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Investors will always be on the quest for a stock market formula that guarantees outperformance. Sadly, all observed phenomena in the stock market have a common flaw: reversion to the mean.
As more investors learn "the formula," the formula becomes less effective until it delivers average returns. Not to mention that investing on the premise of a secret formula is, for lack of a better word, stupid. Do your homework.
Nevertheless, it is human nature to seek above-average results from below-average effort. To that end, you might be interested in the following observation:
Alphabet stocks (stocks with a single-letter ticker symbol) have crushed the broader stock market since the March 2009 lows.
If you tally the investment returns of the 19 single-letter stocks in existence from March 9, 2009, to Nov. 30, 2011 (
Pandora(P - Get Report) and
Zillow(Z) both came to market in 2011, while
Quest Communications -- formerly "Q" -- was absorbed into
CenturyLink(CTL) in April 2011), you're looking at a 149% gain with dividends reinvested.
SPDR S&P 500 ETF(SPY) delivered a 94% return (dividends reinvested).
So, what are these alphabet stocks -- and will they outperform again?
As you can see from the list above, some single-letter stocks are quite familiar. Others, not so much. In aggregate, the list of 21 represents a concentrated swath of the U.S. economy: technology, services and financial services.
In other words, if you buy the alphabet, you are concentrating your bets in volatile sectors that can swing violently when liquidity runs dry.
Picking up these names during the next crisis might seem like a viable strategy -- and perhaps it is -- but just because these stocks survived the last crisis does not mean they are guaranteed to outlast the next. Similarly, it's impossible to tell when the next stock market "bottom" will occur -- the observation above relies on hindsight's 20/20 vision.
However, the performance of these stocks suggests that portfolio diversification is a moving target: Allocate capital to defensive sectors when the market looks like it can do no wrong; favor volatile sectors when it seems as if the world is going to end.
Of course, ETFs make it fairly easy to invest in a particular sector. But for those who are still tempted by the siren song of the alphabet stocks above, the following pages contain
TheStreet Ratings' analysis of each respective stock.