A Look Back at Barron’s Picks for 2012 and Lessons for the Future

Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is time for that annual rite in the investing community that comes every December- lists, lists, and more lists.  Top 10 Lists, Avoid Lists, Buy Lists, Sell Lists, Surprise Lists, etc.  One such list that gets plenty of distribution is the Barron’s annual Top 10 for the upcoming year.  We should be seeing their predictions for 2013 before too long.  But before we get ahead of ourselves, let’s see how they fared in 2012.  I am a big fan of holding these widely disseminated publications accountable so that investors can distinguish foolish advice from good advice.  I detailed the picks in two separate articles (Part 1, Part2) a year ago along with my own recommendations.  So how have the picks performed in 2012 with just two weeks remaining?  What, if anything, can we learn from the picks as we look ahead into 2013?

First, it should be noted that Barron’s picks fell shy of the S&P 500 by 5% (their methodology) in 2011.  Will they be able to bounce back in 2012?  With two weeks left it is clear that Barron’s will soundly outperform the S&P 500.  Their picks currently have a year-to-date total return of 22% against a 16% return for the S&P 500.  Congratulations to them.  And to Market8 who actually had two picks as an emerging market option and both outperformed the S&P 500. (iShares MSCI Hong Kong Index Fund and iShares MSCI Taiwan Index ETF)  That is why it shows 11 picks in the table below.  Apart from high fives, what beneficial investing tips can be siphoned from the results?

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Let the Winners Run

Let your winners run is a fundamental key to outperformance.  Do not sell a security just because it has advanced significantly.  The most bullish thing for a stock is a rising stock price.  This key investing point is a central theme that top performing asset managers employ on a constant basis.  It is important to hit the big play.  Think New England Patriots offense versus the New York Jets.  Both Barron’s and I were bullish on Seagate Technologies (NASDAQ: STX) and it singlehandedly was the difference in allowing Barron’s to outperform.  The company climbed the wall of worry all year regarding the demise of the hard disk drive market.  At some point valuation does become too egregious that selling becomes the prudent action, but this often times is much later than investors initially realize. 

A corollary, and of equal importance, is to sell your losers quickly.  Do not worry about “getting even” before selling a losing investment.  Don’t sell because of market gyrations, but if the underlying thesis that led to the initial purchase has altered, investors shouldn’t be afraid to take a loss and move on.  This was clearly the case regarding for-profit education stocks as a result of regulatory changes.  Apollo Group (NASDAQ: APOL) is the biggest player in this space and has thus far had a terrible 2012.

Rising Markets Don’t Favor Best of Breed

Rising markets often times favor the riskier and more volatile stocks in a given industry.  This isn’t always the case, but more often than not this assumption pans out.  The lower risk, blue-chip companies win in the long-run, but at times can be left in the dust during strong market rallies.  They make up for this, of course, by going down less during the painful bear markets.  This was highlighted by Barron’s choice of Metlife (NYSE: MET) based on the company’s industry leading balance sheet and top-notch brand awareness.  I favored Hartford Financial (NYSE: HIG) because I figured the stock market would rise notably in 2012.  Hartford Financial would stand to benefit given high exposure to the equity market via their annuity businesses.  This is exactly what happened with the S&P 500 advancing 16%, Metlife returning just 8%, and Hartford surging 37% year-to-date.

I continue to view the equity market as more than 20% undervalued.  I see upside risk for the stock market as it climbs the fiscal cliff worries and several other known unknowns.  If you fall into this camp, then it might make sense to own a few mid-caps and small-caps in industries that you favor.  You don’t want to deviate from your comfort zone, but a few swaps may help put that big winner in your portfolio.   One example would be to favor F5 Networks over Cisco Systems as companies renew capex spending at some point in 2013 after curtailing outlays ahead of the fiscal cliff. 

Dividends Matter

Dividends do matter and can be the key to outperforming versus underperforming.  The one stock on the lists that jumps out is Berkshire Hathaway (NYSE: BRK-A).  Berkshire Hathaway has returned 14% YTD versus 16% for the S&P 500.  Not that big of deal on a stand-alone basis.  The company does NOT pay out dividends to shareholders, but instead retains the cash in expectation of earning higher returns on its investments.  However, the company is sitting on $47 billion in cash that is yielding nothing.  While we certainly should respect Berkshire’s process, there is plenty of cash for a 3% or 4% dividend.  Doing so would have put the stock in the outperform basket instead of the underperform basket. 

Foolish Bottom Line

Make sure you do you due diligence and own research as the many lists for 2013 start to be circulated.  Barron’s earned some credibility in 2012, but more importantly their performance was able to reinforce some key investment concepts.  These concepts can be applied as investors set their portfolio for 2013 and look for guidance from trusted sources. 

It is hard to find a great investment.  If you come across a new idea in the next couple of weeks, add it at the expense of an investment in your portfolio with a broken thesis and hold on to your great investment where the bullish thesis is currently unfolding.

Dividends matter, but they aren’t solely a trait of blue-chip companies.  My suggestions for Apollo Investment Corp and Starwood Property Trust, small-cap companies with high yields, was a winning strategy.  Both stocks have returned more than 30% in 2012 and still look well positioned to outperform as the search for yield permeates across all asset classes. 

So what lesson will 2013 teach us?  My initial guess is that stocks will climb the wall of worry and put together another double-digit advance.  Time will tell.  Look for my analysis on Barron’s new list for 2013 once it is distributed.  And of course I will also have my own suggestions to help investors put together another winning year. 

market8 owns shares in F5 Networks. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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