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I realize that title makes no sense.
I am referring to a table in the year end issue of BusinessWeek which shows the best performing mutual funds for 2004. The table lists 40 funds (mostly open end funds but also five ETFs). Out of 4o funds, 36 of them are either sector funds or country funds. Two of them appear to be broadbased funds, one of them is a small cap European fund and another just says Bruce. I have no idea what that is and I did not try to look it up.
The reason this is noteworthy is that the driving force behind at least 90% of these funds on the list was being in the right sector or country. 90% is an interesting number because the studies that have seen advocating top down management say that 90% of an investor's returned is determined by correctly deciding when to be in the market and then correctly choosing what sectors to own. Said another way stock picking only accounts for 10% of an investor's return.
To repeat; stock picking is least important, but still very important. Good stock picking can enhance returns. As an example I have about an equal weight in healthcare. But, as I have been writing about for months I have avoided large US drug companies and instead owned foreign large drug companies, medical devices, generics and a little biotech. None of the stocks I own are up a lot, but have collectively outperformed the iShares Dow Jones Health (IYH).
As a reminder I would say to anyone that makes decisions about investing is that you can not take short cuts.
5 comments:
I agree 100% with your analysis. From all my backtests and simulations...the number one component is the overall direction of the market. Secondly, the direction of the sector. Third, the stock.
Of course, I'm a short-term to mid-term trader/investor. This ranking of general market, sector, stock might change depending on your investing time horizon. Don't you think?
To play devil's advocate...
As your time horizon increases...your stock picking could become of greater importance. Take an XOM or DE whose sectors have been under pressure for many years (up until recently)...but these individual stocks have weathered on.
In case anyone's curious...
Bruce looks pretty unremarkable, except for showing such high returns and having a big chunk of their money in healthcare stocks.
Good post Roger.
Byrne, is this BRUCE fund real? Can I invest?
Stephen
hmmmmm this is correct so far as it goes, but remember that the average return from stockpicking probably doesn't summarise the distribution of returns very well. I would guess that you could add or remove a lot of risk from stockpicking (mainly add it through not sifting out unsound companies).
dsquared (happy new year!)
Response to Dsquared
Thank you for your comment. You are right. Taking short cuts with stock selection can lead to a very bad outcome. I have seen this happen before. Part of what I have tried to do as I continue to study and learn is see where other people go wrong and learn from their mistakes.
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