#3 What Didn't Work in 2012

by Wayne Ferbert on January 17th, 2013

#3 What Didn't Work – Stock Picking
Stocks had a great 2012 and if you maintained a diversified portfolio of individual stocks, you probably had a very good year. The S&P500 was up 15+% for the year so more than likely, your stock picks rallied also.
Remember our post #4 on what worked in 2012: Indexing!  You just had to invest in broad markets and spread the money in almost any mix between small cap, mid-cap, and large cap and you would have had a very good year. It was a high beta year – meaning that many stocks had a high correlation to performance with the broader markets.
Stocks tended to trade much more in line with the market or with their sector in 2012. It was a classic “all boats rise with the tide” result.
There were some exceptions as some very big names that had performance that diverged from the markets significantly. Apple (AAPL) had a huge year in 2012. Bank of America (BAC) also had a banner year. On the flip side of the coin, companies like Hewlett Packard (HPQ) delivered terrible performance and lost value investors a lot of capital.
When you look at the performance of the 10 sectors tracked by Standard and Poors in the S&P500, you’ll see that over the last 4 years of annual performance data, the collective 10 sectors in 2012 showed the lowest standard deviation in price change. In other words, the performance was more closely clustered around the average return of the total Index than in the prior 3 years.
In the end, stock picking in 2012 probably made you money. But did it generate the kind of returns that justified the friction involved in managing the individual stock portfolio? You know the friction we are referring to: commissions from trading and all of the time/energy in researching and tracking your stock picks. To be a stock picker, you need to generate enough excess returns over the market to justify these friction costs.
But don’t feel too bad if you were unable to generate the alpha to cover these costs of friction. Most of the “so-called” professional mutual fund managers were not able to beat the S&P 500. Looking at the last 12 months, less than 1/3rd of actively managed US Equity Large Cap funds that Morningstar rates were able to beat the S&P 500 performance after fees.
It is a difficult proposition – but one that the markets in 2012 didn’t help you with. You may have made money investing in stocks in 2012 – but beating the market by a wide margin was a more difficult proposition given the high beta market we exhibited at a stock level.

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