Investing in the wretched: James Saft

April 27, 2012

By James Saft

(Reuters) – At a time when one super-stock, Apple, is driving returns and portfolio construction, it is important to remember that there is usually more to be gained from the widely derided than from the universally loved.

Choosing stocks like Apple, which makes great products and has the glow of success about it, is an easy and comfortable choice. Investors feel they are affiliating with something successful, and they get that blast of pleasurable chemicals to the brain every time they see a positive story in the press or a surge in share price.

That success comes with a price tag. A review of the literature shows that portfolios with stocks in widely admired companies usually underperform baskets of stocks with companies nobody much likes.

A 2010 study by Meir Statman, a professor at Santa Clara University, and Deniz Anginer, a World Bank economist, found sustained outperformance from what they called ‘spurned’ companies.

The study used the annual survey of analysts and executives, conducted by Fortune Magazine, of the most and least admired U.S. companies as a benchmark. They found that over a 24-year period you’d actually be better off holding stocks of the least admired companies.

“We studied Fortune Magazine’s annual list of ‘America’s Most Admired Companies’ to find that stocks of admired companies had lower returns, on average, than stocks of spurned companies over the period April 1983-December 2007. Moreover, we find that increases in admiration were followed, on average, by lower returns,” Anginer and Statman wrote in the study, published in The Journal of Portfolio Management.

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