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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Tuesday, June 13, 2006

Do Stock Winners Repeat Themselves?

Between 1980-2000 there was a study of stocks that had exceptional positive returns. The questions is do these handful of winner stocks repeat themselves?

Often you will read in the news that a particular stock has risen 20%-30% in a very short time and we kick ourselves for not getting part of the quick rise in stock value. In this study it is shown that individual stock perform much like asset classes; they have good periods and bad periods of performance. At the same time, individual stocks have a significant amount more of volitility and risk than asset classes because asset classes are a bunch of stocks and because they are more diversified than an individual stock the risk is less.

If you look at this period and take the top 10 performing stocks (minus the smallest 20% of the market) the average annualize 3-year performance of these equal-weighted portfolios of ten stocks was 135.3%. However, when you look at these 10 companies' performance in the next three years they average 9% (the S&P average for this period is 17.3%). So if you chased performance and tried to market time and bought these stocks at the top you would be very unhappy with the results when compared to the S&P 500's results.

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