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Peril’s of Picking

A Lesson on the Perils of Stock Picking
By Dan Solin

A blog by David Randall at Reuters lauded the stock-picking skills of fund managers who dumped shares of Apple before its shares began their plunge. Randall observed that 321 funds had more than 5 percent of their assets in Apple shares at the beginning of 2012. He noted the prescience of the 16 percent of the fundmanagers who significantly reduced exposure to Apple before the stock decline gained momentum.

The insightful fund managers were all too eager to share the reasons for their decision to dump Apple. One noted his belief that Apple had “saturated the market.” Another believed Apple was losing its “pricing premium.” A third sold because it “raced through his price targets.”

My take is quite different. I find it remarkable that 84 percent of fund managers who were over-weighted in Apple stock suffered massive losses. The funds who didn’t see the plunge included some big fund families, like the T. Rowe Price Growth Stock fund and the JPMorgan Large Cap Growth Select fund, both of which added shares of Apple stock as its price was declining.

The debate about whether to buy or sell Apple stock misses the point. Trying to pick a stock that will outperform is little more than a crap shoot. Concentrating your portfolio in any one stock adds unacceptable risk. Wall Street is littered with worthless stock certificates of companies that were once considered “sure things,” like Polaroid, Bethlehem Steel, Bear Stearns and Lehman Brothers.

Picking a fund manager who believes in stock picking is little better. According to a report issued by Standard & Poors, very few funds that perform well are able to maintain their high level of performance. The report found only 10 percent of 707 domestic stock funds that were in the top quartile as of September 2010 remained there at the end of September 2012.

Instead of being attracted to those funds that dumped Apple, you would be better advised to attribute their decision more to luck than to skill. Your confidence should be shaken by the overwhelming majority of funds that got clobbered when Apple shares dropped in price.

The irrefutable data makes a persuasive case that active management is a loser’s game. You play that game at your peril. That’s the real lesson of the Apple saga.