Guru Stocks Earn Their Name

It's time to review my column's performance for the first quarter of this year. In my Jan. 10 column, I reviewed how my ideas did for all of 2005, when they produced an average gain per recommendation of 7.7% vs. a gain of 3.3% from investing in the S&P 500 over a comparable period.

I've been fortunate that my picks continued to well during 2006's first quarter. The total return for my recommendations for the three months ending March 30, 2006, was 3.3%, nearly three times the S&P 500's comparable return of 1.2%. My returns were based on all 21 recommendations I made during the period. From Jan. 1, 2005, to March 30, 2006, my picks have enjoyed an average gain of 12.8% vs. 6.2% for the S&P 500.

Let me explain the math. To determine my performance, I took the closing price of each stock on the date I recommended it and compared it to its closing price as of March 30. Taking all the winners and losers, the average gain per recommendation was 3.3%. Each recommendation was given equal weight.

Then I made a comparable calculation with the S&P 500. The S&P 500's return of 1.2% is how much investors would have made if instead of buying my picks, they had put the same amount of money into an S&P 500 index fund on the date of each recommendation and held it to March 30.

Those are the basics of the calculations. Note, the returns from both my recommendations and the S&P 500 do not include transaction costs or dividends. Also, the period I'm using goes from Jan. 1, 2006, to March 30, 2006. The reason I stopped at March 30 and not March 31 was that my supplier of data had technical problems that prevented me going to the very end of March. There's no reason to think that anything special happened on March 31 (the S&P 500 dropped a bit less than a half-percentage point that day), but for purposes of full disclosure, I felt I needed to mention this.

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At the time of publication, Reese was long CBIZ, ESI, COP, CHRW, INTC, DELL, PBR, C, HD, LRW, COF, CVX, EAS and BKS, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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