With markets bouncing up and down, investors may be fearful the Omicron variant will send stocks into a tailspin.
Others worry global supply chain and price pressures will turn inflation into a persistent, return-eroding headwind. Will the Fed raise rates, hurting existing bond prices?
In seeking profits and protection, many investors turn to Wall Street’s “Where to Invest” guides for answers. Hitting newsstands now, these annual publications entice readers with “The Best Stocks from Top Analysts” and how to “Invest Like a Pro in 2022.”
While their current forecasts always sound compelling, a year later Wall Street’s hottest tips often turn out to be nothing but a cold shower.
Watch or read our analysis of last year’s most promising Wall Street predictions.
The Sensation of Cathie Wood
Last December, there was probably no fund manager more sought after for insights into the coming year than Cathie Wood. The leader of tech-focused money manager ARK Invest had become the equivalent of Wall Street royalty, thanks to ARK’s lofty returns.
With the 2020 investment landscape shifting underneath investors’ feet, Wood’s flagship ARK Innovation ETF returned 150%. With four other ARK funds also delivering gains of 100% or more, Wood offered access to innovation and profits for a devoted and growing investor base. Money flooded into ARK’s funds.
What a difference a year makes.
While U.S. stocks have risen nearly 25%, Wood’s ARK Innovation Fund has fallen more than 25%. ARK’s healthcare-focused Genomic Revolution Fund—up 178% in 2020—has tumbled 36% this year.
Just one of ARK’s eight funds has delivered any gain at all, while four have suffered double-digit losses.
That sound you hear today? It’s not the landscape shifting, but rather the clatter of investors’ footsteps—stampeding out of Wood’s funds.
21 Stocks for a Recovering World
Fortune turned to a heady group of eight leading strategists, fund managers, and research analysts to assemble a catchy list of “The 21 best stocks to buy for 2021.”
Convinced investors’ tech-stock infatuation wouldn’t continue in the new year, Fortune’s experts picked stocks in other industries “poised to deliver big results” in a post-COVID world.
In a year in which tech stocks returned 35%, just four of Fortune’s stock picks outperformed the tech index. Eight of the experts’ stocks posted negative returns, with medical supply and device maker Teleflex (-22%) dropping the most.
From January 1 through the time of this writing, a portfolio of Fortune’s twenty-one recommendations returned just 13%, compared to the 25% return of the total U.S. stock market.
Probably not the “big results” followers of Fortune’s advice had banked on.
U.S. News’ 10 Best for 2021
A review of U.S. News & World Report’s “ten best” stocks for 2021 reveals what that publication’s experts believed the world’s population would be doing in the coming year: working from home, streaming music and video content, buying in bulk, connecting via social media, and, occasionally, working out in our renovated home gyms.
Sounds to me like they nailed that prediction!
The problem, of course, with acting on market insights you believe are unique is the much higher likelihood those insights aren’t unique at all, but in fact shared by millions of others and already reflected in stocks’ prices.
Stock picking, then, becomes just a random exercise, as the results of U.S. News’ stock picks suggest.
While winners BJ’s Wholesale (+78%), Lowe’s (+60%), and Adobe (+26%) delivered above-market returns, their gains were offset by losses on Nautilus (-63%), Alibaba (-47%), Spotify (-28%), and Disney (-17%).
Collectively, U.S. News’ “ten best” rose just 6% for the year. That’s probably not the performance most readers would have expected from a publication that pretty much predicted the future.
Losing Both Ways: The Kiplinger Hedge
In an unconventional twist on the annual prediction tradition, Kiplinger sought to hedge its bets by offering readers not only “21 Stock Picks the Analysts Love1” but a list of “5 Stocks to Sell or Avoid2” for 2021.
Of the twenty-one “strong buys,” six stocks fell by 25% or more, with TAL Education Group (-93%) dropping the most. During a phenomenal year for the S&P 500 Index (+27%), Kiplinger’s most-loved stocks rose just 6%.
Remarkably, all five of Kiplinger’s “stocks to avoid” delivered double-digit positive returns. Led by oil and gas exploration company APA Corp (+88%), the “forsaken five” surged by an average of 31%, meaning investors who sold the stocks short lost that same amount.
That’s right, not only did Kiplinger’s “stocks to avoid” outperform the “stocks to buy” by a whopping 25%, but the devoted follower of Kiplinger’s advice—who bought stocks long and sold others short—underperformed the U.S. stock market by more than 50%.
Finding Fortune in Predicting Doom
Want to make money regardless of the market’s direction? Just predict things are going to get much, much worse. At least that’s the profitable strategy of financial newsletter writer Harry Dent.
Dent, who claims to have correctly called Japan’s 1989 bubble and the 2000 dot-com crash, also landed on the New York Times’ bestseller list with his 2009 book, The Great Depression Ahead.
In March of this year, Dent proclaimed “a huge collapse” would come “by the end of June, probably sooner.” The “biggest bubble crash ever” will be so bad, he warned, “some industries are never going to come back.” Dent predicted the S&P 500 Index would fall nearly 50% within months.
Dent’s advice for investors seeking shelter from impending doom? Buy long-term Treasury bonds. Even “real estate will go down 30%, 40%, 50%,” Dent said. “Everything is going to default. The 30-year Treasury will magnify your money.”
Since the date of Dent’s predictions, the S&P 500 has risen 21% and real estate investment trusts (REITs) are up 26%. Dent’s favored 30-year Treasury bond, meanwhile, has returned a relatively paltry 9%.
These shockingly poor predictions don’t seem to have dented the value of his own business, however, which Dent himself pegs at “$20 million-a-year at best, $10 million-a-year at worst.”
Proof, perhaps, that when it comes to the prediction business, you make more money selling the advice than following it.
There’s No Crystal Ball
What’s the takeaway for investors?
Picking next year’s winning stocks is certainly possible, but highly improbable. Rather than rely on speculative forecasts fueled by experts in the media, successful investors harness the collective wisdom of the market via low-cost and well-diversified index fund portfolios.
After all, expert predictions may be a great way to sell magazines but following that advice can prove costly.
1 Ashworth, Will 2021, ‘21 Top Stock Picks the analysts Love for 2021’, Kiplinger, January 21, accessed December 9, 2021, <https://www.kiplinger.com/investing/stocks/stocks-to-buy/602136/21-top-stock-picks-the-analysts-love-for-2021>
2 Smith, Anne Kates and Huang, Nellie S., 2021, ‘5 Stocks to Sell or Avoid’, Kiplinger, December 16, accessed December 9, 2021, <https://www.kiplinger.com/investing/stocks/stocks-to-sell/601874/stocks-to-sell-for-2021>