March Madness: What Works On Main Street

March Madness: What Works On Main Street

This editorial appeared in Better Investing magazine back in April 2000 in response to a widely-circulated “research paper” that assailed investment club performance. In my opinion, investment clubs unleash stewardship and deliver the potential for better futures to all who come to understand the philosophy and methods.

by Mark Robertson, Senior Contributing Editor, Better Investing

The coming of April showers means that, once again, March Madness has come and gone. March Madness. With each passing year, I find that I enjoy the mighty meetings of high school basketball teams, closely followed by their collegiate counterparts. By the time this magazine reaches your coffee table, there’s a pretty good chance that a number of magical moments will have happened. Gene Hackman and his Hoosiers were just one shining moment. There will be others. The goose bumps are “on ice” just waiting to be experienced. “Do you believe in miracles?”

We’ve acknowledged in past articles that George Nicholson always regarded NAIC and investment clubs as his “Grand Experiment.” Investment clubs are also human. The things that can be discovered are nothing short of miraculous.

Exploring the rewards of investing while stripping away the myth and mystery is something that brings a smile to our faces. Learning to smile together is a gift that we hope to share with as many people as humanly possible.

March Madness. It brings out the best. Unfortunately, it sometimes brings out the worst, too.

The January/February 2000 issue of the Financial Analysts Journal features an article by Brad Barber and Terrance Odean entitled, Too Many Cooks Spoil the Profits. This publication is received by Chartered Financial Analysts. Although fairly few people will ever see this report, we believe that exploring some of the conclusions is worthwhile. If nothing else, Barber and Odean have been regularly appearing in the media. We think they could gain much from a better understanding of investment clubs and strategic long-term investing.

Quoting their conclusion: “Unfortunately, [investment clubs] do not beat the market.”

We have “been here” before and it won’t be the last time. A year ago, a number of publications assailed our Beardstown Ladies. Too many cooks? Most of us rather like cooking with our friends. There is some impressive cookin’ going on. There will come a day that we’ll demonstrate that we not only achieve (in the words of Barber and Odean) “savings, education, friendship and entertainment . . .” but we also achieve very promising performance levels as well. Collectively, NAIC investors achieve high returns. Clearly, this does not happen for every single club or every individual, but we have scores of success stories. We think it’s valid to point to our Top 100, this issue’s main feature, as substantial evidence. With Intel, Lucent Technologies, Home Depot, Cisco Systems, Merck, PepsiCo and Microsoft among the most widely held companies, clearly somelevel of success has been attained by our practitioners.

Nearly 4,500 investment clubs (11.9 percent of registered clubs) responded to our latest Top 100 Survey with complete portfolio summaries and club accounting reports. Barber and Odean assail the “touting” of investment club performance in the media by citing sample bias. Barber and Odean base their findings on 166 investment club account statements from a single discount broker! Not only that, they cite turnover levels of 65 percent (nearly a complete overhaul of the stocks within a club portfolio every year-and-a-half.) Barber and Odean also share that these club accounts were concentrated in high beta, small-cap stocks. These characteristics lead us to a simple question, “Are you sure that you’re assessing NAIC club performance?” That doesn’t sound like what the long-term investors we know about are doing.

Most people are not statisticians, but I think that they can sense that 4,500 data points might be more representative than 166. Particularly when the “166” are “weak.”

The authors dwell on excessive turnover and poor returns due to commission costs. We ran a quick, biased, completely unscientific survey to investigate a hunch. Approximately 50 online investors responded. I think we can assume that these investors are “most likely” to be the most active. We asked them to provide their turnover figure for 1999. The highest turnover rate reported was 40 percent. The lowest, from several respondents, was 0 percent. (No sell transactions for the year.) The average was 8 percent. Unscientific, yes. And admittedly biased. But, in my opinion, closer to the truth about what long-term investors are really doing.

Here’s another aspect that the Barber and Odean study that raises questions. MANY investment clubs use dividend reinvesting. So, I went back and checked. In 1996, our investment club had 64 percent of our assets in DRPs. Our discount brokerage account would have been terribly UNinformative about the true performance of our club.

Barber and Odean include another rehash of the Beardstown Brouhaha of 1999 as “evidence” of poor performance. It bears repeating. Investment clubs, including our Beardstown Ladies, are human. A mistake was made. But, for the record, the Beardstown Ladies achieved a 15.3 percent annualized return for the 14 years ended in 1997. (This was part of the Price Waterhouse audit.) The annualized return for the S&P 500 for this same 14-year period was 16.9 percent.

If the ladies are guilty of under performance, consider this: In his book, Common Sense on Mutual Funds, John Bogle Sr. documents that only 14.1 percent of “growth and value” mutual funds beat the Wilshire 5000 (16.0 percent returns for the total market) for the 14 years ending in 1997. While committing their “crime,” our Beardstown Ladies “defeated” 5-out-of-6 mutual funds.

March Madness, indeed.

Is the point that the ladies would have been better off stuffing their recipes and cold cash into the corners of their mattresses? I certainly hope not, because if that’s the case, these two educators are not only failing to educate — they’re DE-educating.

A number of us recently gathered online to discuss James O’Shaughnessy’s book, What Works on Wall Street. What works on MAIN Street?

Patience. Discipline. Discovering the best companies, at the best prices, with our friends. Too many cooks? Not even close! It’s the best type of cooking capitalism has to offer.

Round Table (February 2015)

You’re invited to join us as the colleagues of the Round Table present their favorite stock study ideas at the February session.

