< Go Back

Winning by Picking Losers

Winning by Picking Losers

    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?

More Episodes