There's plenty of research showing that professional stock fund managers do worse than the indexes over time. In other words, consistently picking winners is impossible except by chance or illegal means. But I wonder if picking losers is easier?

Suppose you built an index fund by starting with the largest 500 stocks in the United States, based on capitalization, then removing the fifty or so stocks that experts predict will be dogs for the coming year or so. Would your remaining 450 stocks beat the S&P 500 index?

It seems to me that picking losers has to be easier than picking winners. But one problem with my concept is that the most beaten-down stocks can have the largest percentage gains if they show signs of life. Also, low stock prices can make companies susceptible to takeovers, which can also mean spikes in the stock price. I realize it's not easy to pick losers. But is it exactly as hard as picking winners? I only need to be a little bit better at picking losers than winners and I have a good investment strategy.

When the housing bubble burst, it didn't take a genius to know that the companies in that industry would suffer for several years. Okay, okay, hindsight is easy, so let's see if you and I can predict which industries or companies are likely to be dogs over the next three years.

My prediction for dead-money stocks would include any company competing with the iPad. I think Microsoft, Dell, and HP will have anchors tied to their butts for a few years as consumers skip their next laptop upgrades in favor of iPads.

What are your picks for dead money stocks?

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May 27, 2012
People used to be able to make money in the stock market by buying the 10 "Dogs of the Dow" on the first trading day of the year and selling them on the last day. It got too popular and doesn't seem to work now, but you are usually better off going against the flow. It is just as hard to pick losers as it is winners.
-1 Rank Up Rank Down
May 25, 2012
I just asked around.
You short the (relative) underperformer and buy the (relative) outperformer.
May 25, 2012
Over what time period? Apple is almost certainly a loser over the next 5 years. It is a company based on temporary peaks when it releases a revolutionary product and then loses the market to others. Over the next year it may do well, over 5 it will go down.

Try price/earnings ratio. Drop the 50 with the highest price/earnings ratio and see how you do. That is a direct measure of stock to company performance. Of course it is based on past performance.
May 25, 2012
I'm personally avoiding large bank stocks, which requires also avoiding S&P 500 and other large cap index funds. My mid cap index fund may or may not be safer. It's an experiment.
0 Rank Up Rank Down
May 25, 2012
Scott: "[In my context, a "loser" is any stock that doesn't go up as much as the index. That's a huge universe compared to the ones short sellers profit from. -- Scott] "

An index is (or used to be, before all that retail stuff popped up) supposed to capture the average performance of its market segment. Therefore, about half the stock in the segment will underperform it and the other half will outperform it.

So, I'd guess you have a 50% chance of picking a loser.

I don't know how to do it but with options it ought to be possible to construct a set of trades whose profit lies in the relative outperformance of the index.
+7 Rank Up Rank Down
May 25, 2012
You're confusing picking losing companies and picking losing stocks. The first is easy (as it is with winning companies), the second is very hard. The differentiating factor is price. It isn't enough to pick a company that is going to decline in the future if that is alreasy priced into the stock - the company will have a hard time,but the stock may fluctuate or even go up. So, it's mispricing you're looking for, not future prospects.
The same is true for the reverse - picking winners. We all know Apple is going to make a ton of money and crush competitors. But is that already priced into the stock? That's hard to tell.
May 25, 2012
Of course back in the "dot.com" boom/bust era when companies ipo'd with a power point and
Lots ofvrazzle dazzle there were tons of spectacular winners and losers and the (in)Famous site
F***ked Company.com tracking it all, but of course specializing in followw
Ing and picking upcoming losers who often had spectacular and amusing flame outs.
But also often had tell tale signs making it possible to easily pick their impending doom.
-2 Rank Up Rank Down
May 24, 2012
I'm surprised at the number of people saying "don't try to pick stocks or time the market; it can't be done." Actually, as a financial advisor, I agree with the first part - that MOST people shouldn't try, because MOST people are lousy at it. It's probably also good advice for installing electrical wiring and gas lines. But it's a big leap to say that because it's often (perhaps usually) done poorly, that it can't be done well.

Most people buy high and sell low. They buy what's already gone up, and is in the news, and is likely overpriced, and sell whenever it goes down significantly. This is true even of their timing in buying/selling index funds, so they don't solve the problem.

