Darts, monkeys, and countless other bizarre stock-picking processes are routinely trotted out by members of the media eager to prove that the random walk theory Burton Malkiel wrote about so long ago is actually is true.
Malkiel believed that stocks are priced so efficiently by the markets that a monkey could throw darts at a board containing the stock pages of your local newspaper and more often than not, beat the professionals. His premise was simple: you're better off buying indexes. That was in 1973 and only today through the work of people like Malkiel and industry stalwart John Bogle is this idea taking hold. (Want to know more? Check out Financial Concepts: Random Walk Theory.)
What's In A Ticker?
While I consider myself a contrarian when it comes to media, I too will stoop to the level of voodoo science, providing readers with an interesting and quite possibly, profitable hypothesis. Plenty is written in the press about stocks with symbols containing one letter like Visa (NYSE:V) or Macy's (NYSE:M), usually debating the merits for and against owning such a symbol. Only 26 of these are available at any given time; today there are 18 in use on the three major U.S. indexes (NYSE, Nasdaq and AMEX), leaving eight available for all comers.
For instance, the letter P is available. Why isn't management at Pier 1 Imports (NYSE:PIR) beating on the NYSE's door, demanding their symbol change to the singular? Given its rough go the past few years, a change of scenery might do the company some good.
Small business marketers used to recommend that you come up with a name early in the alphabet in order to get higher response rates from the phone book, yellow or white. Perhaps the same applies to stock symbols. For more on portfolios and ticker symbols, see Understanding The Ticker Tape.)
A Little Elaboration
I've assembled a group of 10 stocks whose tickers contain only one letter. Some are single letter symbols like Citigroup, while others have multiples of the same letter repeated. They are the first 10 that randomly occur from the beginning of the alphabet. I've taken these stocks; assumed a $10,000 purchase in each company in May 2005, and compared their annualized returns to the S&P 500's annualized returns. The randomly selected portfolio's returns are surprising.
|Company||3-Year Annualized Gains*||Return On A $10,000 Investment|
|Agilent Technologies (NYSE:A)||36.02%||$25,165.66|
|Barnes Group (NYSE:B)||39.22%||$26,983.91|
|Circuit City (NYSE:CC)||-34.30%||$2,835.93|
|Calgon Carbon (NYSE:CCC)||20.88%||$17,662.95|
|Dominion Resources (NYSE:D)||15.85%||$15,548.49|
|SCOLR Pharma (AMEX:DDD)||-33.56%||$2,932.84|
|*May 27, 2005 to May 28, 2008|
Double The S&P 500!
At first glance, I couldn't believe my eyes. Is it possible that the indexers could be wrong? How in the world could this happen. We're not talking about a few percentage points here; we're looking at an absolute whitewash. Over 30 years, the difference would be a staggering $4.2 million.
The Indexer's Argument
Some would argue that, if extended over a long time frame, the index would more or less carry on at the same rate of return while the group of 10 would slowly disappear from the indexes either through acquisition by another company, bankruptcy or some other means of delisting. There is no possible way this portfolio could stay together as a complete unit for such a lengthy period. Therefore, as an indexer, you might argue that it's a non sequitur.
I don't agree with this line of thinking however. As portfolio's change, so too will the index. A committee selects the holdings in the S&P 500 and thus it is a subjective, rather than an objective index. Yes, it does represent the 500 largest companies by market value, in the U.S., but when substitutions are required, the actual choices are made by individuals open to bias. If, on the other hand, one of the above "ABC" stocks delisted, the selection bias for replacement would likely be less biased due to the limited group of companies' available (41 symbols with only one letter) for inclusion. I'm a strong believer in individuals owning fewer stocks, not more; and a portfolio of 10, diversified by both market cap and sector, as this one is, makes it an excellent argument against indexing.
The purpose of this article was to show what thinking outside the box could do for your investment portfolio. The above stocks for the most part are household names. None really jump off the page screaming "buy, buy, buy". They're simply 10 stocks cobbled together to form a formidable team. Isn't that what portfolio construction is all about?
For more on portfolio construction the good and the bad, check out Major Blunders In Portfolio Construction and A Guide To Portfolio Construction.
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