Is Complacency Sinking Your Returns? - Investment Ideas
Earlier this week I read an article that suggested the moon's effect on tides may have led to the disastrous sinking of the Titanic. The theory is that the unusually close proximity of the moon to the Earth at the time probably caused higher than expected tides, which dislodged extraordinarily large icebergs. What struck me about the article is that it mentioned that the captain of the Titanic was assigned to this maiden voyage precisely because he was a highly experienced, knowledgeable and careful seaman of the North Atlantic. I hadn't known that he was so credentialed. What we all do know is that those unusually large icebergs made their way much further South than expected, into the shipping lanes.
So here is a situation where an experienced professional was extremely comfortable operating in a certain environment and in a certain manner. Yet the environment had changed beyond his expectations and, because he was operating the ship the way he would given past conditions, the captain was headed for disaster. And we all know what happened as a result of his complacency.
What We Can Learn from Titanic
The lesson of the Titanic's captain could have similar implications for your stock portfolio. Perhaps you're a seasoned investor and have been selecting stocks the same way for 10, 20, or even more years. If so, how do you truly know if your stock-picking strategy still works? Have you been keeping perfect records to know with confidence that your strategy outperforms, or are you simply "remembering" that your stock picks have been profitable? (Numerous behavioral studies have shown that people tend to remember their successes and ignore their failures. We condition ourselves to "believe" we're better at performing a task than we actually are. Humans are an optimistic species. It's a trait that served us well during our evolution, but it may not serve us so well in our modern, complex world of investing.)
On the other hand, if you're new to stock investing, what kind of ideas do you have that will lead to higher returns? Would you like a way to test those ideas?
How To Look Deeper
Furthermore, how would you like to have access to numerous data items like analyst ratings , target prices and corporate financial statements for thousands of companies? After all, the more informed you are; the better decision maker you'll be. Does the appeal to test your ideas over many historical time periods, including up and down markets and economic cycles, appeal to you? Would you like to get a sense of the riskiness or volatility of your strategy? In other words, wouldn't it be good to know the frequency and size of the "icebergs" inherent in your strategy? Wouldn't you like to know if momentum , value, or growth strategies (or combinations thereof) perform better over time?
Zacks offers a tool that allows you to find answers to these questions. You can use the Research Wizard to navigate all the different data available, discover strategies that lead to higher returns and test it all for confident trading. It truly is a one-of-a-kind product, available to the individual investor. With the Research Wizard, you're only limited by your imagination.
Let's look at an example. Sticking with the non-complacency theme, I decided to not only look at stocks with the best Zacks Rank , but those that most recently appeared as Zacks Rank #1s (Strong Buys). So I'm avoiding complacency here by selecting the freshest and best Zacks Ranks.
Testing a strategy of the stocks that just became a #1 within the last week yielded a 10.8% annual average return--compared to a 0% annual average return for the S&P 500 from 2000-2011. So $10,000 invested in this strategy at the end of 1999 would have returned $34,062 at the end of 2011, versus $10,049 for the S&P 500. The strategy was, however, slightly more risky with the largest losing period returning -32.5% compared to -27.5% for the S&P 500. The number of stocks in the portfolio averaged just above 30 over this 11-year timeframe, and portfolios with a smaller number of stocks tend to be more volatile.
Here's how to find the stocks that just became Zacks Rank #1s:
- First, start with only
US common stocks
- Next, create a liquid, investible set of the stocks with
the largest 3000 market values
average daily trading volume greater than or equal to to
(if there's not enough liquidity, it'll be hard for you to trade)
- Select only those stocks with a current
Zacks Rank equal to 1
. (You want current high-ranking stocks.)
- Finally, select only those stocks with a Zacks Rank [1 week ago] not equal to 1 . (You want the previous week's Zacks Rank to NOT be a 1.)
Here are five stocks using the above methodology (3/16/12):
KR - The Kroger Company
Kroger, a Cincinnati-based company, operates as a retailer in the US, and manufactures and processes food for sale in its supermarkets. This company has become a new Zacks #1 Rank of a "Strong Buy". The improvement in the Zacks Rank is due to several quarters of earnings surprises and recent upward revisions in both quarterly and fiscal earnings estimates.
ICE - IntercontinentalExchange, Inc.
IntercontinentalExchange, an Atlanta-based company, operates regulated exchanges, clearing houses, and over-the-counter (OTC) markets for agricultural, credit, currency, emissions, energy and equity index contracts. This new Zacks #1 Rank has a solid history of earnings surprises and just had four estimate revisions in the last seven days, and five in the last 30 days for both its current fiscal quarter and annual earnings.
HLF - Herbalife Ltd.
Over the last year, this company has had super strong earnings surprises of at least 15%. Couple those surprises with at least eight revisions for both the current quarterly and annual earnings estimates over the last 30 days, and you have what adds up to a Zacks #1 Rank. Herbalife, a network marketing company, sells weight management, nutritional supplement, energy, sports and fitness, and personal care products worldwide.
WLK - Westlake Chemical Corp.
Westlake manufactures and markets basic chemicals, vinyls, polymers and fabricated products. This company has delivered a positive earnings surprise six out of the last seven quarters and had at least two quarterly and annual estimate revisions within the last 30 days. Earnings surprises and upward earnings revisions lead to a good Zacks Rank.
CPRT - Copart, Inc.
Copart provides online auctions and vehicle remarketing services in the United States, Canada and the United Kingdom. This Zacks #1 Rank's latest earnings report beat expectations by over 20%, which has caused upward estimate revisions within the last week and month for both quarterly and annual earnings.
Do Your Own Research
Because I'm a strong proponent of self-improvement, I encourage you to verify your strategies and try to improve upon them with the Zacks Research Wizard . Starting today, you are invited to do this free of charge. You'll have 14 days to create, tweak and backtest your strategies. At the same time, you can see the latest picks from pre-loaded winning strategies that average gains of up to +67.4% per year.
Don't be complacent with your current strategy. Avoid unseen disasters in your portfolio by becoming a better stock picker today.
Learn more about your Research Wizard free trial >>
Kip Robbins is a Quantitative Analyst with Zacks.com. He analyzes screens and strategies for Zacks customers and for use in Zacks Research Wizard , which empowers individual investors to use market-beating screens, build their own, and back test their results.
COPART INC ( CPRT ): Free Stock Analysis Report
HERBALIFE LTD ( HLF ): Free Stock Analysis Report
INTERCONTINENTL ( ICE ): Free Stock Analysis Report
KROGER CO ( KR ): Free Stock Analysis Report
WESTLAKE CHEM ( WLK ): Free Stock Analysis Report
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