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Step 3: Stock Pickers

Great Companies Don’t Make Great Investments Remember Peter Lynch’s advice about buying companies whose products you like? It turns out this advice is not as good as it sounds. Great companies don’t make great investments. You may love Apple’s iPad, but this doesn’t mean Apple is a great stock to buy. In fact, the opposite is usually true. Distressed companies have earned higher returns than those of companies with lots of hype or goodwill at the time of purchase. Unfortunately, investors generally avoid investing in distressed companies, because it seems counterintuitive to buy perceived losers. Finance Professors Meir Statman and Deniz Anginer wrote a 2010 study called “Stocks of Admired Companies and Spurned Ones.”54 Their study was based on Fortune Magazine’s annual list of “America’s Most Admired Companies” from 1983 to 2007. Fortune’s annual surveys ranked companies on eight attributes of reputation: • Quality of management • Quality of products or services • Innovativeness • Long-term investment value • Financial soundness • Ability to attract, develop and keep talented people • Responsibility to the community and the environment • Wise use of company assets From these ratings, Statman and Anginer constructed two portfolios, each consisting of one half of the Fortune stocks.

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