I’ve put a stock-picking contest under the tree that I hope you’ll enjoy.
It was inspired by a grinchy breed of investors who don’t believe in the magic of stock picking. These sourpusses think the market is efficient, meaning that share prices properly reflect all of the available information about a stock. If they’re right, it shouldn’t be possible to earn outstanding returns from stock picking unless you get lucky.
It’s a thought that’s enough to drive stock pickers like me to the punchbowl.
But here’s the thing: If the market is efficient, it should be just as hard to select tomorrow’s losers as it is to spot future winners.
I don’t think the market is all that efficient, so my contest will ask you to demonstrate your ability to pick both winners and losers.
How you make your picks is entirely up to you, but personally I think looking at the numbers is a fine place to start.
To spot winners, I seek stocks that are trading at low multiples of their sales, earnings, book value or cash flow because a stocking-full of studies indicate they’ve fared quite well over the very long term. Benjamin Graham, the pioneering money manager, espoused many strategies that focused on such stocks and his techniques have continued to outperform the market for decades after his passing.
On the other hand, stocks with very high price-to-value ratios are worrisome because their long-term returns tend to be miserable. They represent the flip side of the value coin.
To be sure, there are other stock-picking methods that have also done very well over time. For instance, momentum investors believe in following the trend. They like stocks that have gained the most in recent months and avoid those that have fared the worst. Once again, this strategy is not a guaranteed path to riches but its long-term results have been quite good.
So how does all this play into a stock-picking challenge?
To keep things simple I decided to focus on a fantasy portfolio that starts with $10,000 invested in each of the big six Canadian banks: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Toronto-Dominion Bank and Royal Bank of Canada.
The idea is to choose one of the bank stocks to sell and one to buy. After making the choice, the fantasy portfolio will start 2014 with $20,000 in your favourite stock, nothing in the one you want to avoid, and $10,000 in each of the remaining four.
Which bank stock would you move money from and which one would you move it to? If you’re having a hard time making up your mind, you can size up each stock at globeinvestor.com. Then put your selection in the comments section of this article.
The person with the fantasy bank portfolio that gains the most in 2014 will be sent a $20 Tim Hortons gift card as a reward in 2015. (If there is a tie, the winner will be determined by random draw.) But you have to get your selection in before the end of this year to be eligible for the prize, and, please, only one entry per person.
Do you have what it takes to choose the best, and worst, bank for 2014? Take the test to find out.