Be wary of the media-hype around the “best stocks to own in 2017” says columnist Barry Ritholz, CIO of Ritholz Wealth Management, in a recent Washington Post article.
The lists, Ritholz argues, “look slick and professional; they seem to be expertly assembled” with both high-profile and more obscure names. He explains, however, that after taking three of the “top ten” lists gathered from a simple Google search and checking on their performance over the past year, he found their performance to be “for the most part, pretty mediocre.” Most lists, in fact, tend to underperform the benchmark, he says, offering the following reasons:
- Methodology: Typically, such lists are not assembled using a well-founded, rigorous methodology;
- Losers: Research proves that, over time, most stocks will underperform their benchmark. “It should come as no surprise,” Ritholz writes, “that a list that is somewhat random in its assembly will similarly underperform a broad index;”
- Winners: Index performance is “actually driven by a very small number of holdings,” he argues. “What are the odds that a very short list—say nine or ten holdings—will have any of those winners? It’s fair to say about 1 in 4.”
- Too concentrated: “Unlike a benchmark of 500 or 3,000 equities, 10 stocks is a very concentrated compilation. It’s too few to reap the benefits of proper diversification; any one stock can drive down total performance of the group by having a bad year.”
“Perhaps the most expensive mistake is these silly exercises in stock picking,” Ritholz concludes, adding, “Crossing them off your list will save you a bundle.”