When the average person tries their hand at stock picking, they’ll go on the internet and check the price-to-earnings ratio. Maybe they’ll dig a little deeper and look at the some other statistics. They’ll check the institutional ownership, look at the competition, look at its historical valuation, growth rates, debt levels, etc.
If you’ve played this game before, you know how this usually turns out. Some stocks do well, others do poor and you’re never really sure why winners perform better than losers. “This stock was twenty percent cheaper and was growing almost twice as fast, what happened?” Life happened. There are hundreds of variables that come into play when analyzing a stock and you can never be sure which one will carry the heaviest weighting.
So maybe we can’t pick winners, but how about the professionals who have dedicated their lives to stock selection?
Professional analysts have unlimited resources at their fingertips. They have boots on the ground, access to management and a database deeper then the Pacific Ocean. They went to Ivy League schools and most went on to receive an MBA, CFA or both. These are the best of the best when it comes to analyzing stocks and have every advantage you can possibly think of. But alas, even they have trouble discerning winners from losers.
Below is a table from April 1, 2015, which shows the 10 S&P 500 stocks with the highest percentage of sell ratings. These ten stocks underperformed their peer group by an average of 1%. The ten most loathed companies on average underperformed their peers by just 1%, hardly indistinguishable from zero. To be fair to analysts, these stocks did underperform. Furthermore, it has been seven and a half months since April 1st, maybe not the most relevant time frame.
Stock picking is not only difficult for the laymen, but for the professional as well. Historically, one out of every five stocks has been a home run, so when picking stocks, it’s much easier to lose than it is to win.