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The hazards of stock picking


By Chris Hanson
The Wicked Smart Investor9681099086_accb793d2b_z-1

If you could accurately predict a future number one song or the next hot stock it would be immensely profitable. You could invest early, watch the run up and maybe cash in for a hefty profit. But investing, like the music industry, is never easy. Trying to pick the next big stock is risky business.

Back in 1981, I successfully predicted a chart-topping song. Late one night, I fired up my black and white TV and tuned into WCVB’s “Five All Night Live All Night.” I was instantly transfixed by the punk rocker appearing on the screen. He had spiked blond hair, snakeskin pants and a thick English accent. If that wasn’t enough, the sneer on this rebellious hell-raising face would have caused the nuns at school to demand “Get that look off your face, before I slap it off.” Billy Idol was everything I wanted to be, but just couldn’t.

After the interview, he got up and sang a rousing rendition of Tommy James and the Shondells’s “Mony, Mony.” I was smitten. The next day I ran down to Quincy Records where Jimmy sold me the “Don’t Stop” LP. I took that home and played that song ad nauseum. I was convinced this awesome song was a certain number one hit.

I was somewhat correct. Despite a celebrated appearance on Solid Gold, Idol’s “Mony Mony” peaked at number 107 on the US charts. The song was doomed to be slapped with a permanent “bubbling under” status. I turned my attention to other Billy Idol songs: “White Wedding” and “Rebel Yell” which were much bigger hits. Then, in 1987, something peculiar happened. Idol released a live version of “Mony Mony” that bolted up the charts. In a strange coincidence it bumped Tiffany’s “I Think We’re Alone Now,” another Tommy James creation, out of the number one spot. Finally, my prediction was accurate.

Now, if I could only predict hot stocks as accurately I’d be a billionaire. I know my limitations though, I can’t accurately predict the future, and neither can anyone else.

Many investors still try and it’s usually at their own peril. Investors could develop an emotional attachment to a stock viewing an impressive interview with a CEO or seeing shoppers lined up for a company’s products. They become convinced the stock is a blockbuster and invest heavily while failing to diversify their portfolio. Most investment research advises against this strategy. JP Morgan published the results of a study “The Agony and the Ecstasy: The risk and reward of a concentrated stock position.”  The key findings are sobering. First, the study found that up to 40% of stocks have a catastrophic decline, falling 70% or more and never recovering. Yikes!  Next, the study found two thirds underperformed the Russell 3000 over their lifetime. Last, the study found that 75% of concentrated holders’ risk adjusted return would increase with diversification.

The Wicked Smart Investor feels these statistics speak for themselves and advises against stock picking but not everyone will heed my advice. Some investors feel they have better insight than anyone else or they will be just as lucky as Billy Idol. It is possible, but highly unlikely.

You may have more luck, and profits, investing in a songwriter like Tommy James than a heavily hyped stock. In addition to his own recordings, two covers of James’ songs went to number one. If you throw in Joan Jett and the Blackhearts’ number 7 “Crimson and Clover,” James could have spent the ’80’s cashing royalty checks. Maybe James was singing “Money, Money.”

  1 J.P.Morgan Eye on The Market, Special Edition

chrishansonAbout the Author

Chris Hanson is the author of The Wicked Smart Investor blog and a CPA who specializes in financial planning at Lindner Capital Adivisors in Hanover. He earned his BBA at the Isenberg School of Management University of Massachusetts and an MBA at Babson College’s F. W. Olin Graduate School of Business.

He may be reached at (978) 888 – 5395 and you can read his blog at wickedsmartinvestor. blogspot.com.

Reprinted from the January issue of the South Shore Senior News