5 reasons to ignore top 10 stock lists
1. Folly of forecasting – The existence of these lists implies that the creator of the list has some ability to forecast excess returns for these securities over the next twelve months. The track record of forecasters is by all accounts terrible. Why should we expect markedly different results in this endeavor?
2. Ignoring risk- We talked a couple days ago about the importance of risk management, specifically the use of stop-loss orders for traders. Do these lists have explicit, actionable risk parameters attached to these ideas? The best case is that the list has an implicit time stop, i.e. one year, for each security.
3. Time frame mismatch – is not a fan of these lists either. Barry Ritholtz at the Big Picture writes: “I always hate these kind of stock picking cliches — and why do you have to commit to holding a stock regardless of what happens if conditions change?” In short, for many investors there is a definite mismatch in time frames.
4. Incomplete diversification – In today’s market ten securities is likely not enough to compose a diversified portfolio.
It definitely doesn’t hold if you plan to have a globally diversified portfolio.
5. Inflating the value of security selection – If nothing else the past few years have taught us the fact that security selection can take a back seat to larger economic/macro influences. The far bigger and more important decisions investors have to make have to do with risk tolerances, asset allocation, etc. Security selection is at best the last item on a financial plan.
