I use this occasional feature to expose spoken or written "wisdom" that is technically correct, but is also misleading and potentially harmful to investors’ financial well-being. This issue’s may not be harmful, but it is an example of presenting misleading data. Given that the publication in question, Barron’s, holds itself out as providing accurate and well researched information to investors that can enable them to have superior investment results, I think they owe their readers a better analysis of how well the stocks they wrote about favorably and unfavorably over the past year have done.
An article in their online edition dated January 8, 2011 contains the "2010 Report Card" under the headline "Again, Our Picks Beat the Market". It even has a graphic showing a bull holding the report card with a mark of "A". Digging into the article and the lists of stocks raises some doubts about claim’s accuracy.
The first sentence in the article says the 130 companies with favorable articles "gained 14.1% compared with 12.4% rise in their in their benchmarks, measured from the Friday before publication (emphasis added) through Dec. 31. That’s a difference of 1.7 percentage points or 13%." Their bearish picks also did better in that they underperformed their benchmarks, which are based on market capitalization, gaining an average of 15.9% vs. 17.1% for the benchmarks.
A couple of smaller issues first. The data used for the calculations is as of January 7, not December 31. Claiming to be 13% better is very misleading because it is on a different base than the 1.7% difference. Had the two values been 2.0% and 0.3%, would they have claimed they were more than six times better?
More importantly, the averages are of performance over periods of different lengths. The stocks mentioned in articles early in the year have had much more time to make larger moves than those in articles late in the year. It would have been better to show performance over the same period for each stock, say the next 3, 6, or 12 months.
My main problem with their data is the starting prices used. As emphasized above, they are from the day before publication, so they are not prices available to their readers. It is not unusual for a Barron’s story to cause a stock to make a significant move on the Monday after publication. There have been cases of "insider trading" brought against those with advance knowledge of the articles who have traded to profit from the anticipated Monday price changes. While I have not had the time to get the data needed to compute realistic performance, based on a few stocks I checked I have no doubt that the comparisons would be less favorable and might even show that their "picks and pans" did not beat the market.
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