity products too, some of which make sense, but also makes the following assertion that doesn't: "Under prevailing IRS interpretations, commodity ETNs are taxed like zero-coupon bonds. That means investors don’t owe tax on the note until they sell, the note gets called (if it’s callable), or the note matures."
AFAIK tax is owed on zero-coupon bonds every year because of imputed interest (AKA phantom interest because you don't actually receive it until maturity) and I am not aware of any 'prevailing IRS interpretation' to the contrary. Anyone know different?
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