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Why Stock Picking Is Harder Than You Think, With Periscope Wealth Management
ACCESS Newswire
9 min read
NEW YORK, NY / ACCESSWIRE / March 8, 2021 / Nothing beats the elation of picking a big winner. The feeling you get knowing you made the right buy, the reinforcement that you saw something the rest of the market missed, and most importantly the gratification of seeing big gains in your trading account. According to Daniel Riso, co-founder of Periscope Wealth Management, picking a stock(s) that will positively impact your financial situation is more unlikely to happen then you might think and are led to believe by online brokers, asset managers, and financial advisors. Daniel Riso and Joseph DiMauro began their financial careers, 15 years ago working for the same firm. They followed a traditional investment approach of selecting mutual fund and asset managers, but after a few years, they began to question the efficacy of this approach. "Thousands of strategies came across our desk over years, many with the same value proposition…certain companies they were holding were going to outperform the market. The problem was, the track records rarely backed up the story," DiMauro recalls. "We felt less and less convinced that our clients were going to see outperformance." In 2014, they began working with the Dimensional Fund Advisors (DFA), founded by David Booth.1 DFA takes an entirely different investment approach. Instead of relying on speculation and investing in a few hand-selected stocks and hoping they'll perform, they take an evidence-based approach and remove most of the guesswork. Instead of trying to figure out which stocks are undervalued, using data, the firm diversifies investments across a whole host of different stock baskets. This long-term approach utilizes historical market trends, peer-reviewed academic evidence, practical application, and most of all, patience. Although diversification may be used in an effort to manage risk and enhance returns it does not guarantee a profit or protect against a loss; and while past market performance is not indicative of future results, we have found this approach to work well for our clients.
When Riso and DiMauro adopted this technique, their entire approach to financial planning changed. "Now instead of spending hours on researching asset managers and more hours explaining our research to clients, we come to each client meeting with a pre-determined playbook in hand, this allows us to focus on our client's, goals, family, financial planning, budget, estate strategies, risk management, college planning and matters that are far more impactful than discussing market performance," explains Riso.
In January of 2018, they created Periscope Wealth Management, with the mission to change the way a traditional wealth management firm works with clients. They built the firm around 4 distinct client deliverables of competence, coaching, convenience, and continuity. In the last three years, they've expanded their firm to 8 dedicated financial advisors and staff members. "We are so passionate about educating investors about evidence-based investing because it puts people at ease. Our clients aren't trying to pick the next 5-star fund manager out of a hat, and they aren't trying to pick the next Amazon, so results are not so contingent on luck" says DiMauro.
The inherent trouble with utilizing a traditional investment approach is rarely discussed. Instead, the big wins are always publicized, and for good reason, everyone loves a success story, and much like the lottery, people love the anticipation of "what if." However, this mentality is fundamentally flawed because history has proven that over the long run, it's the total stock market that prospers, not necessarily individual stocks. Hendrik Bessembinder2 explores this concept in a 2017 study titled, "Do Stocks Outperform Treasury Bills?" In his research, Bessembinder analyzes the return metrics of the US stock market and Treasury Bills from 1926 to 2015 (See Infographic Here).
Most people know that stocks provide a greater return than bonds, but Bessimbinder points out that only 42.1% of common stocks have a holding period return that exceeds the one-month Treasury Bills over that 89 year time period and more than half deliver negative lifetime returns. This begs the question: if all these stocks underperform how does an equity premium exist? Why invest in stocks? It turns out that there have been approximately 26,000 stocks that have appeared in the Center for Research in Security Prices (CRSP) Index3 since 1926 and collectively those stocks have created $32 trillion of wealth. This is additional wealth beyond that of the Treasury Bill would have generated over that period. Shockingly, only a thousand firms, or less than 4% of all firms listed, are responsible for 100% of that $32 trillion of wealth created over that time. That's an extremely positive skew. This isn't so obvious at first because the skew is nearly undetectable in annual return data (see Figure 1A) but when the return data from a 10-year timeframe is assessed, a different story begins to unfold. (See Figure 1B.)
