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Timely and Trusted Forecasts!??

Written by Jerrold "Lex" Grecu, CFA, CFP(r) on 05 March 2014.

2013 was the best year for the S&P 500 Index since 1997, with a total return in excess of 32%.  This unusually strong performance for US stocks was a welcome surprise for investors who follow a disciplined buy-and-hold strategy but a source of exasperation for many investors who trust in the advice and business forecasts of large financial publications such as Kiplinger Magazine.  Kiplinger's slogan/tagline is "Timely, Trusted Personal Finance Advice and Business Forecasts."  Sounds awesome!  Not only are they giving us the forecasts we surely need to navigate the complex financial markets but they are giving us these forecasts right when we need them most.    Who could ask for anything more?!  Obviously, I'm being sarcastic but this is no laughing matter for the hundreds of thousands of investors who actually read Kiplinger Magazine and believe they are a trusted source simply because they claim to be.

As many of you know, each year I routinely purchase the January issues of several financial publications.  Not to glean some prescient insight on investing or the direction of the markets, but instead to take note of the many authors who will soon have egg on their faces 12-months from now.  It's an exercise resulting in almost instant investment Schadenfreude.   Last January, Kiplinger Magazine published their "Investment Outlook for 2013."  In that issue, they had two articles of interest: Kiplinger's 8 Stock Picks for 2013 and  5 Stocks to Sell Now.  Perfect!  That's exactly what we all wanted to know at the start of 2013, right?  What should we be buying and what should we be selling?  For that information would surely be helpful in a year of "economic unrest and enough political uncertainty to give any sane investor pause." -Kiplinger

In their Outlook for 2013, Kiplinger forecast a dovish 7% return for the S&P 500, well below the actual 32% total return of the S&P 500.  And how did their 8 Stock Picks for 2013 perform for the year?  Let's take a look:

Table 1: Kiplinger 8 Stock Picks for 2013 vs. S&P 500 

Company Ticker Price on 01/01/2013 Price on 12/31/13 Percent Gain/Loss
Coach COH $54 $56 4%
Covidien COV $50 $68 36%
John B. Sanfilippo & Sons JBSS $17 $25 47%
Qualcomm QCOM $61 $74 21%
Toll Brothers TOL $32 $37 16%
TRW Automotive TRW $54 $74 37%
Wmware VMW $94 $90 -4%
Wells Fargo WFC $33 $45 36%
Kiplinger Stock Picks weighted average performance 25%
Performance of S&P 500 32%


Not really setting the world on fire with their crystal ball.  Investors who relied on the "trusted forecasts" of Kiplinger would have left a bit of return on the table compared to the investors who simply bought an S&P 500 index fund.  Kiplinger's underperformance isn't a surprise.   It is a common occurrence with forecasts of all financial publications.  What's really funny (for an investment geek like me) is how well their 5 Stocks to Sell Now performed for 2013 compared with the S&P 500.

Table 2: Kiplinger 5 Stocks to Sell Now (2013) vs. S&P 500

Company Ticker Price on 01/01/2013 Price on 12/31/13 Percent Gain/Loss
Alpha Natural Resources ANR $10 $7 -30%
Apollo Group APOL $21 $27 29%
Chipotle Mexican Grill CMG $297 $533 79%
Exelon EXC $28 $27 -4%
Hewlett-Packard HPQ $14 $28 100%
Kiplinger Stock Picks weighted average performance 35%
Performance of S&P 500 32%

 

A few things jump out from the data.  First, TWO of the stocks  (Chipotle and Hewlett-Packard) recommended for sale at the beginning of 2013 performed better than any of the stocks Kiplinger recommended to buy.  Secondly, as a whole their recommended stocks to sell outperformed their recommended stocks to buy.  Double Ouch!

Why is it, you might ask, is your financial advisor persistently shining a spotlight on the missed forecasts and poor stock picks of the financial media?  I do it because the seeds of some of the biggest financial mistakes made by investors are planted and cultivated by the sensational headlines of those purporting to foretell the future.  It's almost impossible for even the most disciplined investor to block out the financial "noise" and the barrage of forecasts and "sure thing" investment picks they hear or read about in the media.  Thus I feel it's important to be reminded (and frequently) of how little value there is in forecasting the future.  As William A. Sheriden wrote in the preface of his excellent novel The Fortune Sellers, "On a daily basis, we are showered with all types of predictions:  tomorrow will be unseasonably warm; next winter will experience record snowfall; the economy will stall next quarter; a deep recession is imminent by year end; the stock market will experience a technical correction; invest in biotech stocks; the aging of the population will bankrupt social security; burgeoning world population will lead to massive famine; global warming will raise sea levels three feet; artificial intelligence will transform society; robotics will antiquate manual labor; declining values will cause increased violence; nations will splinter during the post-cold war era; Microsoft will dominate information technology.  Of these sixteen types of forecast, only two --- one-day-ahead weather forecasts and the aging of the population --- can be counted on; the rest are about as reliable as the fifty-fifty odds in flipping a coin.  And only one of the sixteen --- short-term weather forecasts --- has any scientific foundation."

At Grecu Capital Management, Inc. we believe investing is a science, not an art.   Our investment strategy is not based on hunches or predictions because this has never been a reliable way to build wealth.   Long-term wealth has historically been created by long-term investment in free markets.    One constant through time (other than people making forecasts) is the desire of all humans to create a better life for themselves and their children.   Free markets, like no other economic system, harness this basic and powerful human desire.   Unfortunately the vast majority of the world's population live in economic systems that stifle this basic human desire.  However, the countries we invest in have flourished economically through the years because they have allowed free markets and free people to be productive, to create and innovate, and build enormous wealth.  To have a positive investment experience over time, one need not pick which tree in the forest will be struck by lightning (stock picking) but instead simply buy entire forests around the globe.  The forests that thrive are the ones nurtured by economic climate that allows for freedom, innovation, entrepreneurship and the realization of our basic human desires.  By dividing your wealth among these economic forests in an intelligent manner - paying close attention to correlation (how one economy/market reacts to another) and the economic and geopolitical climates, we're able to structure diversified portfolios that capture the the positive long-term returns while reducing risk....all without the need for tea leaves, crystal balls or "timely, trusted forecasts" by the financial media.  

Thanks for reading!  

Jerrold "Lex" Grecu, CFA, CFP(r)