Is it me, or has it been a while since we trotted out that blindfolded chimp? You know, the little fellow who beats the pros on Wall Street by throwing darts at a newspaper stock table? Cute story. But is it true?
And if it is true, why? And where does that leave a bunch of Joe and Josephine Odd Lots like us? I mean, if the billionaire boys' club can't hack it -- with their computers and inside information -- what chance do we have of beating that pesky chimp?
It's pretty much true
The chimp's lack of bias (hence, I suppose, the blindfold) keeps him at the market average -- no better, no worse -- which is something most money managers can't do for you. At least not once you deduct their fees.
But there's good news: It just doesn't matter. Not if you're managing your own portfolio. Not if you use independent sources. Even better, if you ignore Wall Street research.
It sounds kooky, but I confirmed all this myself while selling research to Wall Street's institutional "buy side," especially the part about ignoring "professional" research. More on that in a bit, but now the really good news ...
beat a chimp
When I met Motley Fool co-founder Tom Gardner, he and his brother David were planning to launch their first newsletter in a decade. I admit I was skeptical. Should this guy really be charging for his research? Seriously, could a Shakespeare nut in a Fool cap really pick stocks?
Fat chance. Remember, I'd spent years peddling broker data to Wall Street. And my run-ins with the sell-side analysts and the money managers who buy their research convinced me that -- lacking real inside information -- you cannot beat the market picking individual stocks.
I'd watched too many try and fail with my own eyes. It didn't seem to matter whether you were pumping AT&T
No wonder we're treading water
It turns out that by constantly rounding up and turning loose the usual suspects, we sealed our fates. We made money in the boom years and got wiped out in the bad. But hardly anybody walked away rich -- few ever really outperformed over the long haul. Certainly not enough to justify the management fees and bonuses we investors paid.
And if you think things have changed, forget it. Just look at the volume on any day's most-actives list. Yesterday alone, Apple Computer
It's no coincidence, of course, that all three are widely followed and highly touted on Wall Street. That's why everybody owns them, and why you can't beat the market with stocks like those. They are the market.
There has to be a better way
Tom Gardner, on the other hand, was consistently pointing me to lightly traded companies like Moody's, which has doubled since I added it to my IRA. And to my surprise, he was using good old-fashioned legwork and bottom-up fundamental analysis. So, by the time he launched his small-cap newsletter, Motley Fool Hidden Gems, I was really coming around.
After all, and even more surprisingly, none of the criteria Tom and his staff were applying was a big secret to Wall Street. They'd been passed down to us in lectures and books, from Ben Graham through Bill Miller and Peter Lynch.
But something set Tom's performance apart from the market pros I'd known. Turns out it was two somethings: (1) Tom wasn't jumping into and out of stocks, sectors, or markets, and (2) I hadn't heard of most of the stocks he was recommending. Eureka!
Anatomy of a winner
Little Middleby makes ovens -- commercial ovens, of all things. When Tom floated the idea and then recommended it in Hidden Gems in November 2003, the business looked solid. But the markets are efficient, I thought; surely anybody could see that.
So, I ran the name on Multex and Bloomberg, even First Call. Nothing. The analysts didn't care, so the money managers -- the guys who really move the markets and who buy the research -- didn't, either. Now that the stock's up more than 300%, guess who's sniffing around? Wall Street.
Of course, you know better than to draw conclusions from a few examples. And not all of Tom's Hidden Gems picks have tripled -- or even doubled. Still, as of Sept. 25, the 60-plus stocks recommended in Hidden Gems are up 31.8% on average, many times better than the 14.5% turned in by the S&P 500 (you can view the entire scorecard if you like, with a free trial).
What this means for you
Even Mark Hulbert, the investment newsletter-industry watchdog, admits that some guys can pick stocks. But this Hidden Gems deal I'm seeing with my own eyes. Whether it's up or down from here, I'll be watching. I'll keep you posted.
I opened with Peter Lynch -- and the chimp -- for a reason. You see, unlike your typical Wall Streeter, both throw their darts at any stock on the board. Market cap too small? No such thing. No Wall Street coverage? Bring it on. No convoluted relationship with big investment banks? All the better. Never heard of it? Bingo!
That's how Lynch made a killing on retail giants like Limited Brands
Well, Lynch knew that companies that can reasonably rise five, 10, or even 20 times or more in value (1) are small but growing, (2) are well-run, and (3) operate in great industries. To which I'd add that they (4) are often run by founders with large personal stakes in the business.
you'll become a great stock picker
But I'm pretty darn sure you don't want to rely on Wall Street research. You don't want to be shuffling around the week's most-actives, either. Most importantly -- as much as I knock the pros -- you don't want to be taking the other side of their trades.
In a choppy market like this, there's only one way I know to consistently make money with stocks: Steer clear of the beaten path and buy where Wall Street isn't looking. You can do it. But you need to get your hands on some solid, independent research.
So, how about his: Do what I did and put Tom Gardner's approach to work for you. Right now, you can test-drive Tom's complete Hidden Gems small-cap service for 30 days without spending a cent. You can view all of his picks, and there's no pressure to subscribe. To find out more about this special trial, click here.
This article was originally published on Nov. 10, 2004. It has been updated.
Fool writer Paul Elliott owns shares of Moody's and promises to keep you posted on Tom Gardner's progress at Hidden Gems. All picks and results are posted on the Hidden Gems websiteand can be viewed the instant you sign up. Moody's and Time Warner are Stock Advisor recommendations. The Motley Fool isinvestors writing for investors.