Despised stocks produce twice the return

Buying what’s popular is rarely a successful long-term strategy. If you want superior results to the market, you have to do something different. 

If you’re like many Australians you still rely on your broker for expert stock picks. The broking industry has been under immense pressure since the GFC and the following snippet from a recent blog posted by Smead Capital blog offers no consolation.                                                                       

In his January 30, 2015 article, “Easy way to get rich: Buy the most hated stocks,” [Marketwatch.com] columnist Brett Arends points out how well you would have done in the last seven years if you had purchased the 10 most-hated stocks based on Wall Street analyst opinions. Here is how he measured this:

Go back seven years, to the start of 2008. Imagine at that time you had invested $100,000 in an S&P 500 index fund, reinvesting all dividends, using a tax-sheltered account. Today you’d have about $170,000. Not bad.

If, instead, you had invested that money at the start of each year in the 10 stocks that analysts rated most highly, cashing out on Dec. 31 and then buying the top 10 most loved stocks for the following year, today, seven years later, you’d be slightly better off — you’d have nearly $180,000, according to my analysis using FactSet data.

But now imagine you had done the exact opposite, and each year had invested your money in the 10 stocks that analysts rated the worst. How would you have done?

Hmmm.

Today you’d have $270,000. No, really. You’d have earned more than twice as much as investing in a simple index fund.

Investing in the current environment has been easy for anyone that’s avoided the resources sector and instead bought high dividend paying stocks and companies with large overseas earnings. Fortunately Intelligent Investor was well ahead of the curve and members that have followed that advice since we published The coming China crash back in 2011 have done extraordinarily well.

There’s no reason why the Aussie dollar won’t fall to 50 or 60 cents versus the US dollar if China experiences a deep recession or Australia’s property market cracks, but with this group of companies now either being treated as defacto term deposits or regularly trading on price-to-earnings ratios well above 20 it’s not surprising that these stocks are still being regularly tipped by brokers. They should perform well in the short term as interest rates fall and it’s an easy sell to investors wondering how to escape pygmy term deposit rates. 

But as the evidence in the blog shows, buying what’s popular is rarely a successful long-term strategy. If you want superior results to the market, you have to do something different. With bargains thin on the ground perhaps the only thing you need to different right now is hold more cash.

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