If stock picking didn’t work in 2008, when will it work?

It seems plausible that last year’s financial meltdown was so extensive and so well-advertised that investment experts (in particular, stockbrokers and discretionary managers) would have found it relatively easy to outperform the broad market by selecting the right stocks or sectors. But a review of several widely read sources of advice suggests that, in at least one respect, there was nothing unusual about 2008: it was just as hard as ever to outperform the market.

A few samples from the “where to invest now” articles we were reading a year ago:

A prominent money manager and self-described “contrarian” investor wrote in a January 2008 Forbes column: “You have to choose carefully here, since many financial stocks will not come back for a long time, if ever….The safest plays are among the big banks.” Outcome: Prices for the seven financial stocks mentioned in the column, including Citigroup, Freddie Mac, and Wachovia, declined an average of 74.0% in 2008. Source:Dreman, David. “Seize the Day.” Forbes, January 8, 2008.
Wall Street Journal, New York Stock Exchange 2008 Trading Summary, January 2, 2009.

A money manager who applied detailed quantitative analysis to successfully predict the crash of 1987 was expecting a gain of 20% for the S&P 500 in 2008: “Our models show the S&P 500 is undervalued by 25%… Our indicators are extremely bullish.”Outcome: Disappointment.Tergesen, Anne. “What the Pros Are Saying.” Business Week, December 31, 2007.

A successful former hedge fund manager and globetrotting author argued correctly a year ago that a recession in the US was already underway. He was bullish on commodities (“the commodities bull market still has years to go”) and China (“there are gigantic opportunities in China and gigantic changes taking place there.”)  Outcome: The Dow Jones-AIG Commodity Index declined 37% in 2008, the worst year since its inception in 1998, and total return for the S&P GSCI Index was -46.49%. China ranked 26th among 47 world stock markets tracked by MSCI, with a total return of -50.83%. In fairness to the forecaster, he was making a long-term recommendation, not a prediction for the next twelve months. Investors who overweighted their portfolios in 2008 with commodities or Chinese stocks are hoping he’s right.

WEALTHFLOW VIEW – IF STOCK PICKING (ACTIVE MANAGEMENT) DIDN’T WORK IN 2008, WHEN WILL IT WORK?  IS IT SIMPLY AN EXPENSIVE AND FLAWED CONCEPT PLAYING TO OUR INTUITIVE BUT MISGUIDED BELIEFS THAT THE SMARTEST PEOPLE CAN FORETELL THE FUTURE?

Duncan R Glassey
Senior Partner – Wealthflow LLP

duncan.glassey@wealthflow.com

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.