Over the past several weeks, SmartMoney staffers have gone through a marathon exercise -- racing through some 34,000 pages of past issues to discover precisely what we got right, wrong and embarrassingly wrong over these many years. Overall, we're happy to report, our investment advice has been more on-target than off. But, yes, there are a few train wrecks in our past. Here, an unvarnished -- if, admittedly, abbreviated -- accounting.
HIT: 10 Stocks for the '90s
- April 1992 | By James B. Stewart
The bet for the premier issue of SmartMoney, in April 1992, wasn't just that a magazine should be in the business of picking stocks; it was also that the right person to pick them would be someone like James B. Stewart -- a dogged investigative journalist who, until then, had been reporting and chronicling the titanic failures of the major investment houses for The Wall Street Journal. Both bets turned out to be good ones.
Had you put $10,000 in Jim's 10 stocks for the '90s and left it alone until the first trading day of the new millennium, it would have amassed to more than $90,000. The same investment in Standard & Poor's 500 index, by comparison, would have yielded less than $17,000. Even 20 years later, after two colossal market booms and bombs, Jim's 1992 portfolio was up more than 500 percent, or better than twice the haul of the S&P. Perhaps more striking than such dollar calculations, though, was the thinking behind the picks. Chipmaker Applied Materials, Jim noted in 1992, had an edge on process technology for flat-panel displays, what was then the Achilles' heel in "notebook-sized computers." If the technology proved successful, the company would "be poised for further rapid growth in what is already one of the fastest-growing segments of the computer field." It was -- on both accounts. By the end of the 1990s, the share price had grown by a factor of 80.
Other stocks in the portfolio were decidedly nontech: a mobile-home builder (acquired by Warren Buffett's Berkshire Hathaway), a bank (gobbled up by another bank on Jim's list), the La-Z-Boy Chair Co. (which quadrupled in value on a national wave of couch-potatoism). "Yuppies may scoff," wrote the author, but La-Z-Boy was well-positioned to capitalize on "two major trends of the '90s": the aging of the baby boomers and "the worldwide demand for comfortable furniture."
HIT: Where to Invest
The percentage, quite frankly, is shocking. Just 29 percent of actively managed mutual funds have beaten their benchmark indexes over the past five years, according to Morningstar. Over the past decade, the so-called pros have done even worse, with just 26 percent doing a better job choosing investments than a blind index fund. It is in that context that our flagship "Where to Invest" portfolios, published each January, have stood out -- outpacing the S&P 500 in 13 of the past 19 years, and on more than a few of those occasions, lapping the venerable index to boot. Returns for the magazine's picks tripled those of the broad market in 2007, doubled them in 2005 and 2011, and routed them by 34 percentage points in 2000. Annualized returns for the first decade of the list (1993 through 2002), meanwhile, were 14.5 percent, compared with 9 percent for the S&P.
No doubt some of this success over two tumultuous decades has been due to plain dumb luck. (Markets, like tornadoes, are adept at turning the best laid plans into rubble.) But then, we'll take a little pride in some of our picks as well. In 2003 we chose two generic-drug makers, Barr Laboratories (up 92 percent a year later) and Teva Pharmaceutical (up 54 percent), when most analysts were afraid a lack of blockbusters would tar the whole drug sector. In 2007 we gambled on Amazon.com's own gamble that its huge investment in technology would soon pay off. Since then, net sales have more than quadrupled and the stock price is up by a factor of five.
And in 2009 we bet on Apple. We admit that, by that point, we were Stevie-come-latelies. Still, in the month we told readers to buy, Apple shares were $520 cheaper than they are now. Better late than never.
MISS: Lehman Brothers
- Where to Invest, 2007
All of which, we hope, will distract the faithful reader from the fact that we picked Lehman Brothers in 2007, just a year and a half before the investment bank became the centerpiece of a global financial catastrophe -- and filed for the biggest bankruptcy in history.
"Lehman Brothers," we said in our "Where to Invest" article, "has gone from Wall Street laughingstock to fierce competitor, largely by diversifying away from its past dependence on fixed-income trading and underwriting." What we didn't piece together then was that the bank had diversified itself into a pile of subprime mortgages, many of which would turn out to be worthless.
There was -- full disclosure -- a hint that not all was right. "Other investment pros," we wrote, "can't help thinking that the winning streak will end." How right they were.
MISS: Return of the Goldbugs
- June 2004 | By Russell Pearlman
Gold! When we caught up with a Texan named Bill Murphy in June 2004 ("The Return of the Goldbugs"), the former pro football player and commodities broker had invested every penny he had -- more than $2.5 million -- in gold bullion and in the shares of gold and silver companies. The Iraq war had begun the year before, the U.S. government was operating half a trillion dollars in the red, and Murphy was convinced that the globe would only descend into more turmoil. The price of gold -- then $422 an ounce -- would double, Murphy declared. He was right, of course -- and then some. The yellow metal shot up to a high of nearly $1,900 an ounce in September of last year; and even at its current price, it's almost four times its 2004 value.