Now, we know that the Center for Research in Security Prices Index 1-10 (CRSP 1-10) Index has produced an average annual return of 9.8% from 1926 to 2015, while the Treasury Bill has only produced an annual return of 3.5%. We can infer that during longer time frames that ~6.3% of equity premium is skewed heavily into just a handful of stocks, which means that picking a bunch of high performers is highly unlikely. Yes, you have a good chance of picking some winners in a 1-year time frame, but when you invest through time periods where the compounding is meaningful, the odds of picking top performers has been found to be drastically lower. "I suspect this is the single, most impactful piece of data for investors to understand," says Riso, "If more investors understood the statistical hurdle they have to jump to beat the market, they would think differently about their approach."
Even if someone has all the confidence in the world in their ability to identify the top performers, only owning a handful of stocks can make for an incredibly stressful investment experience. The fundamental problem with a traditional, speculative approach is that the statistical variance of the portfolio drastically widens in comparison to a more diversified, evidence-based approach. So even if an investor is correct in their analysis and successfully identifies several of the market's top performers, this would require near impossible patience and the ability to sustain prolonged underperformance. Most retail and professional investors may have that level of patience and they certainly may not have that level of patience when they are paying a fund or asset manager. Throughout history, we've witnessed companies like Amazon, Apple, and Microsoft suffer unimaginable losses.
In December 1999, Amazon went from a closing high of $106.688 on 12/5/1999 to $5.97 on 9/23/2001, a loss of 94.4%. It wasn't until the end of 2009, 8 years later that they broke even.
Apple experienced a similar loss when they fell from $0.64 on 4/8/1991 to $.12 on 6/30/1997, this was a loss of 81.25%, which didn't recover until the end of 1999. This was an 8 year run of flat returns, only to be lost again in 2000.
Finally, Microsoft could have made their early investors very wealthy if they stayed the course. They hit $58.72 at their peak on December 19, 1999, only to experience a 74% drawdown, and hit a low of $15.28 by March2, 2009. Finally, after 17 years of flat returns, investors saw positive returns in 2016.
The solution? Evidence-based investing. This approach helps to remove the guesswork around allocating assets because it is founded in statistical analysis. For every investment decision, there is a mathematical approach to find the answer. A time-tested approach can make it much easier for an investor to buy into the strategy and hold for the long run. That is not to say that even with this strategy there won't be bad years, but over time, statistics show that if investors follow a certain subset of principals, they will probably do just fine.
According to Riso, "If we take Dimensional Fund Advisors recommended core equity weighting based on academic evidence (with monthly rebalancing) and analyze the data from 1985 until 2019 we get a surprising story. If we dissect every 10-year performance stretch starting each month over those 34 years, we get a distribution of returns. The worst 10-year performance run was 1.57%, between March 1999 and Feb 2009, which isn't great but isn't all that bad considering it endured two market crashes. The best 10-year run was 15.39% per year from January 1985 to December 1994. On average, the 10-year performance was 9.60%.4"
Though this strategy is not sexy, or necessarily revolutionary, it may be a much safer alternative to betting on one's ability to pick the handful of stocks that are going to outperform over the next few decades. And when it comes to your financial future, limiting some uncertainty and anxiety can work wonders.
1,2 Dimensional Fund Advisors, LP, David Booth, and Hendrik Bessembinder are not affiliated or associated with Equitable Advisors, its affiliates or financial professionals 3 The CRSP 1- 10 Index is a market cap weighted index covering the total US stock market 4 Past market performance is not indicative of future results
Daniel Riso and Joseph DiMauro offer securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA/SIPC (Equitable Financial Advisors in MI & TN) and offer investment advisory products and services through Equitable Advisors, LLC an SEC-registered investment advisor. Periscope Wealth Management is not a registered investment advisor and is not owned or operated by Equitable Advisors. PPG-158194 (2/21)
Contact:
Name: Daniel Riso and Joseph DiMauro Business Name: Periscope Wealth Management Address: 1290 Ave of Americas, 4th Fl. New York, NY 10104 Phone Number: (845) 706-9200 Send Email Website Link: http://www.periscopewm.com/
