John Dorfman has been an asset manager for decades and a columnist for Bloomberg since 1997. For his final Bloomberg column, he highlights nine lessons that emerged from writing that column. (My own comments are mixed in below with John’s):
Here is an overview of these nine lessons:
Lesson One: Out-of-favor stocks are the best road to capital gains.
Stocks with extremely low price-earnings ratios should heighten your resolve to go against the crowd and buy stocks that are unpopular. In eight years from 1999 through 2006, investing in these low P/E outliers produced a hypothetical gain of 830 percent, while the S&P 500 was up 31 percent.
Two: Errant Analysts: Don’t be swayed by what Wall Street analysts say.
From 1998 through 2006 Dorfman tracked the annual performance of the four stocks analysts most loved (those with unanimous "buy” recommendations for a large number of analysts) and the four they most hated (those with a high percentage of "sell” recommendations).
Over the nine years from 1998 through 2006, the stocks the analysts loved posted an average annual loss of 3.7 percent. The despised stocks did better, down 0.2 percent annually. Neither group beat the overall market.
Three: High portfolio turnover is not necessary for good results.
Overtrading, selling too soon, excess commissions, transaction costs and taxes — all hurt performance.
Four: Meaningless Momentum
The investment value of a stock is independent of whether it has been moving up or down. That matters to Traders, but it should be of little consequence to Investors.
Five: Mission Impossible Predicting the market with consistency is extremely difficult.
I’ve learned to take all market predictions, including my own, with a grain of salt. In my very first column for Bloomberg News, in October 1997, I predicted that the bull market of 1991-1997 would end in 1998. It didn’t end until 2000. On the plus side, I correctly forecast that market declines in 2004 and 2006 wouldn’t turn into bear markets. (We noted a very similar issue in the Folly of Forecasting).
Six: Predicting the economy is probably even harder.
This is a varietation of the perils of predictions. For seven years, Dorfman ran an economic prediction contest, in which participants were asked to forecast variables such as growth in U.S. gross domestic product, oil prices, and unemployment. Few people did well, and among those who did, there were few repeats from one year to the next.
Seven: High valuations alone aren’t a good reason to sell a stock short.
A short sale is in essence a bet that a stock will decline. Dorfman’s efforts to select shorts based on high price-earnings or price-book ratios were mostly unsuccessful.
As all good short sellers should know, just because a stock is expensive does does not mean it won’t get more expensive. Similarly, any value player should know that merelty because a stock is cheap is no guarantee that it won’t get even cheaper.
Eight: High profits alone are no reason to invest in a stock.
Dorfman found that over a seven year period (August 1998 through August 2005) a list of the 15 companies he considered "most profitable" performed almost identically with the overall stock market. Problem was, it was obly after considerable research and much higer transaction costs. The SPY would have been a better play.
Nine: Dialog with readers was one of the best parts of my experience as a columnist.
I can say from my own experiences that this is very true!
Excellent stuff! Thanks, John . . .
Nine Lessons I Learned in the Past Nine Years
Bloomberg, Feb. 13 2007
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