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Barron’s Stock Picks’ Performance

February 28, 2017

In Barron’s Jan 9 and 16 issues they ran analyses of the 43 small cap and 169 larger cap stocks recommended in their 2016 issues showing that their picks beat the indexes 20.3% vs. 15.3% for small caps and 12.8% against 11.2% for the larger caps. While their picks are not funds this is an indication of active investing beating passive funds, but see my comments that follow.

  1. The Barron’s analysis assumes that one share of every stock they recommended was purchased when their issue hit the stands and that they were purchased at the price in their article which was already old.
  2. The Barron’s results are not dollar weighted. I am not sure what the effect would be if it were, but the way they did their analysis they used percentages and averaged that. I believe that lower priced stocks tend to have greater short term swings in values than higher priced stocks.
  3. The article also assumes that investors had sufficient funds lying around to make these purchases which most people would not; and if they did then that part of their portfolio earning a money market rate would drag down the overall return.
  4. Barron’s also assumes there would be no trading costs which would not be the case.
  5. Barron’s does not provide for taxes on sales while benchmark index funds would have much less trading making them more tax efficient while the Barron’s “portfolio” was tax inefficient.
  6. While they beat the indexes I am not impressed with their results. The large caps weren’t that much greater than the benchmarks and likely they would not have outperformed when considering the added costs I just mentioned. The small caps had a reasonably good spread, but on balance the amounts invested likely weren’t that substantial and it seems like a lot of work and activity for relatively small net returns.
  7. All of the stocks recommended were held for periods less than a year and some only a month. For a true gauge of performance I suggest that longer periods are more appropriate. When I measure 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.
  8. The picks do not necessarily reflect a balanced stock portfolio. For instance 20% of the small cap recommendations were small banks. This certainly doesn’t reflect diversification and the results were skewed because of this.
  9. With index funds the dividends most likely would be received while the trading in the individual shares likely would result in missing some dividends further reducing the return. Barron’s said their comparisons included dividends.
  10. Another thing to consider is that the 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 or traveling or in an unavoidable position where you could not act on their picks. That too would change the final results.
  11. A final issue to consider is the amount of mail you will be getting. Each stock 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 am sure there are fallacies in my calculations and comments since I am using the information in the articles without any underlying analysis; however, I think my point is made that passive funds appear to be a better course than active investing. Also, there will always be some exceptions and some super stars that trade actively, but on average for longer periods, it seems choosing index funds is a sounder way to invest in equities for the nonprofessional investor or trader.

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