MARKET COMMENT
A Dud Of A Share Picking Strategy

By Bruce Jackson (TMFGoogly)
December 28, 2001

This is the third in my series of races between the biggest FTSE 100 risers and fallers in a given calendar year. The exercise is merely one of interest, as none of my own money has been staked in the past, nor will be in the future.

Before turning to the runners and riders, a little background blurb is required.

Contrarian Investing

Many studies of the stock market have proven that, on the whole, buying cheap shares is the only way of beating the returns of the stock market. By cheap, I mean factors like, amongst others, a low price to earnings ratio (P/E) and/or a recent decline in a company's share price (otherwise known as relative weakness), are often seen as positive indicators.

Cheap shares are unloved. That's one of the reasons why they are cheap. If you are buying cheap shares, you are going against the crowd. Nobody else likes them or wants them. This type of investing is far easier said than done. Often a company is unloved because it deserves to be, and all that is likely to happen in the future is that it remains unloved and its share price keeps falling. You obviously need to steer clear of such impostors. They are not actually cheap.

But sometimes, just sometimes, a company is unloved and cheap. Again, such beasts are not easy to spot, but when you do get it right, the results can be spectacular.

Perhaps, just perhaps, a non-judgmental (i.e. mechanical) way of picking unloved and cheap companies is to simply select the biggest losers from the previous calendar year, and hold them for the ensuing year. The FTSE 100 consists of the 100 biggest companies by market capitalisation in the UK, so by using that index, perhaps you can be somewhat assured that you are selecting companies that are temporarily out of favour rather than those that are permanently and deservedly out of favour.

Without further ado, here are the results of last year's experiment.

Winners of 2000

                     27/12/00     24/12/01   Change %

Celltech Group         1090p        845p     (22.5%)
AMVESCAP               1360p       1000p     (26.5%)
Spirent*                620p        158p     (74.5%)
Shire Pharmaceuticals  1105p        828p     (25.1%)
Reckitt Benckiser       939p       1002p       6.7%
Average                                       (28.4%)

Losers of 2000

Telewest*               109p         59p     (45.9%)
British Telecom         403p        249p     (38.2%)
Sage                    304p        228p     (25.0%)
Colt Telecom*          1450p        100p     (93.1%)
Invensys                 156p        117p    (25.0%)
Average                                      (45.4%)

FTSE 100                                     (16.7%)

* No longer in FTSE 100 index

It's a double disaster. Only one share out of ten in the black. Pathetic. Don't follow this theory at home. In my attempt to pick which group of shares will be the winners in 2001, this time last year I wrote;

"I think (the Losers will) fall less than the (the Winners)."

At least I got that bit right! As for picking the individual winner and loser from the ten companies, I picked Colt Telecom (LSE: CTM) as the biggest loser but was a bit wide of the mark when plumping for Shire Pharmaceuticals (LSE: SHP) as the winner of the group.

What do the above results tell us? Unfortunately, not a lot, but in hindsight, I guess that should have been obvious. When it comes to mechanical investing, there are no guarantees.

I have been running this little competition for 3 years now, and the results are extremely unpredictable and extremely inconclusive. Perhaps 2000 was an aberration, one of those rare and unique years where the technology share shake out just happened to throw up a still over-priced bunch of Losers. Perhaps the whole exercise is a load of tosh! All I can say is "don't try this at home."

Winners

1999                    135%
2000                    (28%)
2001                    (28%)
2002                     ??%

Losers

1999                     10%
2000                     31%
2001                    (45%)
2002                     ??%

For what it's worth, here are the contestants for the 2002 race.

Winners of 2001
                     24/12/01


Marks and Spencer       358p
Man Group               1142p
P&O Princess Cruises    395p
Northern Rock           616p
Smith & Nephew          420p

Losers of 2001**

Cable & Wireless        320p
Logica                  625p
Pearson                 780p
British Airways         198p
Old Mutual               88p

** Excludes companies, like Marconi, who have been expelled from the FTSE 100 index during 2001.

My tip for success in 2002 - the Losers, but without a great sense of confidence. Perhaps the whole exercise is permanently and deservedly a waste of time! Luckily it's the holiday season.

More: How To Build A Share Portfolio