This week’s Barron’s January 22, 2024 issue has an article titled “How Our Picks and Pans Fared in 2023”. The subhead read in part, “The 77 companies featured in bullish Barron’s articles last year slightly trailed their benchmarks.” The overall performance of the 77 picks was a gain of 9.9%, while the benchmark returns were 12.7%.
I read Barron’s regularly 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 has much more information than I could cover here.
The article provides some ground rules which I think are reasonable. They only included stocks that appeared in an article recommending 3 or fewer stocks. They used the stock price on the publication date and the yearend stock price unless there was an article recommending selling the stock, and then that publication date was used. The benchmarks chosen were the appropriate ones for the recommendations and were the S&P 500, S&P MidCap 400, or the Russell 2000. Each of these indexes has exchange-traded funds tracking them. Barron’s used Total Return, which is the net change in the price of the stocks plus any dividends paid.
Here are my comments:
- Barron’s stocks as a group made money, 9.9%, and I think that is pretty good. However, they just made less than the benchmarks, but the picks all were made hoping for presumably greater gains than the benchmarks. On that basis, I think they fell short.
- 53 of the picks made money, and 24 lost. That is pretty good. When selecting stocks to invest in, it is unlikely that all the picks would be winners. Here, the winners were more than twice as many as the losers.
- The journalists picking the stocks are all experienced analysts who spent considerable time researching the stock written about, yet in the aggregate, they fell short of the benchmarks by 22%.
- The benchmarks include a combination of stocks with the intention that this group will average out the performance of all its components. However, the Barron’s picks were made with the expectation that each stock would have a superior return--I think that is the goal of anyone investing in any stock. Using that yardstick, they did not succeed.
- The picks with gains did very well with the top 16 stocks each exceeding 20% gains and also beating the benchmarks. There were losses exceeding 20% on only 4 stocks, so that is good.
- The big winner was Tesla, which had a 119.8% total return. Further, the Magnificent 7 tech stock grouping grew 112% last year, and the only Barron’s pick from that group was Tesla. Those seven are Apple, Amazon.com, Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla. The picks indicated a bias of the feature writers away from the techies toward the so-called value stocks they thought were underpriced and still remained “underpriced” at yearend. With only one high-tech stock, these picks in total were not diversified across the market.
- Barron’s writers were somewhat at a disadvantage because investment managers usually are able to react to portfolio changes much quicker than a writer whose article takes time to write and then needs to go through a vetting and editing process. I know some very successful asset managers who have many more losses than gains, but once they see the stock performing contrary to what they expected, they sell the losses quickly while the holding period of the gainers is much longer. Barron’s analysis process is somewhat different than an investment manager’s since its purpose is not to trade to beat the market but to provide information that its readers should consider before making an investment decision.
- 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 equal investment amounts. However, if there were unequal dollar investments, then gains or losses on the stocks could be significantly different especially if larger amounts were invested in stocks that made money and much smaller amounts in stocks that had losses. For the 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, and this 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 the stock, and not when the article was published.
- Another factor is actual trading activity based on the price of the stock. The highest-priced stock recommended was $3,046.47, and the lowest price was $10.51. Percentage changes for equal dollar stock acquisitions would be stock price neutral, but most investors lack the sophistication of only looking at dollar amounts invested, and many look at the number of shares acquired besides dollar amounts when making their decisions.
- Barron’s also 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 or paid a percentage of assets under management, their returns would be lower.
- Barron’s does 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. Further, most of the gains on sales would be short-term unless the stocks were retained in future years, but that would be outside of the scope of the Barron’s “report card.”
- Most investors have other activities that consume their time. Those who do their own trading need to devote added time and attention and possibly subscription and conference costs. Individual investors also inject emotions into their decision-making process as well as that day’s political and economic news.
- 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 or an investment strategy, I look at the ten-year performance. Investing is a long-term process designed to achieve long-term goals, as opposed to trading, which is short-term focused. I do not believe performance measurements of less than a seven-to-ten-year period reflect 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’s results 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 will perform extraordinarily well and some much worse than others. But here we are, dealing with a universe of 77 picks over the course of a year. When reviewing this listing I find a few outliers on the high and low ends. The primary outlier on the gain side was Tesla, and I mentioned the omission of any other of the Magnificent 7. All seven were included in the S&P 500 index. I did not check on this, but there must be an analysis online of how the 493 other stocks in the S&P performed versus the Barron’s picks. My gut tells me that Barron’s report card would have been more favorable, validating the choices of its authors, except for the inclusion of only one of the Magnificent 7. Comment: I am not suggesting heavily investing in the Magnificent 7. These stocks are much riskier, and while they had outsized gains in 2023, they could also have outsized losses in a future year. One way of evaluating the weight in a portfolio is to compare the performance of the three major indexes that I provided charts for. On the riskier end is the NASDAQ Index, and on the other end, less risky, is the DJIA index. In the middle is the S&P 500 index. Look at my charts for the 10-year performance of these three indexes and the separate sector performance last year.
- Please see my last three blogs with my 16 charts:
- I looked at some charts of the picks and saw some huge swings from the date recommended to the end of the year. While these swings do not affect the measure of the performance, they could have an important emotional effect on someone who purchased the stock based on the recommendation and then saw it plummet right afterward; however, the ones I looked at returned to the purchase price and then exceeded it. I always wonder why that stock recommendation was not delayed until that final drop. However, then we get involved in market timing and that, too, I believe, is not a viable long-term strategy.
- 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 do not respond to proxy statements, you can expect myriad phone calls requesting that you vote. Too complicated; nothing is simple anymore. (Of course, you could notify your broker not to send you any of the material.)
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 with the goal of creating 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). Further, I suggest that short-term results are not indicative of any strong strategy.
Barron’s had well-informed writers opine on their chosen investments, and the results indicate that individual choices of stock, whatever the reasoning, are not a better way to invest.
Barron’s picks are very transparent, and readers can track them in real time here.
This “report card” also included 2 stocks they picked to sell short, and those two did very well, but I do not deal with clients who trade or sell short, nor do I consider this as a long-term investment strategy to provide for financial security, and the two recommendations are too small of a sample to draw any overall conclusions, so I did not address them.
See how this compares to last year’s analysis, read here.
This Thursday, January 25, at noon, I will be presenting my views on the stock market’s 2023 performance and what I see for the future. Further, I will distribute a 100-page stock market booklet that will be the handout for this free live webinar. The presentation is for the East Brunswick Public Library as part of my continuing Take a Business Break series. I look forward to “seeing” you there.
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