The Investment U e-Letter: Issue # 425
Tuesday, April 05, 2005 Stock Market Performance… What's Wrong about "Can't Go Wrong" Stocks
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
"Stupidity well-packaged can sound like wisdom." ~ Forbes, December 15, 1977
Argh! I get so irritated when I hear it. "I've got a solid portfolio of safe stocks," the well-dressed, well-spoken guy says to me. Some folks offer it up… I'm not asking. And uh oh… now they're going to tell me what they own and all about their performance in the stock market. I know where this is headed… "You know, I've got names: Pfizer and Merck, and Home Depot. My broker says these are can't go wrong stocks." Oh no. Just what I expected. The old "can't go wrong" story. Don't Be A "Can't Go Wrong Stock" Sucker, Too! Investors wonder why they never make money, particularly when they own "can't go wrong" stocks. Brokers wonder why they never make their clients money, since they're buying their clients safe, "can't go wrong" stocks. And mutual fund managers wonder why they can't out-perform the markets, since they're holding "can't go wrong" stocks for their customers. We're talking about a bunch of well-dressed, well-spoken guys with fancy degrees, losing you money. I did some quick math on the stock market performance of some major stocks… I quickly scribbled down the "can't go wrong" stocks off the top of my head, and calculated their share price gains or losses over the last five years. The results were amazing… You know what? All the "can't-lose" stocks have lost money. And the losses have been big, too… The average loss over the last five years in "can't go wrong" stocks has been a whopping 42%. With the exception of Wal-Mart (which has been falling off a cliff lately), the smallest loser of the "can't go wrong" stocks has been Dell - down 29%! See for yourself: Stock Market Performance? Here Are the Five-year Returns on "Can't Go Wrong" Stocks… - - 30% Pfizer
- - 65% Intel
- - 76% Cisco
- - 43% Merck
- - 15% Wal-Mart
- - 38% Microsoft
- - 40% Home Depot
- - 29% Dell
A Freak Occurrence? No Way! Now, you might be thinking… - the last five years have been bad for stocks, and
- this kind of move hasn't happened before and won't happen again.
You'd be wrong on both counts… Yes, the last five years have been bad. But while these "can't go wrong" stocks are down by 42% in the last five years, the Dow Industrials are only down 7%. Look, these "can't go wrong" stocks are the bluest of blue chips. The benchmark index for the bluest of blue chips is the Dow Jones Industrial Average. So if you believe your broker when he tells you that it's just been "a bad stock market performance for blue chips over the last five years," you're fooling yourself! The difference between a 7% loss and a 42% loss over five years is huge! He's wrong! He's lost you a lot of money! Next, if you think it hasn't happened before and won't happen again, you're wrong too! The "Nifty Fifty" Stocks of the early 1970s The Nifty Fifty were called "one decision" stocks… you simply buy and never sell. Never mind that they were ridiculously overpriced. The "Nifty Fifty" included names like Polaroid, Sears and IBM. Forbes magazine said people thought "these companies were so good it didn't matter what you paid for them." Ah, but it did. These stocks traded at a big premium to the rest of the stock market in terms of value, because, well, you "couldn't go wrong." But as a group, the reality of their performance in the stock market was that they lost more than half their values in 1973-1974. By the time it was all over, people were so disgusted with the "Nifty Fifty," these stocks eventually traded at sizeable discounts to the overall market in terms of valuation. They finally bottomed, on a valuation basis in relation to overall stock market, in the early eighties. Ouch! If the experience of the early 1970s "can't go wrong" stocks is any indication, we may have another five years of "rot" in these names. Maybe by 2010, the "can't go wrong" stocks will finally show some performance and trade at a discount to the overall market. The message is simple, but not as simple as you might think. The simplest message would be "don't buy can't-go-wrong stocks," but that's not quite right. You can buy them at the right price. Maybe we'll be buying them in 2010… when the idea of "can't go wrong" stocks is completely forgotten about once again. Good investing, Steve Today's Investment U Cribsheet - When to follow the crowd and when not to… Well, there's one indicator that called four of the last six double-digit drops in the performance of the stock market. To learn more, check out IU E-Letter # 399 - Investor Sentiment Indicators
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