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

Erosion of 2015 Expectations

Eddy Elfenbein of Crossing Wall Street

Crossing Wall Street Update (2/6/2015)

We have to love a newsletter update that starts out quoting all things Schlossian.

“When it comes to investing, my suggestion is to first understand your strengths and weaknesses, and then devise a simple strategy so that you can sleep at night.” – Walter Schloss

A number of you have written me about the massive adjustments made to several of the energy stocks this week. No, you’re not imagining things. Expectations have been transformed — very notably for 2015 as year-end projections plummet. This week’s EXTENSIVE roll call of stocks that are “Materially Weaker” is not a hoax, either. We’re elated (and a little bit proud) about our energy sector message a few months ago when we suggested things seemed a little too good to be true and urged caution.

During the update, I was reminded of days when Ken Kavula and I would wince while crunching updates. Eddy captures that moment here:

The surging U.S. dollar and collapsing oil prices have dramatically changed the outlook for corporate earnings growth. Guidance from companies hasn’t been this poor since the depths of the Financial Crisis. At the end of the Q3, Wall Street had been expecting Q4 earnings of $32.24 (that’s the index-adjusted number). Now it looks like it will be about $27.64. That’s a big cut. At the end of Q3, the Street was expecting full-year earnings for 2015 of $136.07. That’s now down to $119.76. That’s a 12% cut in four months. Stock prices haven’t responded nearly as much.CWS Market Review: February 6, 2015

Stock prices follow earnings. Rinse. Repeat.

Cycles are massively challenging. Memories are short. Trend trajectories are temptation embodied because collectively, we’re a bunch of optimists.

Cy Lynch has cautioned us many times in the past about cyclical hyperventilation and vulnerability from the likes of Value Line, Morningstar and NAIC/BetterInvesting. (Sam Stovall and his S&P minions seem to have a better handle on peak and trough chasing.) Step through a case study of Carbo Ceramics (CRR) and it comes clear. While soaring on wings of bubbles, it’s hard to remember the last trough and hard to believe in inevitable future troughs.

MANIFEST 40 Profitability Expectations

The condition that Eddy is talking about is pretty vivid when looking at the average net margin forecast for the MANIFEST 40. Keep in mind that this is a collection of relatively higher and more stable stocks … your favorites. But as we’ve shared from Barry Ritholtz ( in the past, this time of year is historically packed with EXUBERANCE. Profit margin forecasts are elevated during the first quarter and generally erode as we tear calendar pages down.

It’s not easy to refer to the 2015 forecast as exuberant … as the collective forecast is starting the year close to recessionary levels last seen in 2008-2009.

Stock prices follow earnings.

Of course, the thrust of this is reduced expectations for stocks in 2015. As we’ve said many times lately, we don’t believe in 1-year crystal balls for individual stocks (or broader markets or baskets) but there can be an element of self-fulfilling prophecy to some of this. For the MANIFEST 40, the 1-year analyst consensus price targets and the average 2.1% current yield combine to produce a 1-year total return forecast of 10.9%. Using S&P 52-week target prices, the total return forecast is 9.7%. Nothing to “panic” about, particularly with our core stocks … but these forecasts are generally much more optimistic as the year starts … until the reliable Ritholtz earnings erosion removes a suitable amount of exuberance.

MANIFEST 40 Most Widely Followed Stocks (Tracking Dashboard)

Heavy Hogs (2014): Invest With Your Friends

Heavy Hogs (2014)

The Groundhog Challenge is our 9-year running stock picking contest that runs from Groundhog Day to Groundhog Day.  The results over the years have been pretty special and we’ll be back soon with the 2014 finish line results. The “Heavy Hogs” is the annual tracking portfolio for the consensus favorites.

The overall results for Groundhog VIII (2014) were … for lack of a better word, a little stinky. (I have high expectations and you’ll see why when we report the comprehensive results)

Collectively, we stumbled to multi-year lows for relative return and accuracy.

Not all of us were blessed with the luck of the Irish like Mr. McManus, so it probably makes sense to remind ourselves that there seems to be better performance in “numbers.”

As of 2/1/2015, 10-of-the-20 (50%) most frequently chosen stocks by 2014 Groundhoggers had outperformed the general stock market over the annual contest – racking up an average return of 18.1% (+3.9% RR) led by Apple (69.4%)

When nobody else is selecting that hidden gem you’ve identified, be careful. Confirm your assumptions. And when legions of our your friends hold their nose at your selection (think BODY) — you might be right, but ignore them at your peril. It’s also worth noting that there’s no escape hatch in this contest version. You’re stuck with the selections made in early February for 52 weeks until Punxsy Phil stirs again.

Don’t get me wrong. This lack of an escape hatch is often a virtue. We generally believe that hyperactivity in “investing” is erosive and history rhymes with us.

But when the consensus selections outperform the vast majority of hundreds of participants, it’s probably worth heeding the group. Investing with your friends can be a very good idea.

Heavy hogs 2014 20150202

A Few Of Our Favorite Screens

 Rt banner 20150131

These Are a Few of our Favorite Screens

For the January Round Table, we spent some time with a few screening resources in the quest for some good ideas for further study. We’ll collect them here and tabulate the overall results, using a version of the coach’s poll for collegiate sports (20-16-12-8-6-4-2-1 for votes) and see what percolates to the top of the charts.

