Why investing in the market’s dogs can pay off more than today’s hot stock
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To beat the market, you must be willing to buy stocks that are out of favor and unpopular. Few investors are willing. To find out if you are, ask yourself which of the following stocks you would be more interested in purchasing:
1. A stock with a year-to-date gain of 174.1% and a trailing price/earnings ratio of 56.6.
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2. A stock that is down 59% so far this year and has no P/E, having lost money over the past 12 months.
If you’re like the vast majority of investors, you would choose the first stock. But, according to a new study, you’re more likely to do better with the second one.
These two stock examples are in fact real. Stock No. 1 belongs to Nvidia NVDA. Stock No. 2 belongs to New York Community Bancorp (NYCB) NYCB, which plans to change its name to Flagstar Financial effective Oct. 25 — the same day as its third-quarter earnings report.
If you find it difficult to imagine passing over Nvidia — the darling of the AI world and currently riding a wave of immense popularity — in favor of a banking company struggling to recover from its brush with bankruptcy, then you almost certainly are not a contrarian investor.
The best-performing investment newsletters monitored by my auditing firm have no trouble passing over the crowd favorites to bet on turnaround situations. And according to this new study, it’s no accident that their performance is so good. Three of them currently are recommending NYCB, in fact.
Entitled “Finfluencers,” the study was conducted by Ali Kakhbod and Dmitry Livdan of the University of California at Berkeley, Seyed Kazempour of Rice University and Norman Schurhoff of the University of Lausanne. “Finfluencers” is shorthand for financial influencers — “individuals who provide unsolicited investment advice on social media platforms.”
The researchers analyzed the stock recommendations made by 29,000 finfluencers on a major social-media platform between 2013 and 2017. They found that the recommendations from the vast majority of them did not beat the market: 16% of the finluencers were judged to have no ability (neither beating nor lagging), while 56% were judged to have “anti-skill”—significantly lagging the market.