The 2018 professional stock picker’s report card

A positive 3% return on the benchmark NIFTY index for the calendar year sounds like a sleepy year for the markets. But any investor will tell you it was anything but sleepy.

In fact, it felt a lot like one of those Hollywood horror-thrillers which starts with a group of attractive college-kids partying in a remote cabin in the woods. Everyone’s having the time of their lives. No one notices when the first one or two of them mysteriously disappear about 20 minutes into the movie. But soon they realise something is terribly wrong. Until the panic-stricken surviving few wish for nothing more than to make it out of there alive. The 2018 market probably felt a little bit like that to many investors.

How did your portfolio do? The chart above should tell you, your performance could be anywhere between deep in the red and well above benchmark return, and you still couldn’t be sure if you were a bad stock picker or just plain (un)lucky.

The professionals’ scorecard

At the start of 2018, I compiled a list of stocks recommended by the professionals. The heavy-weight recommendations of investment banks, brokerages, equity research analysts. I maintained a running list of their stocks with their starting and target prices to see how you would do if you bought some or all of their recommendations. Turns out, not too well.

The Calm Investor 2018 Stock Picker Scorecard

Of 118 stocks (with some overlap) recommended by 16 financial institutions as “stock recommendations for 2018”, 92 recommendations (78%) are down for the year. An equal-weighted portfolio holding these 118 stocks would be down 17% for the year.

The number of stocks recommended by research house varied, but seven of the 16; Axis Securities, Credit Suisse, Edelweiss Securities, Geojit Financial, HDFC Securities, JM Financial and Reliance Securities saw ALL of their recommendations falling below their starting price.

The “best” performing equal-weighted portfolio was 9 stocks recommended by CLSA, managing a whopping return of +1.2% for the year.

The “worst”: All five of Edelweiss’s recommendations were hammered for a 2018 return of -44%. 

Top stock picks in 2018The table above shows the top 10 returning stocks from the list of 118 stocks the professionals recommended. If you had been smart or lucky enough to pick these 10 stocks and invest equal amounts in these, you would be up 36% for the year. Isn’t hindsight bias a wonderful thing. 

But note how in spite of two of their 10 recommendations (Merck and Sanofi India) being in the top 10 for the year, icicidirect’s recommended portfolio performance for the year is a dismal -13%. Seen this way, diversification is not always on your side.

You can find the full list of 118 stock recommendations and their performance here: The complete list of 2018 stock recommendations

So…the professionals suck?

Yes and No.

A fund manager once told me that 8 out of 10 equity research reports are not worth the paper they are printed on. Partly because of the lack of expertise and experience of the analysts writing them, but in large part because of the perverse effect of incentives. Brokerages make money every time you buy and sell. A brokerage that recommends buy-and-hold is going against their self-interest. So, when taking advice, ask the simple question you should ask any advisor.

A random portfolio generator in early 2017 would deliver double-digit returns. Judging an analyst or fund manager based on their latest year’s results…you know where this is going. It does not make sense. The process of arriving at that portfolio matters far more than the recent returns. Consistency, Magnitude, and Conviction, over a period of time tell you how to evaluate an investor

Finally, seeing the above table of results should tell you, everyone gets it wrong. If your results in 2018 were less than impressive, remember tpeople who do this for a living, appearing on financial news channels, get it completely wrong a lot of the time. I state this with some confidence because I tracked what the experts were saying at various points in history before large up and down moves. It’s not outrageous to assume Nobody knows Anything

The “complete list of 2019 stock recommendations” coming up soon.

Have a great end of the year 2018.   

What do you think?