Screens Featured

The Top 25


Ivory Soap Screen

This screen is based on a recognition that the two most important characteristics of any investment are (1) the return forecast and (2) the quality of the company. The MANIFEST Rank is an index that combines the two characteristics with essentially equal weighting. Here are the top eight results of a current screen based solely on MANIFEST Rank > 99.44

Ivory screen 20150129

Triple Play Screen

This is one of the more popular screens that we’ve covered over the years. It generally works best after a bear market has raged for a while.

It focuses on some of the primary drivers for higher long-term return forecasts. The three things we’re looking for are:

  • Elevated return forecast … generally because of a (hopefully) temporarily hammered stock price.
  • Potential for P/E Expansion … a higher P/E in the future than the current P/E.
  • Margin Enhancement … projected profitability in the long-term forecast that is higher than current levels.

Using one of the current leaders for this screen, we note that Qualcomm (QCOM) has a low return forecast of 9-10% according to Value. Keep in mind that the average low return forecast for the Value Line universe is 3-4%.

We also see a future P/E of 16.0x versus current levels of 13-14×.

Value Line expects “flat” net margins in the 33-34%. The reason this triggered in our database is that the analyst consensus is more optimistic than Value Line when it comes to future profitability for Qualcomm.

For more on this Triple Play screening approach, check out the archived presentation at:

Triple play screen 20150129

Gateway Champions

This screen is inspired by our repeat group champions, the Broad Assets investment club of St. Louis. Broad Assets repeated as champion last year and is running 2nd this year as Groundhog VIII comes to a close in a few days. We featured the concept behind this screen in our Victory By Escape Velocity? cover story from May 2014.

Nutshell: If you really believe that stock price follows earnings, it makes all the sense in the world to look for those conditions.

In this case, we focus on year-over-year (2015 over 2014) earnings estimates and focus on the companies with the strongest upside. We also limit the field to companies that have shown increasing earnings for each of the 4-5 years displayed. (All year-over-year figures > 0%)

Lannett (LCI) continues to have strong expectations, but it will be interesting to see what Broad Assets does with LCI in the future as 2016 EPS estimates are finally plateauing. We also note the presence of Balchem (BCPC), a long time favorite of another St. Louis club — Mutual of St. Louis and our friends Jay and Ray.

Gateway groundhogs 20150129r

Schloss Screen

The American Association of Individual Investors (AAII) features a number of screens based on famous investors and methods including one of our time-honored all-time favorites, Walter Schloss.

Screening Criteria

  • Companies that trade on the over-the-counter market are excluded
  • ADR stocks are excluded
  • Companies in the financial sector are excluded
  • Stock has been traded for at least seven years
  • Current share price is less than the latest quarterly book value per share
  • Current share price is within 10% of its 52-week low (Hugh McManus has to like that one)
  • Percentage of insiders owning shares is higher than the median insider ownership percentage for the entire database
  • Long-term debt from the most recent quarter and fiscal year equals zero

Schloss vl screen 20150129

Piotroski Screen

Joseph Piotroski, associate professor of accounting at Stanford University’s Graduate School of Business, undertook a study of low price-to-book value stocks to see if its possible to establish some basic financial criteria to help separate the winners from the losers.

The result, a favorite screening method among AAII members, is the top-performing screen since inception nearly 20 years ago.

Low Price-to-Book-Value

Piotroski’s work starts with low-price-to-book-value stocks. Price-to-book value was a favorite measure of Benjamin Graham and his disciples who sought companies with a share price below their book value per share. While the market does a good job of valuing securities in the long-run, in the short-run it can overreact to information and push prices away from their true value.

Measures such as price-to-book-value ratio help to identify which stocks may be truly undervalued and neglected.

Motley Fool CAPS

Most frequently chosen Outperform Ratings by the CAPS All-Stars (successful stock pickers) that have 5-Star ratings on 1/29/2015.

Fool caps screen 20150129

Modified McManus

Hugh likes to shop for high-quality companies when they are trading near their 52-week lows. He keeps a fairly short list of qualified accumulation targets for his personal portfolio. We covered this screening concept here: Gone Fishing … Patiently

What makes this version of the list “modified” is that we’ve applied his shopping methods to the 6000+ companies in the Value Line database, limiting qualifiers to Financial Strength ratings of B+ (or better) and a return forecast (VL 3-5 Yr Proj Ann Tot Return or PAR) to double digits, in general, or better. (Data Source: Value Line Investing Analyzer)

Modified mcmanus 20150130

Great Buffalo

One of our favorite sources of ideas are successful/active fund managers. One of our favorite small company mutual funds is Buffalo Growth (BUFSX) shepherded by Kent Gasaway and his team.

The accompanying table (exported from Morningstar/Premium Version) provides a summary of buy/accumulate decisions made over the last quarter by the Buffalo team.

KYTHERA Biopharmaceuticals (KYTH) is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel prescription products for the aesthetic medicine market.

Case Studies and Analysis Demonstrations

The stocks featured during the January Round Table:

  • Caterpillar (CAT)
  • Google (GOOG)
  • MSC Industrial (MSM)

The audience selected QUALCOMM (QCOM) from the candidates.

Sell Transaction

MWI Veterinary Supply (MWIV) was “sold” from the tracking portfolio during the session. MWIV is being acquired by Amerisource (ABC) for $190. Ken Kavula selected MWIV back on 11/29/2011 for $64.79, so $1000 became $2969 — an annualized return of 40.5% and a relative return of +22.9% versus the Wilshire 5000.

Archived Recording of January Round Table

The recording of this event is now available on the event page:

It can also be found on YouTube at:

If you enjoy this session, please leave us a comment or click Like on the YouTube page.  Thanks!