By: Mary E. Brunson | Jan 20, 2011
As sure as the sun rises each day, every New Year delivers a freshly baked batch of stock market predictions (well, half-baked anyway).
Yep, every January, newspapers, blogs and financial television regale us with their signature picks of the "Top Ten Stocks You Need to Buy NOW!" and the "Stocks to dump faster than that stale fruitcake sitting in the tin on your kitchen counter."
One very popular source for "hot stock tips" is Fortune magazine's annual issue which touts "America's Most Admired Companies," ranking companies on attributes such as the ability to attract talent, financial soundness, and innovativeness. Their "Admired" portfolio is made up of the companies scoring the highest ratings—a veritable crème de la crème for investors. But, before you rush out to nab the latest roster of companies Fortune likes best, it might be a good idea to see how fortunate their picks have turned out to be.
IFA analyzed Fortune's "Ten Most Admired Companies" (2001) (see below) as a whole portfolio and as individual companies, comparing them to the 20 IFA Index Portfolios for the 9-year, 11-month period studied (2/19/01—December 2010)1.
The results of the study are shown in the Risk Reward Scatter Plot below, showing that the equal-weighted "Admired Portfolio" significantly underperformed every single IFA Index Portfolio — even the IFA Index Portfolio 5 which has 85% fixed income. Despite the fact that the "Admired Portfolio" portfolio carried slightly higher risk than the IFA's riskiest Index Portfolio 100, it had a negative return for the time period. In contrast, the IFA Index Portfolio 100 earned an annualized 8.47% return, and did so with slightly less risk than the "Admired Portfolio" (after advisor and mutual fund fees). When you look at the performance of the individual stocks in the "Most Admired" lineup, the story gets worse for the Fortune tellers. In fact, nine of the ten stocks underperformed substantially from a returns perspective, despite the fact that they were far more risky, and seven of the ten ended up with a negative return for the period. Even Warren Buffett's widely touted Berkshire Hathaway stock failed to compensate investors for risk, delivering the returns of an IFA Index Portfolio 45, despite the fact that it took risk greater than an IFA Index Portfolio 80. Returns of all investments include reinvestment of dividends.
No Fortunes in Fortune
The quote that kicked off this article is stunningly accurate. Pro-index funds stories don't sell magazines—a poor reason to perpetuate the myth that financial journalists or "Fortune Tellers" can pick the handful of stocks to achieve wealth — in fact, by the looks of it, it appears the best way to lose a fortune is to follow Fortune.
By the way, at IFA, we have our own fortune. It is from a fortune cookie that IFA President and Founder Mark Hebner received at a Chinese restaurant. We keep it nestled underneath the crystal ball which sits in IFA's conference room. It is the only fortune we follow: