Many investors are a bit like the basketball player, Wilt Chamberlain. Back in the early 1970s, Chamberlain thought he could knock out Muhammad Ali.
It takes guts to challenge experts in their own arena. Most people wouldn’t race a sprinter in a footrace. Few would battle an Olympic wrestler in a backyard brawl. And only a glutton for heartburn would challenge a professional hotdog eater to a face stuffing contest. But that’s what investors do when they pick their own stocks. The market’s return, after all, equals the return of all professional investors—before fees.
Just to match the return of a broad based index, you have to be able to pick stocks as well as the average professional investor. If that still sounds appealing, you might want some help. Let me introduce you to Norm Rothery. He’s a value investor. His methods are similar to those of Benjamin Graham’s, Warren Buffett’s former Columbia university professor. In Buffett’s 1984 essay, The Superinvestors of Graham and Doddsville, he said people may be able to beat the market if they carefully select individual stocks with low price to earnings and low price to book values. Mr. Rothery has done just that.
“Value investing is all about finding stocks (and other securities) that are both cheap and relatively safe,” he says. “The two are intimately related because buying at a low price is inherently safer than buying at a high price, everything else being equal.”
In 2001, Rothery started writing a fee-based newsletter called The Rothery Report . In it, he explains what stocks he is buying or selling. He also updates how each of his picks performs. He provides a free sample edition from 2010, so you can see how he lays out his thoughts.
Between March 31, 2001 and December 31, 2014, his newsletter’s stocks (not including dividends) earned an annual compounding return of 11.8 percent per year. Over the same time period, without dividends included, the S&P 500 averaged 2.7 percent. The average capital gain on each of his stocks was 49.6 percent. The average holding period was 3.6 years.
I first read his report about ten years ago. At the time, I was writing freelance articles for MoneySense magazine. I had written a couple of stock picking pieces for the Canadian publication. And my picks had turned out well. But when I asked the editor if I could write a follow-up article, he turned me down. “Norm Rothery is going to be our stock picking writer,” he said. Sure it hurt my pride. But the editor knew what I didn’t. He was giving clubs to Tiger Woods.
Rothery, a PhD in high-precision atomic physics, was a Chief Investment Strategist at a firm called Dan Hallet & Associates. Right out of the gate, his picks for the magazine began to crush the Canadian stock market, just as he was doing with U.S. stocks in The Rothery Report.
“The Top 200 list that I created has a long public track record,” says Rothery. “Over the ten years from October 2004 to October 2014, the ‘All-Star stocks’ sported capital gains of 17.3 percent per year versus 5.3 percent annually for the Canadian stock market index.”
In September 2012, the Globe and Mail (Canada’s national newspaper) began an investment contest called Strategy Lab. They asked Rothery to build a portfolio of value stocks. And you guessed it. So far, his stocks have hammered the market.
“As you might expect, uncovering the best bargains involves controlling your emotions,” says Rothery. “Value investors don’t like to pay up for rosy prospects or optimistic projections. They prefer hard assets and clear situations that don't require hugely complicated calculations.”
I don’t recommend stuffing your retirement portfolio with individual stocks. By investing with index funds, you’ll beat most professional investors, after fees. But if you like to dabble with a few of your own picks, Rothery says you should do some thorough reading first. On top of his list is Benjamin Graham’s book, The Intelligent Investor. He also likes Contrarian Investment Strategies by David Dreman; What Works on Wall Street by James P. O'Shaughnessy; Deep Value by Tobias E. Carlisle and Warren Buffett's letters to shareholders.
He adds that Burton Malkiel’s book about index fund investing, A Random Walk Down Wall Street, is also important. “ It contains a good amount of market history. And stock pickers should know what they're up against.”
It’s a solid reminder. Picking your own stocks makes you a bit like Wilt Chamberlain. You’re challenging pros to a fight in their very own ring.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.