Fund managers are plagued by this issue. For example (hypothetically): let's say your niche Emerging Markets fund doubled last year; THEN money pours in. Even if you (the manager) think the sector is over-priced, you're bound by the prospectus (and your investors' desires) to buy with all of that new money. Then it falls by half (as you expected). The fund has broken even (doubled, then halved), but most of the investors lost half of their money, because they bought AFTER the doubling. So they pull out what's left (just when Emerging Markets are poised to rebound) and move on to the Gold Fund, which has recently doubled...
Repeat and fade...
May 24, 2012
Anyone competing against the iPad? This makes the supposition that an iPad is displacing other computing devices.

Traditional computers are dying for their own reasons. The biggest problem is really that computer specs aren't moving in meaningful ways, and software requirements have stalled. For most purposes, an 8-year-old laptop is just fine for a modern user -- it plays video, has decent networking, fast enough processor and enough memory to run all office applications, most development tools, and tons of games. It doesn't help that we haven't seen a killer app in half a decade...
May 24, 2012
I can't help but feel that as soon as someone identifies a company as a "loser" it will start to tank regardless of what the company is actually doing. The stock market is only partially based on a company's actual value, the rest is paranoia, pop culture, and possibly voodoo. It obviously doesn't work the other way around, just look at facebook.

BUT - I think most green-energy stocks will be a dead-end until someone makes a real and profound breakthrough. Assuming fossil-fuel magnates who secretly rule the universe don't have them eliminated! :)
May 24, 2012
Scott asked for losers and I don't see where anyone is actually naming loser stocks. I pick Tiffany (tif) as a loser as its prospects for growth are so tied to China and I think China is coming down hard over the next year as europe goes into recession. ALso, Genesee & Wyoming (gwr) which is a railroad company with strong ties to China in Australia. I went short them both but didn't make much money because (as usual) I was early. Since I got off my shorts they have come down but I bet they go down more.
May 24, 2012
I would be just as skeptical here. You may be able to identify one or two companies successfully, but basically you're betting because -you- can't imagine a solution, a large company with demonstrated success decade after decade also cannot. But the company has thousands of intelligent people with more relevant knowledge and experience.

They still fail and die, but they often bounce back and shift this way and that to keep the cash flowing.

You know SGI is still around? They sell storage systems.
+5 Rank Up Rank Down
May 24, 2012
An Index is an artificial construct used by the stockmarket to attract investors by "proving" that in the long term the stock market always produces a positive return. Indexes always perform favourably over the long term, they are constructed that way. If a company's value falls too much they are removed from the index and replaced by the next cab off the rank. Unfortunately for the investor, there is no way in the real world to jump from losing horses to winners without suffering costs, so any investment strategy which attempts to track the index will always produce lower returns due to the trading costs. Funnily enough the more closely you attempt to track the index the higher the costs and the greater the variance between the index performance and your own. Apart from trading costs there are also things called unrecoverable losses which in the real world mean the money has gone and can't be converted from one stock to another, see Enron etc. Whereas an index goes to bed with 100 shares in company A and wakes up with 100 shares in company B instead, no harm done.
May 24, 2012
Picking individual shares is always going to be pure luck.
Index linked funds are far safer but most people see these as long term investments.

But why?

I have a UK FTSE 100 linked fund with very low charges and no withdrawal fee.
I invested a bit last August when the index was down 20% and sold in Febuary when it had recovered. I made 16% in 6 months.

Yesterday I invested again because the market is down almost 15%. I aim to make 10% when it recovers (I also have a backup plan for a larger investment if the market crashes if Greece leave the Euro).

So basically while the markets are swinging high and low there's an easy opportunity to take advantage.
May 24, 2012
If you take the 500 stocks that comprise an index like the S&P 500, you will find that about 250 stocks outperform the index and about 250 underperform it. The index is an average. It is almost impossible that 450 stocks will outperform an average of 500 stocks.

Yes, "the most beaten-down stocks can have the largest percentage gains if they show signs of life" but they can also have the largest percentage losses if they continue to tank. The largest spurts in a stock's price are generally seen near the end of their uptrends or downtrends.
May 24, 2012
People way overlook Black Berry recently. But are they a loser or a winner?

Black Berry seems to have been looking bleak the past couple years because of their recent lack of ability to adapt to a mass consumer market . They do seem to have a possible chance for a renaissance with their new real time QNX based operating system phones. If they can figure out how to market the darn thing, and get program developers to program for it, they have a winner.

