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Step 3: Stock Pickers

driving down stock prices so their expected returns are high enough to attract investors. That is difficult for most investors to grasp since they prefer to believe growth stocks are better investments than value stocks. After all, investors looking for a stock tip want to hear the name of the next Apple, not the next JCPenney. As you will see in Step 8, the data indicates that investors should be interested in great investments (value stocks), not just great companies (growth stocks).

Fortune Kookie I analyzed Fortune’s “Ten Most Admired Companies” (2001)55 as a whole portfolio and as individual companies, comparing them to 10 index portfolios for the 13-year period from January 2001 through December 2013. The results of the study are shown in Figure 3-6, indicating the equal-weighted (across the nine remaining publicly traded companies) “Fortune Most Admired Portfolio” significantly underperformed most of the index portfolios — even Index Portfolio 30 which has 70% fixed income. Despite the fact that the “Fortune Most Admired Portfolio” carried slightly higher risk than the riskiest Index Portfolio 100, $100,000 grew to $174,456 for the time period vs. $330,194 for Index Portfolio 100. The story gets worse for the “Fortune” tellers. Three of the ten ended up with a negative return for the period, and Dell Computer reverted to a privately held company in 2013. Even Warren Buffett’s widely touted Berkshire Hathaway stock failed to compensate investors for risk, closely delivering the returns of an Index Portfolio 60, despite the fact that it took risk comparable to Index Portfolio 90.

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