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Investing in “Fallen Angels”
By JLP | January 5, 2010
This is a guest post from author, Gabriel Wisdom. I haven’t read his book (and therefore can’t recommend it) but I thought this article was interesting. I consider myself an indexer but I also know there are times when certain stocks are beaten down enough to be considered a value. NOTE: I was not compensated to post this article but the book link is an Amazon affiliate link.
THE WALL STREET JOURNAL cited Southwestern Energy, XTO Energy, Range Resources, and Precision Castparts as the best performing stocks since December 31, 1999. $1000 invested in these stocks turned into $32,937. Meanwhile, $1000 invested in the most popular stocks of 1999 turned into $291.
Gabriel Wisdom is a seasoned investment advisor and well known broadcaster, who has handled thousands of investment accounts, representing over one billion dollars in assets during the last 24 years. He is available for interviews, bylined articles, and whatever else you might be interested in. Here is some info from Gabe, summing up his new book, Wisdom on Value Investing.
Wisdom on Value Investing: How to Profit on Fallen Angels
* is based on the fact that markets rise and fall based on emotion, moods, circumstances—and people who are aware of this phenomenon, and use it to their advantage, are in a position to make a lot of money.
THE BEST PERFORMING STOCKS OF THE DECADE WERE “FALLEN ANGELS.”
$1000. INVESTED IN THESE FALLEN ANGELS ON DEC. 31, 1999 TURNED INTO $32,937…$1000. IN THE MOST POPULAR STOCKS 10 YEARS AGO…YIKES!
In the recent article by Brett Arends of The Wall Street Journal, “the most widely recommended stocks 10 years ago, according to a quick survey at the time in the Washington Post were: America Online, Cisco Systems, Qualcomm, MCI Worldcom, Lucent Technology, and Texas Instruments.”
$1000. INVESTED IN THESE POPULAR STOCKS ON DEC. 31, 1999 TURNED INTO $291.
“The disparity between the biggest winners of the decade and the most widely recommended stocks 10 years ago is clear evidence that it pays to buy what’s on sale and avoid what’s hot, especially in the stock market,” according to Wisdom. Chapter 15 of his new book, Wisdom on Value Investing, contains “Ten Fallen Angels for the Next Five Years.” Just published by John Wiley, and already the ten stocks are cumulatively higher…by 50%.
“Investing in the stock market is one place where it pays to be a lone wolf. People feel comfortable buying what’s popular and familiar. Unfortunately, they are setting themselves up for failure, and devastating losses.”
*Affiliate Link
Topics: Investing | 3 Comments »
January 6th, 2010 at 1:07 pm
So, is the implication that you should buy stocks when on sale and sell them as soon as you’re happy with gains in order to remain diversified?
January 6th, 2010 at 2:47 pm
This reminds me of a study that draws an opposite conclusion for mutual funds. Avoid morningstar rated 1-star and 2-star rated funds. The only predictive capability of morningstar ratings is that the lowest rated funds tend to stay low rated funds in the future, whereas there is really no difference between 3,4 and 5-star rated funds (no predictive capability).
Here’s the study:
http://www.bnet.fordham.edu/blake/mstarv2a.pdf
Anyhow, I’d expect the worst companies, today, to be the worst companies in the future, unless they have a new CEO come on board to steer the ship better. I definitely would not be blindly investing my money into individual companies that are considered “fallen angels”. I wonder if the author is taking into consideration all of the “fallen angels” 10 years ago, that are no longer in business today — resulting in 100% losses on those investments…
January 6th, 2010 at 4:51 pm
Isn’t this just buy low and sell high. The big trick is trying to work out when both of these phenomena occur. Personally I’m using a method developed by Yale Professor Shiller which attempts to value the stockmarket. I’m then using index funds and varying my % of allocation depending on whether the market appears over or under valued.