It’s our annual black tie over suit-of-armor extravaganza as we’ll also honor the best moments and decisions of 2014 and since inception of the Round Table five years ago.

Awards to be Presented

  • Best Stock Selection (2014)
  • Best Stock Selection (All-Time)
  • Best Picture/Story
  • Best Accuracy (2014 & All-Time)
  • Best Return Performance (2014 & All-Time)


This Is How We Do (2014 Results)

For those of you who watched the Super Bowl (and those of you who watch the commercials and halftime show), recall that Katy Perry rode into the stadium for the halftime extravaganza on a huge lion, singing about roaring like a champion?

One of her hit songs is entitled, This Is How We Do.

This is how we do… yeah, chilling, laid back
Straight stuntin’ ya we do it like that

I didn’t know what “stuntin” actually referred to but based on this urban dictionary rendition, we think it applies to all things Groundhog. Hugh McManus of Pasadena and the Serious Investment Club of Pittsburgh are the latest in a long line of stuntin legacy — taking home top honors for Groundhog Challenge VIII in the individual and group categories.

Collectively, we “chill, lay back” and select a basket of 5-20 stocks that will go unchanged over the course of the Groundhog Calendar. Over the years, we’ve noticed very little swinging for the fences. A few participants will try to isolate a promising deep value situation with a potential catalyst that could deliver over the course of a year. But for the most part, the participants select high-quality stocks that would be suitable for the long term, a time horizon measured in years, if not decades.

Gh returns 20150202r
We kick off this performance results summary with a look at the collective performance over eight years where the average annualized return is 10.0% during a period when the Wilshire 5000 delivered 6.6% annualized returns.

Straight stuntin’ indeed.

The following table presents the leader board at the conclusion of the 2014 stock picking contest.  $1,000,000 invested on Groundhog Day (2/2/2014) became what is displayed here.

All-Time Results: Honor Roll

Methuselah & The Lottery Ticket

Expecting Alpha

The lottery winners hail from Arizona and Missouri. They’ll be splitting a $550,000,000 jackpot — probably choosing the lump sum payout, with proceeds to both of them estimated at $200,000,000. The event is inescapable on the news and it’s ubiquitous in all forms of media.

But it comes at a gut-wrenching expense. The reality is that it’s a tax (75-80% of all lottery proceeds go to the lottery crack dealers who skim some off the top and dole out the balance to government accounts.) A friend shared an observation this morning that as he bought a ticket for the fun of it last night near Philadelphia, two ladies clothed in rags — potentially homeless — skipped at least one meal to purchase $40 worth of lottery tickets. To me, that qualifies as a gut-wrenching tax.

Let’s compare the prospect of netting a winning lottery ticket to sitting down at the…

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Tesla Motors (TSLA): Speed Bump?

Some people think Tesla Motors (TSLA) got “crushed” on a weak earnings report.

Tsla crushed

Here’s the aforementioned MarketWatch article:

From a short term/trading perspective that first chart is a whack.

But on this chart, it’s a speed bump.

Tsla chart 20150212

This is what a crushing looks like.

Crushed car

I have no idea what the future holds for Tesla, I expect it to be “consumed” by one of the large car companies, but who knows?

But from a long-term perspective, this feels more like a speed bump …

Speed bump poster

Heavy Hogs (2015): Invest With Your Friends

Here are the consensus favorites from the entries in Groundhog Challenge IX (2015).

It was a dead heat between QUALCOMM (QCOM) and Cognizant Technology (CTSH). The figures in parentheses are the number of times a stock appeared among the 2015 entries.

It’s a solid list across the board with an overall PAR of 15.1% and an average quality rating of 91. Collectively, these selections rank in the top 7th percentile of all stocks based on return forecast and quality ranking. The average Value Line low total return forecast is 11.1% (vs. 3-4% for the Value Line 1700). The price-to-fair value ratios according to Morningstar and S&P are also quite favorable … as well as the 1-year total return forecast (+20.3%) based on consensus 1-year price targets (and current yields).

Heavy hogs 2015 20150206

The tracking dashboard for the 2015 consensus selections (Heavy Hogs) is available at:

Shopping in the Dow 30 Aisle

Diamond (DIA) Expectations

The last few years have been pretty good to the Dow 30 stocks — after spending the first ten years of this century in the dog house. The trailing 5-year annualized return is 15.0% versus the Wilshire 5000 at 16.8%. So the other 4970 stocks have actually continued to outshine the Dow 30.

One of the things we’ve noticed is that the renaissance of many of these stocks has persisted — with continuing improvement in profitability, etc. — while many companies are under more margin pressure and “deceleration.”

Here’s a quick look at our 5-year forecasts for the Dow 30 as well as the Value Line low total return 3-5 year forecast. We’ve also included a quick look at Morningstar and S&P price-to-fair value (P/FV) metrics. (100% = fairly valued … <100% is potentially attractive)

In keeping with some of the Groundhog shopping, we also display the 1-year outlooks based on analyst consensus and S&P target prices.

Nutshell: Microsoft (MSFT) and General Electric (GE) are consensus favorites. S&P thinks JP Morgan (JPM) is a steal. There’s an IBM (IBM) bandwagon at Morningstar. Value Line is skeptical about the long-term forecast for Disney (DIS), Cisco Systems (CSCO) and Home Depot (HD). S&P doesn’t want Coca-Cola (KO) … not even with a 10-foot pole. Morningstar thinks United Health (UNH) is overvalued, too. S&P is scratching their heads over Exxon Mobil (XOM) and Chevron (CVX) … and we’ll stay tuned to see what conclusions are reached by Team Stovall.

Djia consensus 20150206