Posted by Scott Keefer on Jul 14th, 2008

Last week I wrote a blog identifying some less than impressive stock picking for the 2007-08 financial year. This week I have come across another example of how stock picking just does not work.

A Daily Telegraph article published December 15^th 2007 provided what they phrased the “hottest” stocks for 2008 according to six leading analysts - Craig James (Commsec), Rick Klusman (Aequs Securities), an analyst from Merrill Lynch, Peter Switzer (Switzer Financial Services), an analyst from Fat Prophets & an analyst from Credit Suisse. (The hot stocks of 2008) Each analyst chose between 4 & 5 stocks.

The returns (including dividends) from the close of trade on the 14^th of December to the close of trade on Friday (11^th July) are set out below. The ASX200 returned negative -23.29% for the same period (not including dividends).

Craig James Rick Klusman

Code Change Code Change

RIO -7.51% BXB -30.43%

GNC -24.35% SNV -52.63%

LEI -26.42% REX -48.02%

HVN -55.76% CCP -82.40%

CSL -3.57% SRA -25.00%

Average -23.52% -47.70%

vs ASX200 -0.24% -24.41%

Merrill Lynch Peter Switzer

Code Change Code Change

NWS -37.09% WBC -32.03%

BSL 15.61% BHP -3.28%

AWC -24.64% BNB -72.72%

MQG -34.32% OXR -40.79%

BBP -70.91% DES -81.48%

Average -30.27% -46.06%

vs ASX200 -6.98% -22.77%

Fat Prophets Credit Suisse

Code Change Code Change

COK 41.27% TWR -20.42%

MUN -34.18% ILU -1.81%

IMA -57.98% RRT -92.75%

CXC -46.84% ZFX -37.86%

PEM -76.69%

Average -24.43% -45.91%

vs ASX200 -1.14% -22.62%

The performances of these picks are less than appealing with every picker’s average performance below the ASX200 index. The average under performance for all 29 shares was 13.03%. If you had started with $100,000 you would now be left with $63,685 not including transaction costs. (Keep in mind that the ASX200 result does not include dividends over the period. This makes the actual result even worse.)

Now of course it has only been 7 months since the picks were made. Some of these picks may turn into extremely good investments in the long term. (Our preferred approach is to buy and hold for the long term.) However, given the brief given to the pickers to identify the hot stocks for 2008, not the long term, the record speaks for itself.

So what is the alternative to stock picking?

A better approach to building investment portfolios is based on scientific research around the realities of how market works. I prefer to recommend index funds as the core of the growth component of a portfolio and then tilt portfolios towards the higher risk, higher expected return sectors of equity markets - namely small and value companies as well as emerging markets in the international context.

Take a look at the following pages - Building Portfolios and Research based Approach pages on my website for more details.

Regards