Feb

29

Msn.com doesn't seem to have an archive of Vic and Laurel's articles from the early 2000s, but I was fortunate enough to have made copies of them. Now I'm curious to know how some of their stock picks and pans did over the intervening 10 years or so.

I decided to take a look at a January 2002 article, "Companies that speak softly carry big profits". The theme of it was that perhaps firms with mild-mannered, self-effacing CEOs might outperform boastful firms that say "We're Number 1!" Vic and Laurel were bullish on the "Modest 10" and bearish on the "Boastful 13". Their subsequent performance is given below.

8 out of 10 of the "Modest 10" firms saw positive total returns on their stocks between then and now, led by Electrolux (ELUX), with a 321% return. The average return was 67%. That's not too bad.

Of the "Boastful 13" firms, 10 of the 13 saw negative returns, including 3 that lost at least 90%. To repeat, 8 of 10 of the Modest 10 were winners; 10 of 13 of the Boastful 13 were losers. Nevertheless, in terms of average return, the Boastful 13 won out over the Modest 10. One of the Boastfuls, Priceline.com, gained 1,454%! That drove the average for the Boastful 13 up to 107%, beating the average for the Modest 10.

Priceline's indiscretion that put them in the Boastful 13 was to proclaim that "Priceline will reinvent the environmental DNA of global business..[and produce]..a totally different form of energy". (Did Shatner write that?) Vic and Laurel had sought companies that said "We're Number 1", but they reasoned that even though Priceline's pronouncement didn't match that exact wording, it was still fairly boastful, and I agree.

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9 Comments so far

  1. Rick Ellis on March 1, 2012 6:41 pm

    It should be noted that the average S&P500 stock achieved 94% total return over the ten year period.

    This result is from an equal weighted portfolio of the 500 stocks rebalanced once/year. Includes dividends.

    Rick

  2. Ed on March 2, 2012 9:43 am

    Yes Rick, but as you know when you re-balance once a year (what is effectively a trading strategy) you are adding something totally new into the mix. It completely changes things. A more accurate benchmark would be the equal weighted portfolio held constant as was done in Pennington's study.

  3. john smith on March 2, 2012 12:03 pm

    Charles, the “Boastful 13″ returns are not real because are influenced too much by extreme values of two stocks: PCLN and FNF. These represent only 3.5B in stock capitalization but, which is a fairly insignificant number, but weight exactly the same as other companies in your sample. Here lies the deception.

    To get the real picture, you should adjust the percentage gains by relative size of the company and consider only then the result of the group as a whole. This is called “weighted average”.

    Good luck!

  4. douglas roberts dimick on March 2, 2012 3:59 pm

    Charles,

    An excellent retrospective… thank you.

    dr

    Ps. I ponder whether these results say more about a revisionary trend, a centurion divergence if you will, of the touted (when not boasted) “value investor” stance claimed since New Deal usherings with invention of the SEC. Did repeal of Glass-Steagall precipitate 2008 and a series of rule changes to a rules-based construct that will (in the future) penalize the long-term, value investor relative to each of the preceding decades back to the 1930’s? Perhaps V&L’s predictions are more telling of how the market is transforming into an electronically dominated exchange system rather than an efficient process for determining economic (contra commercial) valuation(s).

  5. Rick Ellis on March 3, 2012 11:21 am

    In response to Ed’s comment:

    S&P500 Equal weight Buy and Hold, No rebalance, Total return with dividends.

    The end date in Charles’ study was not clear so here are two periods:

    93% total return 1/31/2002 to 1/31/2012

    101% total return 1/31/2002 to 2/29/2012 (date of Charles’ post)

    Rick

  6. Rick Ellis on March 3, 2012 11:58 am

    My earlier studies buy and hold studies had 4% annual turnover due to changes in the S&P500. If you do a buy and hold even if the stock falls out of S&P500, the annual turnover is 3% due to stock mergers, bankruptcy etc.

    Then for the period 1/31/2002 to 1/31/2012, the total return was 96.7%. Dividends reinvested only when a stock is sold due to this turnover.

    The point of the study is not to be precise but to illustrate that random stock selection will result in the same kind of results as in the original post.

  7. Sam on March 5, 2012 3:55 pm

    john smith on March 2, 2012 12:03 pm: “…you should… ”

    … Instead of telling Prof Pennington what he “should” be doing, why don’t you run a study or two yourself and contribute?

  8. Ed on March 7, 2012 11:50 am

    Nice Job rick thanks for the update

  9. Leonard Nimoy on March 7, 2012 3:53 pm

    I agree with Sam — Prof. Pennington already provided the market caps for the stocks, so John Smith, why can't you bust out your TI-30 and do it yourself?

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