TSX TrendWatch Weekly

Regular readers know that I am appalled by the way the financial press often misleads investors with false or misleading information that could be harmful to their potential profits.  If financial institutions and financial advisors can be held accountable for investor losses, why not the media too?

This week I take issue with the Globe & Mail’s annual “Pick one stock” competition. It is a meaningless exercise that should be eliminated.  I’ll have more on that in a bit, but first last week’s action in the equities markets.

WEEKLY REVIEW… The S&P/TSX Composite Index took a breather last week and slipped back -2.2%. The S&P/TSX Venture Index didn’t decline as much (-0.7%), in keeping with continuing strength in the small caps.

UTILITIES, INDUSTRIALS and INFORMATION TECHNOLOGY top the sector list at the moment, while FINANCIAL SERVICES is the laggard at the bottom of the list. It continues to look like the run on FINANCIAL SERVICES stocks, that we saw particularly in the first half of last year, is over.

In spite of the one-week decline, we’re still up in dreamland as far as the S&P/TSX Composite Index stocks are concerned, with 80% of them rising on a 10-week moving average basis. It’s not just S&P/TSX Composite Index companies either. Our deeper and broader analysis shows that similar results are evident for North American ETFs, income trusts, US equities, S&P/TSX Venture Index stocks and so on. It would take much more of a pull-back than what we saw last week to change this rosy scenario.
The median weekly move for S&P/TSX Composite Index stock prices is +0.7% at the moment… quite generous on an annualized basis.

A STOCK FOR ALL SEASONS? As mentioned at the top, the Globe and Mail has an annual “Pick one stock” competition. This isn’t a Globe invention… other financial publications have done something similar.

The concept is simple.  They round up a bunch of alleged financial experts and have them pick one stock to buy and hold from January 1 to December 31. The winner among the “contestants” is the person whose stock pick gained the most value over the course of the year. The prize is a coffee mug and bragging rights to being the biggest fool to participate in a contest like this.

This link lets you read about the latest “competition” in detail.

The question I have to ask is.. “Is there anything an investor can learn or gain from this exercise?” The answer…  “ABSOLUTELY NOT! NOTHING!  NADA!“.  But I’m going to try to add value by picking this exercise apart and demonstrating how every aspect of this contest is fundamentally flawed and harmful to investors looking for useful information.

So, let’s have a closer look…

1. Does it make sense to put all of your money in one stock for an entire year… specifically Jan 1 to Dec 31?  I think we can all figure that out by ourselves… so why would the Globe even suggest the idea? If each competitor chose a portfolio of stocks, that might make more sense; but that isn’t the case here.  So we’re already in a fantasyland that is meaningless to investors. The whole idea of diversification has gone out the window.
2. Why would any investor adopt a buy-and-hold-for-one-year approach?  Answer: No one in their right mind would do that! Even the classic buy/hold investor, Warren Buffet (via his Berkshire Hathaway investment firm), underperformed the S&P 500 last year by 26 percentage points. And that was on top of losing just as much money as every other buy/hold investor in 2008 (-40% or more). Buy/Hold never works better than selling stocks when they’re declining and buying them when they’re rising.
3. There are 14 “experts” competing this year. Will the winner’s pick outperform the broader market? Not necessarily. He or she could simply have lost less than the rest. In earlier versions of this competition, there was a “competitor” that consisted of throwing a dart at the stock page to pick that one special stock. I’m guessing that they quit doing that, because the random choice was often the winner!
4. Is the winner necessarily a better stock picker?  No, of course not! Jean-Francois Tardif won this contest three times. (He bowed out this year.) Does that make him an even better stock-picker?  Of course not! Flip a coin ten times and if it comes up heads seven times, does that mean the coin is unfair?  Of course not! It could come up heads ten times out of ten and still be a fair coin.  That’s the way probability works. You’d have to have a few thousand tosses and the appropriate statistical tests to come to the conclusion that the coin is biased. Winning this stock-picking competition three times in a row means absolutely nothing.
5. Is the winner at least a better investor than his competitors in this contest? Of course not! And, if you chose that “expert” to be your financial advisor on that basis alone, you’d be a total fool! Given the rigid conditions of this contest, the winner is the winner by chance, not skill.
6. Isn’t the rationale behind the stock selection, at least, useful to investors? Well, it might be today (if it makes sense to you, and you happened to agree); but tomorrow or next month the same rationale would likely lead you to a different selection. Consider some of the reasons our contestants have used in picking their one stock…

• It has a seasoned management team
• It broke out of a two-year downtrend
• It’s an unloved stock
• We expect organic revenue growth
• Emerging markets are where it’s at
• Warren Buffet likes the railroad sector
• Cold weather will be good for natural gas prices
• American banks are cheaper than Canadian banks
• Everyone needs fertilizer

If, by fertilizer, they mean horse-shit, than all of the above criteria could be valid! In fact, all of those reasons could be undone in less than a month.

I’m certainly not saying that you shouldn’t have reasons for buying each and every stock, but those same reasons will lead you to different conclusions over time. For instance, a very simple investment strategy is to buy equities with low price-earnings ratios, relative to their peers. But, when the price rises (or earnings decline) enough to bring that stock back to “normal”, your reason is no longer valid and you should sell. That’s common sense, but common sense tends to be lacking in the business media.

How many times have you seen a financial reporter or interviewer challenge a money manager or analyst’s “picks” from a year ago, because the price went down… or praise him for being right on the money, because the price went up?  Both are equally meaningless!  The stock-picker certainly didn’t control all world events for 365 days, so the price change over a full year means nothing as far as success or failure is concerned!  Any investor should reevaluate his or her buy/sell decisions on a regular basis… perhaps even daily, if time permits. Yesterday’s reasons won’t necessarily hold up today and neither yesterday’s reasons nor today’s reasons will predict profits a year from now with any regularity.

The equities markets are nothing like a horse race, where your money is stuck on the same horse from beginning to end, as is the case in the “pick one stock” competition.

An astute investor switches horses throughout the race. As one horse falls behind, he or she switches to another one that is moving faster.  How often you choose to switch horses is entirely up to you, but by the end of the race, there’s a good chance that you’ll win, place or show.  That’s not possible at a real racetrack (or in stock-picking competitions), but it’s totally possible for any individual investor.

That’s what relative trend analysis™ (RTA) is all about and why this web site is here.