Emotionally for me BB is a winner, but logically their a flip of a 20 sided dice. But Not necessary a loser in any way to me.

I have had Their QNX based playbook tablet for about a year. I use it every day now since I broke my laptop. It has never crashed, I have dropped it twice on concrete with no harm, and the hardware and build is superior to any other tablet I have laid my hands on so far . If feels more like a tool than a cheap toy, and I actually use the calendar.

I haven't been able to use it at its full potential. Still learning new things with it all the time.

This Past month Just got a 400 dollar android based phone from a friend... it's glitch prone, has crashed twice, and i'm not really impressed with it. And apple products are a no go for me.

If BB can pull off their next generation products they might do pretty good. They have a good quality product coming up this next year or so... If they get their ducks straight, take their time to do it right. They have a winner.

Unfortunately BB management is where the dice come into play.
May 24, 2012
Wow. I wouldn't even hazard a guess. Because if I was wrong, I'd feel bad, and if I was right, it would be pure luck, in the blind-pig-finds-truffle category.

There has also been research done on having a computer program not only pick stocks, but sell them when the time was right. The computers did better than people, because (so say the experts, but what do they know) that computers don't trade emotionally.

From what I understand, Morningstar (the big fund rating company) is now providing different information about funds than they used to. They used to tell you only what a fund's raw performance was. That is, if you took a particular fund and looked at its value on January 1, 2010 and compared it to its value on the same date in 2011, you'd get a percentage increase and decrease. But now, they also provide what I call "realization," which is how much money people made who sold the fund over the past year.

And the not-so-amazing thing is, the realization figure is always lower than the actual performance. Why, you ask? Because people tend to buy a fund (or a stock) when it is going up (when it has already consumed some of its potential value) and sell it after it starts going down (when it has already lost some of its value). So people tend to buy too late and sell too late, eroding their possible return on their investment.

So what does this tell us? First, don't buy and sell individual stocks. Or individual funds. You'll do a crappy job of it. And don't try to time the market - you'll lose. You may get lucky once, or twice, but over time you'll lose, because you'll invest emotionally rather than logically. Take a look at Facebook's IPO, and you might have an idea of what I mean.

Scott's scenario was actually an attempt to build a large-cap index fund that would beat the S&P 500 index (betting on the S&P as a whole can be done, through an ETF called a "Spider," by the way). To have that be a good investment, then large cap would have to end up as one of the top asset classes for the year. Will it be this year? Who knows. But what if small cap does better? Or if foreign funds go up? Or if gold goes up (which it probably won't, but there I go trying to pick a winner or a loser).

The best investment strategy is diversification. Own a lot of asset classes in a portfolio that matches your risk tolerance, goals and objectives, and over time you'll do great. It isn't as much fun as trying to pick winners and losers, but then again, that's just gambling; it's not investing.

One question, Scott. Had you already heard about HP planning to lay off 27,000 people in its PC division because of the lack of PC sales due to people using i-whatevers in place of PC's before you wrote this post? Be honest now.
+5 Rank Up Rank Down
May 23, 2012
Lol - Scott, you're picking losers by picking a winner :). So maybe picking winners is easier?
May 23, 2012
While not a stock, I'd say medium and long term US government bonds are the biggest sucker bet in the market today. The 10 year bond is paying under 1.75% today which is below any realistic measure of inflation. Even the 30 year bond is under 3%. These are not sustainable yields even if the fed does plan on keeping interest rates artificially pegged at 0% forever. Eventually these rates would seem like they'd have to reset to more realistic levels (especially given the large and rapidly growing supply of US government debt) at which point the value of existing bonds will crash. Over anything longer than a few month time horizon you'd be far better off keeping cash under your mattress than buying government bonds. Then again, just like we were told in the mid 00's that realestate was the safest investment you could make just as the bubble was about to pop, you'll hear the exact same thing about treasuries right now. Why are people such idiots?
May 23, 2012
[Your theory is that professional stock fund managers COULD pick winners for their clients but prefer not to? What exactly is their reason? -- Scott]

They are too busy picking the winners for themselves, and selling the leftovers to their "clients" to profit from them, not make profits for them. See also the Google results for "Goldman Sachs muppets."
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