In The Market, Boring Beats Exciting ...

Investors are very often drawn to flashy, exciting stocks — those that exhibit the most volatility. But, says Mark Hulbert, they should be doing the exact opposite.

“That is because ‘boring’ stocks — those that have exhibited the least historical volatility — on average outperform the most ‘exciting’ issues — those that have been the most volatile,” Hulbert writes in The Wall Street Journal. “And not by just a small margin, either.”

Citing research performed by Nardin Baker of Guggenheim Partners, Hulbert says that a portfolio invested in the 10% of lowest volatility U.S. stocks would have outperformed a portfolio invested in the 10% of stocks with the highest volatility by 19 percentage points per year from 1990-2012. Baker found very similar results in 20 other developed markets and a dozen emerging markets, Hulbert says.

A few reasons may be behind the low-volatility effect, Hulbert says. University of California, Berkeley Finance Professor Terrance Odean offered one: “Individual investors don’t systematically search for stocks to buy. They buy the stocks that catch their attention,” Odean said. “These tend to be volatile stocks, with big price moves, about which exciting stories can be told. Investor buying can drive up prices, volume, and volatility. … And that, in turn, often leads to even more attention getting paid to these companies, more overpricing in the short run and underperformance in the long run.”

Baker, meanwhile, says analysts are drawn to high-volatility stocks because they want stocks with the highest upsides, adding that high-volatility stocks tend to turn over more often, so those stocks generate more trading revenue for brokerages. Peter Hafez, director of quantitative research at RavenPack, also tells Hulbert that his research shows low-volatility stocks tend to respond better to both good and bad breaking news than high-volatility stocks do.

The bottom line, according to Hulbert: “The clear investment implication is to load up your portfolio with boring stocks and shun the most volatile ones.”