That's not what we predicted at all. "History, at least the past 200 years or so," we wrote, was not on the side of gold lovers. While there was perhaps some short-term money to be made in the precious metal, "the bull market for gold will not last and anyone making gold the cornerstone of his or her investment portfolio is making a serious mistake." New York fund manager Chris Davis agreed with us at the time. Gold, he said, wasn't an "earning asset" (one that paid dividends). It was a psychological asset. "I just don't get it," he shrugged. Neither, it seems, did we.
HIT + MISS: Return of the Doomsayers
- September 2007 | By Russell Pearlman
Without question, no article in the SmartMoney archive was more timely than Russell Pearlman's "Return of the Doomsayers," in September 2007. The article, a 2,100-word survey of apocalyptic market predictions, made an eloquent, even sensible case for why the equity sky had to fall. When that bubble burst did come, warned money manager Jeremy Grantham, it would "be unlike anything we've ever seen. It's terra incognita."
Just weeks later, on Oct. 9, 2007, the S&P 500 closed at 1565 -- and then dropped off a cliff, losing more than half of its value over the next 13 months.
If only we had heeded our own warning.
Rather than head for the storm cellar, we bet, in our January 2008 "Where to Invest" feature, that the world economy would expand at a 4.8 percent clip. We also named a dozen big multinational companies that would benefit. The portfolio lost 54 percent of its value in the 12 months that followed, some 14 points worse than even the dismal S&P 500 index's return.
That year, we bet the store on the financial-services sector. ("Subprime fears laid waste to the group," we said, "but some well-run firms will emerge stronger.") One of those well-run firms was Genworth Financial, whose $11 billion in annual revenue came from things like long-term-care insurance, retirement planning and mortgage insurance -- businesses we assumed would grow rapidly. When mortgages began sinking en masse, however, the insurer took a massive hit. Within 12 months, Genworth shares had dropped 94 percent.
HIT + MISS: Bill Miller
- February 1997 + August 2006
When we first profiled Bill Miller, in February 1997, naming the steward of Legg Mason Value Trust one of the nation's seven best fund managers, he was already six years into the most famous streak in fund-management history. Still, he had a long way to go, whupping the market for the next nine years straight, as he rode 1990s tech darlings like Dell Computer and even one from 1911 (IBM) into the stratosphere. By the close of 2005, the end of Miller's 15-year streak, the price of Dell's shares had climbed 625 percent, more than 10 times the rise of the S&P over the same period.
Miller, a former military intelligence officer and philosophy student, would hold on too long to some of his favorite stocks -- and lead many of his faithful fund holders into an unfortunate reversal of their fortunes. That dramatic fall, in fact, would begin shortly after we profiled Miller again, featuring him in "World's Greatest Investors" in August 2006. Famous for his come-from-behind victories over the S&P, Miller was trailing the index when we wrote about him -- but that year his quirky gambits (would Middle America really fall in love with Sears again?) did not pay off. Then, during the financial crisis in 2008, he snapped up AIG, Wachovia, Bear Stearns and Freddie Mac; the latter three were almost wiped out, and Miller rode them all the way down. (We told readers "even the best managers have bad years" and that they should stick with him.)
Miller admitted, in a December 2009 SmartMoney story, that he didn't think the financial system would deteriorate as badly as it did in the crash. "We relied too much on history," he said. "You're always a captive of your past." The legendary manager withdrew from managing Value Trust at the end of April 2012: His once-Olympian fund was trailing the S&P by three points, year to date.
HITS (Mostly): World's Greatest Investors
Despite our mistimed moments with Bill Miller, SmartMoney has had a knack for highlighting the best and brightest money managers at the right time. We introduced readers to market beaters like Joel Tillinghast, Wally Weitz, Will Danoff, Bill Nygren and George Mairs, and investors would have largely fared well following their guidance over the years.
When we named Robert Rodriguez to our 2009 "World's Greatest Investors" list (a feature we introduced in 2005), the manager of the FPA Capital fund -- who had grown up poor, just two miles from his Los Angeles office -- told us his goal in managing money was, above all, to not lose it. Truth is, he's done a lot better than that. His fund is up 58 percent since our story ran, outpacing the broad market by 10 points.
On the other hand, some of our selections have not fared so well. We twice called manager Thyra Zerhusen one of the world's greatest (in 2010 and 2011), and we included her in our kick-off-the-year manager roundtable in 2007. But on the whole, the nine stock picks she has offered our readers over those years haven't exactly panned out. She's a buy-and-hold gal, though -- and frequently, for Zerhusen, those long-horizon bets have paid off.
We've felt the same way, in fact, about many of the pros featured in these pages. After all, in the short term, the stock market may be a voting machine, as the economist Benjamin Graham famously wrote. But over time, it acts like a weighing machine -- measuring the true value of an asset, not its popularity. The same holds true, we've found, for the true investing greats: Their wisdom is best judged over years, not market quarters. Maybe it's wishful thinking, but we hope the guidance in this magazine will stand the test of time as well.