This week’s Barron’s January 23 issue has an article titled “A 2022 Report Card We Can Be Proud Of.” Its 84 picks “beat” the market in a terrible year for stocks. Here is my take on this.
Before I begin, let me mention that I read many articles in Barron’s each week and recommend it to anyone seriously interested in stock market investing. The article in question should also be read in its entirety since it shares its ground rules of the picks and provides insights into the outstanding successes and notable losses.
The 84 Barron’s picks lost 4.8% versus a loss of 5.2% for the benchmarks. The losses are the total returns which are the combination of stock price changes and the dividends paid. Each stock’s total returns are measured against the appropriate index for those companies for the time period the stocks were owned. So, Barron’s is applauding a loss that is .4% lower than the benchmarks. That doesn’t seem like it is that fantastic! Another way of presenting this is that Barron’s picks outperformed the market by about 8%, which might sound a little better. Here are some comments:
- Barron’s stocks lost money. They just lost less than the benchmarks, but the picks all were made hoping for gains. On that basis, I think they failed.
- 40 of the picks made money, and 44 lost. Pretty even, but if the pickers were so good, why couldn’t they at least have had more wins than losses? Presumably, the stock pickers are all experienced investors or analysts, yet they couldn’t even come up with more gains than losses.
- The benchmarks include a combination of stocks with the intention that this group will average out the performance of all its components. However, Barron’s picks were made with a bias that all the stocks would have superior returns.
- The 40 stocks that made money had an average total return of 14.2%, and the 44 stocks that lost had an average loss of 21.9%. So, the stocks with losses did much worse than the stocks with gains. Again, not so good. I’ve evaluated investment managers that had many more stocks with losses, but the net returns were positive because once they saw the losses happening, which was contrary to their expectations, they unloaded them quickly while holding the stocks with gains longer. The way Barron’s articles worked, the reaction was slower. Remember, Barron’s is not providing investment advice but information that its readers should consider before investing.
- I am not sure if the Barron’s analysis assumes that equal dollar amounts were invested in each stock. Using percentages provides a reasonable measure of relative performance for unequal investment amounts. However, if there were unequal dollar investments, then gains or losses on the stocks could be significantly different if large amounts were invested in stocks that lost money and much smaller amounts in stocks that had gains. For purpose of mathematical validity, I would assume equal dollar amounts were invested in each company.
- The article assumes that the shares were purchased when recommended. That is practically impossible as people need time to read, understand and consider the recommendation and then act, with each person having different time commitments.
- Presumably, the recommendations would cause added buying and the prices to rise, which would change the opportunities for readers. There is also after-hours trading that might affect the stock prices. As an exercise of the performance of the recommendations, this is pretty good, but I do not think it represents a practical method of investing.
- Speaking about timing, every stock would need to be sold when the authors changed their minds about it.
- Another factor is the trading activity based on the price of the stock. The highest-priced stock recommended was $1,450.35, and the lowest price was $6.12. Percentage changes would be the same, but most investors lack the sophistication of only looking at percentages, and the dollar changes factor into decisions.
- I did not review the sectors of the Barron’s stocks. The article addresses some sectors that did well or poorly. The weight of sectors in the Barron’s listing could have skewed the performance. Because of this, I am not sure these stocks were representative of the overall stock market.
- The article also assumes that investors had available funds to make these purchases. To the extent the funds came out of the part of their portfolio earning a money market rate, that would need to be factored into the overall “portfolio” return. Since 2022 had losses, any money kept in a money market fund would have increased the “portfolio” return. The funds would have had to be kept available to make the buying timely.
- Barron’salso assumes there would be no trading costs. I think that is reasonable in that many large brokerage firms no longer charge commissions on many trades. However, for those that had accounts where they paid a commission on trades, their returns would be lower.
- Barron’sdoes not provide for taxes on sales of stocks with gains, while the benchmarks would not consider taxes. This would reduce the total return. If the trading was done in a tax-deferred account, then taxes would not have been a factor.
- While they beat the benchmarks, I am not impressed with their results. With taxes added in and the time and attention needed for the trading, it does not seem that the 8% reduced losses made these efforts worthwhile.
- All of the stocks recommended were held for periods less than a year and some only a few months. I suggest that longer periods are more appropriate for a true gauge of performance. When I measure the performance of mutual funds, I look at the ten-year records. Investing is a long-term process designed to achieve long-term goals. I don’t believe performance measurement of less than that period reflects accurately on the skill, dexterity, and ability of the managers.
- Built into the benchmarks are the dividends paid. The purchase and sale of individual stocks based on the timing of the articles might cause a dividend payment to be missed or an extra one to be captured. These would affect the total return.
- Barron’sresults assume every stock was invested in. If you decided to skip a few for whatever reason, the results would have been different – either better or worse. Their performance assumes strict adherence. Besides having a possible bias against some of their picks, you could have been sick, traveling or in an unavoidable position where you could not act on their picks. That, too, would change the final results.
- There will always be exceptions where some stocks perform extraordinarily well, and others perform worse. But here, we are dealing with a universe of 84 picks over the course of a year. When reviewing this listing, I found one outlier that earned more than 40% and six outliers that lost more than 40%. While only one that did very well is a little unusual, it might not be totally unexpected since 2022 was a terrible year for stocks. However, six that did so badly indicate the precarious nature of the stock picking, the really poor decisions the analysts made and the lack of cutting losses quickly.
- A final issue to consider is the amount of mail you will be getting. Each company would usually make about six mailings a year. That is a lot of “stuff” to shred, or that can pile up. And if you don’t respond to proxy statements, you can expect myriad phone calls requesting that you vote. Too complicated; nothing is simple anymore.
I like Barron’s and these annual recap articles in particular. I find them interesting and informative. I also find them a validation of my suggestions that most people should invest to create long-term financial security with a well-diversified stock portfolio that would hopefully reflect the growth of the United States economy over a long-term period (with that period being a minimum of seven years and possibly ten years or more).
I am sure there are fallacies in my calculations and comments since I am using the information in the article without any underlying analysis; however, I think my point is that short-term results are not indicative of any strong strategy. Barron’s had well-informed experts opine on their preferred investments, and the results do not provide conclusive proof that individual choices of stock, whatever the reasoning, are a better way to invest.
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