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There's plenty of research showing that professional stock fund managers do worse than the indexes over time. In other words, consistently picking winners is impossible except by chance or illegal means. But I wonder if picking losers is easier?

Suppose you built an index fund by starting with the largest 500 stocks in the United States, based on capitalization, then removing the fifty or so stocks that experts predict will be dogs for the coming year or so. Would your remaining 450 stocks beat the S&P 500 index?

It seems to me that picking losers has to be easier than picking winners. But one problem with my concept is that the most beaten-down stocks can have the largest percentage gains if they show signs of life. Also, low stock prices can make companies susceptible to takeovers, which can also mean spikes in the stock price. I realize it's not easy to pick losers. But is it exactly as hard as picking winners? I only need to be a little bit better at picking losers than winners and I have a good investment strategy.

When the housing bubble burst, it didn't take a genius to know that the companies in that industry would suffer for several years. Okay, okay, hindsight is easy, so let's see if you and I can predict which industries or companies are likely to be dogs over the next three years.

My prediction for dead-money stocks would include any company competing with the iPad. I think Microsoft, Dell, and HP will have anchors tied to their butts for a few years as consumers skip their next laptop upgrades in favor of iPads.

What are your picks for dead money stocks?

 
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May 23, 2012
I don't think there's free lunch, if people knew in advance which one are the losers the stock price would already reflect the fact that they are losers, just as the stock price of the "good" stock reflects their predicted future growth. According to the theory the current stock price (for good or bad stock) already reflects the information available, only if you have special information/skills you can pick real winners and real losers, but the special information to pick losers is just as hard to come by as special information to pick winners.

Even more, if it was easier to pick losers than their price would be even better reflecting the reality than the winners price, so that would not bring you any advantage, if that's true then the only rational to do is actually focus on winners for which the info is harder to get (according to your theory/assumption)
 
 
May 23, 2012
Actually you have the facts wrong, Scott: "There's plenty of research showing that professional stock fund managers do worse than the indexes over time." is factually incorrect.

It is the people who invest with professional stock fund managers who don't do as well as indices. Professional stock fund managers, personally, do very very well indeed.

And if you read the Intelligent Investor by Ben Graham, you will realize that your comments here only really apply to the uneducated investor that falls for the antics of the professional shills you are talking about.

[Your theory is that professional stock fund managers COULD pick winners for their clients but prefer not to? What exactly is their reason? -- Scott]
 
 
May 23, 2012
You can't almost by definition. One of the operations you can use to make money on the stock market is to short-sell stocks. Short-selling basically bets that the stock is a loser. If anyone could reliably pick losers, they'd beat the market.

In simple form, it works like this: Imagine you have Facebook stocks. I am willing to bet that FB will go down. To make money on that bet, I borrow your stock, and pay you interest on the borrowed amount (say, 1000 shares at $38 at 5% interest). Once I get your stock, I sell it. FB goes down 10%, I rebuy the stock with a 10% discount, give you back your 1000 shares, your 5% interest and reap up 5% of $38000: almost two grand with the obvious bet that FB is a loser. Oh, and you, who were betting that FB would go up, just lost two grand :-)

[In my context, a "loser" is any stock that doesn't go up as much as the index. That's a huge universe compared to the ones short sellers profit from. -- Scott]
 
 
May 23, 2012
The problem with picking against apple's competetors is that if any of them do better than expected, they'll go up. Take Asus, their new tablet is good enough to give apple a run for its money. They also have the reputation as having some of the best hardware out there.

I'd pick Best Buy as going down the crapper. The customer service is getting worse, they don't have the media selection they used to thanks to the internet, and frankly I'm getting a desperate vibe from them. I can't even get a straight answer on getting them to do a pricematch and they can't be bothered to check the internet. Like most people go there from work with ads in their hands of a competetor's price... I just went across the street.
 
 
May 23, 2012
Cable TV companies? DVRs, Internet based programming and wireless internet access all would seem to be growing threats to their business model.
 
 
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May 23, 2012
Companies that mine coal are in trouble. Natural gas has become so cheap that utility customers are all switching to it, and environmental regulations make it seem like there's no incentive for any power plant not already using coal to start. Natural gas deposits that have come online recently, and which appear about to come online are so huge and promising, that I think we just might see the end of coal mining within the next few years.
 
 
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May 23, 2012
"It seems to me that picking losers has to be easier than picking winners."

I don't think so. You can pick a company that /has/ lost, like BP during the oil spill.

Picking one that /will/ lose is like picking a winning "put" option. By which I mean to say that that field gets harvested by the pros too.

Regarding the tablet business, who knows how the Win8 tablets will work out? They're great for the corporate market and for people that have a pc at home. If microsoft doesn't screw it totally, they are on the way to being a serious competitor again. After all, in one year at latest, you can have the same windows os on your desktop, your tablet and your phone.

Apple may well be reduced to making home computers, like atari or commodore back in the stone age.
 
 
May 23, 2012
I would pull Microsoft and HP out of your theory if I were you:
Microsoft is currently researching ways to charge Enterprise customers to use iPads and smartphones to access microsoft Services (SQL Server, Exchange, SharePoint, and cloud services).
HP's desktop division isn't their only money maker - and they nearly dumped it almost a year ago. Their real cash cow is currently the print industry (printers, toner, and services). They also make a fair amount of money on servers and switches.
Dell is still trying to get out of the "we're a desktop company" ditch by buying up companies that build enterprise solutions. They are the only one of those three companies that are poised for failure IMO.
 
 
May 23, 2012
So to answer the question on which stocks are dead money: Everything you have heard of.
 
 
May 23, 2012
The stock (and bond, and commodity, and real estate) market seems to be dominated by two related phenomena, the Keynsian Beauty Contest, and the Greater Fool theory. Both of these follow that prices go up because people think they will go up.

I suppose the dream is to be a sort of investment hipster. Pick the stocks 'before they were cool', and shun those stocks that are popular. This would require a ton of work however, because by the time you read about it in a financial journal it's already too late. You would have to do all of the investigative work yourself.
 
 
May 23, 2012
without naming names I'd be highly skeptical of tech giants w/billionaire playboy CEOs who buy other past their prime tech giants and hire fired CEOs from yet other floundering tech giants - just saying...
 
 
+13 Rank Up Rank Down
May 23, 2012
I wonder if I can win at roulette by weeding out the losing numbers? I just have to remove two or three...

But seriously, I've thought the same thing, just do the opposite of the losers. The problem is there's an infinite variety of ways to be wrong. They can't all have opposites that are right.
 
 
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May 23, 2012
In general stocks of companies that are doing great attract moment investors and stocks that are doing awful attract value investors.
As the crowds often cannot attain the gain of the market index, it is perhaps best to go for the stocks in between, the boring stocks that attract nobodies attention.
 
 
+12 Rank Up Rank Down
May 23, 2012
I've had the exact same thought - with the same concerns (that the "losers" might end up being the best bargains). But I think we could find some that are overpriced given their earnings outlook.

I'll also take issue with your comment that "professional stock fund managers do worse than indexes..." It's probably true on the whole, but I think that's mainly due to all of the fad-chasing funds. There are plenty of good funds/managers with a track record of beating the indexes over time. I believe that a good process for selecting quality (or under-priced) stocks - Warren Buffett style - can work; it's just that so much of the money out there is not even attempting to do this.

My dead money pick: Facebook. It's over-hyped, over-priced, and it's popularity may be over. Plus, in Warren Buffett terms, there's no moat around it; the next big thing can come along anytime and displace it.
 
 
 
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