How Not to Create a Fortune

Last Updated Jul 6, 2010 11:19 AM EDT

"Investment graffiti" can be defined as advice on the market or an individual security that is designed to titillate, stimulate, and excite you into action but has no basis in reality. In fact, such advice can be hazardous for your portfolio. Let's look at an example.

The August 14, 2000 issue of Fortune contained an article "10 Stocks to Last the Decade." Fortune explained that it went to great lengths to compile its recommendations:
"Fortune first identified four sweeping trends that we think have the potential to transform the economy...So for help in finding the stocks best positioned to capitalize on these four trends, we sought out some of the top stock pickers in the country...We also did our own due diligence by poring through financial statements, talking to companies, and giving their products a test run. The result: ten stocks that we think will be winners over the coming decade."

Fortune probably assumed no one would ever hold it accountable, but we will. Below are the total returns of Fortune's picks as well as the total return of some simple benchmarks for the period from January 2000 through December 2009.
  • Genentech (DNA) -- 182.4 percent (Note: Genentech was acquired for cash in 2009.)
  • Russell 2000 Value Index -- 121.3 percent
  • Russell 2000 Index -- 41.2 percent
  • CRSP Deciles 1-10 Index -- -3.2 percent
  • S&P 500 Index -- -9.1 percent
  • Oracle (ORCL) -- -11.8 percent
  • Charles Schwab (SCHW) -- -16.8 percent
  • Univision -- -30.7 percent (Note: Univision was sold to a private company in 2006.)
  • Morgan Stanley (MS) -- -39.6 percent
  • Viacom (Class B) (VIA-B) -- -61.2 percent (Note: In 2006, Viacom was split into two companies, Viacom and CBS. The return reflects an investment in both companies from that point.)
  • Broadcom (BRCM) -- -65.3 percent
  • Nokia (NOK) -- -67.1 percent
  • Nortel -- -100 percent
  • Enron -- -100 percent
All but one of the "stocks for the decade" not only lost money, but also underperformed benchmarks. Only one single stock outperformed an appropriate benchmark, two went bankrupt, and the average pick lost 31 percent.

When considering this performance, note the advice Fortune gave its readers in its May 12, 1997 issue: "Let's say it clearly: No one knows where the market is going-experts or novices, soothsayers or astrologers. That's the simple truth." It seems Fortune knows its advice is graffiti, but it's graffiti that sells.
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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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