Thursday, April 27, 2006

The FORBES Diet Plan ?

How is Forbes magazine like a diet book? Maybe the question isn’t as crazy as it sounds.

There are over 1600 diet books for sale on Amazon.com, and annual diet book sales are truly staggering. A few years back some academics decided to do a study on what separated high sales diet books from low selling ones. They studied and scored the books by length, readability level, various facets of the writing, how much weight readers lost, cost or difficulty of the food, color of the cover, and anything else they could think of. Eventually they started applying the variables against the sales of each book and using regressions to figure out which of these magical ingredients led to a successful diet book. One might hope the successful diet books would be the well written ones that worked better.

Nope.

It turns out that the one factor that has the biggest influence on selling a diet book is a firm and authoritative explanation of why the diet works, even if it actually doesn’t. This trend agrees with the sociology work of Ellen Langer, and is mentioned in Malcolm Gladwell's excellent essay "The Pima Paradox" (about half way down). The human mind is much more willing to accept facts that have an explanation attached, even if the explanation doesn't make sense. The assumption is that if someone explains it, then they have thought about it and that's all one needs to know.

It's a scary thought, but perhaps this explains why publishers look for doctors to co-write diet books. It may also explain the success of “The Complete Scarsdale Medical Diet,” which sold an amazing 15 million copies in all editions despite the unappetizing name (but which wasn’t part of this study due to the timeframe involved). Or maybe the reason people buy diet books is that is gets them thinking about their eating habits and that, in turn, helps them along to their goals.

I wasn’t really thinking about this about a year ago when I read an article in Forbes that purported to identify ten hot takeover stocks that one should buy in anticipation of rich gains when they were bought out. I am forever looking for additional stocks to analyze so I put all ten stocks into my analysis list and worked on them one at a time to see if any met my exacting standards for investing. Those ten stocks were: Avaya (AV), CenturyTel (CTL), J.B.Hunt transportation (JBHT), Kindred Healthcare (KND), Louisiana-Pacific (LPX), Office Depot (ODP), Radioshak (RSH), Skywest (SKYW), Steel Dynamics (STLD), and Supervalu (SVU). I didn’t save my original materials but it looks like I may have gotten some of the list from Jack Gage and Michael Ozanian in their article “Return of the Barbarians,” although there appear to be some stocks in the online version that aren't in my notes from the paper version and vice versa. Three of the stocks (LPX, SKYW, STLD) made it past my initial screening but I didn’t buy each for different reasons. I am very picky.

No stock ever leaves my review list, however, and when it came time to review the decisions I made last year (as I frequently do) I wondered how many of these ten companies had indeed been bought out.

None.

That’s right, in a banner year for buyouts and takeovers, not a single one of the “hot takeover targets” listed in Forbes had been bought out. I was surprised. I kept digging to see how you would have fared buying the listed stocks. Over a span where owning the simple Dow Jones Index ETF (DIA) would have made you 9.9% capital gains plus dividend, buying all ten “takeover targets” from Forbes on an equal dollar-weighted basis would have made you 23% even though none got bought out. (As an aside, buying just the three that made it into my “possible buys” list would have made 54.8% and the two stocks I did buy with that pile of money have returned 54.3%). Here is a chart from the day of my analysis (6/10/05) until the day of writing this article (4/26/06).

The ten "takeover targets" extracted from FORBES, performance from intial evaluation to the present, and comparison with a Dow Jones ETF. Not a single one of these was taken over, but 7 of the ten stockes gained nicely and you would have done well to own them.


So did Forbes mess up? Are they full of it? Were the columnists out of ideas? Apparently not, as you would have been a happy investor if you had bought all those stocks. There may have been no takeovers in the group but I will say that anything that gets you thinking about your portfolio and starts you out with a decent list to work on helps you toward your goals.

So maybe sometimes investment writing, like a diet book, is more about the response it provokes from the reader than about giving correct predictions. Maybe getting people to take a critical look on their own is all a writer can hope for.

I sure hope so, that would certainly take a lot of pressure off of me….

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