Retirement Weekly: Retirees: Don’t fall for a popularity contest when it comes to your investments
Fortune’s annual ranking of most admired companies provides yet more evidence of why you should be a contrarian.
Since the magazine’s year-ago list was released, each of the five most-admired companies has lagged behind the S&P 500
by a large amount. Those companies were Apple
Their average return since Feb. 2, 2022, when that year-ago ranking was published, has been a loss of 21.7%, versus a 9.7% loss for the S&P 500. (These returns include reinvested dividends.)
The investment takeaway is the importance of not getting swept up in a company’s popularity. You can admire a company without also believing that its stock is a good investment.
This is especially important for retirees to hear, since they are prone to fear of missing out. FOMO tempts them to invest in companies that are most popular on Wall Street, even if in their more sober moments they concede that those companies appear to be overvalued.
To be sure, the inverse correlation between popularity and performance doesn’t hold in each individual case. Apple, for example, has been No. 1 in the Fortune ranking for 16 straight years, including in Fortune’s 2023 ranking released earlier this week. And Apple’s stock has far outpaced the stock market over this period.
Nevertheless, according to researchers, Apple is more the exception than the rule. On average over the decades, more-admired companies in the Fortune annual ranking have proceeded to underperform lower-ranked firms. In addition, increases in reputation rank were correlated with decreased subsequent performance—and vice versa.
One academic study, published in the Journal of Portfolio Management, was conducted by Deniz Anginer of Simon Fraser University and Meir Statman of Santa Clara University. The professors calculated the performance over a 25-year period of two hypothetical portfolios: The first was constructed to own the most admired companies in each year’s Fortune ranking, while the second contained the companies that were most despised. The second portfolio outperformed the first by 2.1 annualized percentage points.
Even more telling was the relative performances of two additional portfolios the professors constructed. The first contained the most-admired companies whose reputations increased the most over the trailing year, while the second contained the most despised companies whose reputations fell the most. The second outperformed the first by 5.6 annualized performance points.
Another study, published in the Journal of Corporate Finance, also found a negative correlation between changes in a company’s Fortune ranking and the subsequent performance of its stock. In addition, the authors of this other study—Yingmei Cheng and Aaron Rosenblum of Florida State University, Baixiao Liu of Peking University, and John McConnell of Purdue—analyzed various possible explanations for this inverse correlation.
They found that “the CEOs of firms that experience an increase in [admiration] score are more likely to undertake acquisitions than are the CEOs of firms that experience a fall in score and the acquisitions are more likely to be value reducing.” This suggests that, when a company becomes more admired, it uses its additional “reputational capital” to engage in so-called “empire building”—acquiring other companies even when doing so comes at the expense of shareholders.
The bottom line is straight from the contrarian analysis playbook: To pick stocks, you shouldn’t overlook those that are out of favor. To find a prince you sometimes have to kiss a toad.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.