FOOL ON THE HILL: An Investment Opinion
Every year the Motley Fool writers put together a Halloween Special. And, every year we dutifully trot out the returns for the companies that had been selected as "tricks" or "treats" from the prior year. In this article, we look at the annual returns now for companies that were selected two, three, and four years ago, both long and short, and see how they stack up.
One of the great things about the Internet is that there is a factor of accountability. It's not tough to go back and see how a Fool's picks have done. For example, PRIMUS Communications (Nasdaq: PRTL), my pick from this past Valentine's Day Special, has been an unmitigated disaster from a stock-price perspective so far. (As an aside, I think that this particular company has been punished by virtue of an overall downturn in sentiment toward its sector. I am not particularly concerned that its operating prospects have deteriorated.) I find it a positive thing to go back on an annual basis to rate the performance of each Fool's pick. Other Fool features where we do this are the Dueling Fools Flashback and the annual Industry Focus, a for-sale product that comes out each December.
I have one problem with these reviews, though. The amount of time is far too short to really get a determination of the performance of the company in question. Seriously, companies can remain priced at inefficient levels for years at a time. A single-year period is generally not sufficient to declare someone's argument "correct" or "incorrect," particularly if it is based on fundamentals (much less the six month lag that we use in declaring a winner in the Dueling Fools space).
But since the holidays come annually, it is a really convenient break point to review them. It should be mentioned that the vast majority of "stock-picking services," media or otherwise, rarely come back to review their past performance at all, so my criticism is only one of degree. How much better off would many investors be if Wall Street analysts were forced to disclose their own past performance? But in this age of instant gratification, who in the world could possibly wait for several years to determine whether an investment or a whole strategy is working?
Well, I can, and I know that there are thousands of Fools out there who can as well. I'm perfectly willing to stick with a strategy based on firm fundamental analysis of companies that I believe have a high probability of outperforming the overall market. It doesn't mean that I'm always right. In fact, I do invest aggressively enough that it would be foolish of me to discount the possibility of being wrong on one, if not several, of my investments. Were my expectations any different, I'd just put everything into bonds, because at one time or another every single company goes down in price over the intermediate to long-term.
I'll give you an example: If you bought Corning (NYSE: GLW) in 1991, your return on investment in 1998 would have been zero. But, for the true long-term investor, the return on investment for Corning over this past decade has been 1,176%, or an annualized 28.5% per year. For at least seven of the 10 one-year intervals in this progression, the Corning investor would not have looked so great.
With this in mind, let's go back a little further than the one-year returns of the picks made by my Foolish colleagues. I'll list the returns for all of the Halloween specials. Though, as the Corning example above demonstrates, this still may not be enough time, since the first one ran only in 1996.
Here we go. For those of you not up on the lingo -- "Tricks" are ones that the author believes will underperform the market, "Treats" are ones that the author believes will outperform. For the sake of consistency, I'm going to match the returns to the writer's point: If it is a trick, a negative stock performance will yield an overall positive return, as if the stock were held short.
1996 (Annual Return for S&P 500 = 19%)
1996 Treats Annual Return
Curative Health Sciences (Nasdaq: CURE) -32%
7th Level, now Learn2.com (Nasdaq: LTWO) -29%
Copytele (Nasdaq: COPY) -37%
Einstein/Noah Bagel (OTCBB: ENBXQ) -80%
National Health Enhancement Services,
acquired by McKesson HBOC (NYSE: MCK) -21%
National TechTeam (Nasdaq: TEAM) -45%
Stratosphere (bankrupt, shares cancelled) infinite
CDW Computer Centers (Nasdaq: CDWC) 38%
Global DirectMail, now Systemax (NYSE: SYX) -51%
Carrington Labs (Nasdaq: CARN) -50%
It's interesting to see that only two of these selections trailed the performance of the S&P 500 over the four-year period. Five of them have returns exceeding 40% per year. Not too shabby. But, compare with the one-year returns and you will see a dramatic difference for some companies. This has a great deal to do with the shorter-term inefficiencies in the market.
We'll look at the 1997 and 1998 returns as well, just for yuks:
1997 (Annual Return for S&P 500 = 15%)
1997 Treats Annual Return
Hershey Foods Corp (NYSE: HSY) 2%
Creative Technology (Nasdaq: CREAF) -15%
National Realty (NYSE: NLP) -23%
Greater Bay Casino (bankrupt, shares cancelled) infinite
Koo Koo Roo,
now owned by Prandium (OTC: PDIM) -91%
now Wade Cook Financial (OTC: WADE) -68%
Quigley Corp. (Nasdaq: QGLY) -59%
1998 (Annual Return for S&P 500 = 21%)
1998 Treats Annual Return
Jabil Circuit (NYSE: JBL) 55%
Anheuser-Busch (NYSE: BUD) 24%
Dave & Buster's (NYSE: DAB) -36%
K-tel Intl. (Nasdaq: KTEL) -74%
Trump Hotels & Casino Resorts (NYSE: DJT) -30%
Prepaid Legal (NYSE: PPD) 26%
Several of these companies had dramatically different returns as of the one-year period than they do now -- some better, some worse. But, when determining which number you need to focus on, ask yourself, "Am I investing for one year, or for a lifetime?" If the answer is the latter (which I certainly hope it is), you can see that the longer out the return, the more power (or for negative returns, discredit) it gives the thought process that went into selecting the company in the first place.
Bill Mann, TMFOtter on the Fool Discussion Boards