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 Financial Happenings Blog 
Friday, August 25 2006

An interesting piece of research was presented on today's ABC lunchtime news show.  Dr Karl was talking about some recent research that showed that companies that listed on the stock exchange performed better if they had a simple and easy to remember name.  It was presented as light hearted research, however it provides a reminder as to some of the folly of 'active management', that is spending time and money to try and identify which companies are going to perform better than any other.

It reminds me of some research that said companies that start with the letter 'W' had outperformed over a period.  In fact, I would think that over the last 10 years this might still hold true - there are not that many companies that start with the letter W the biggest such as Woolworths (25.7% a year average for last 10 years), Wesfamers (23.2% a year average for last 10 years), Westfield (had a merger about 3 years ago so there are no combined results), Westpac (19% a year average for last 10 years) and Woodside (23.1% a year average for last 10 years) are all strong performers over this time.  All these companies beat the average sharemarket return be some margin.

So the moral of the story is that we should invest in shares that start with 'W' or have easy to remember names.  Or, for a lay down winner, easy to remember shares that start with the letter W.  No rational person would be, or should be, comfortable with either of these strategies as a basis for a long term investment strategy.  Therein lies the problem with 'active management', trying to pick and choose which shares are going to outperform.  There is so much information already priced into each share that it is really difficult to pick any that will outperform.  And, when patterns or outperformance are identified, who says that it is just not luck driving the higher returns - such as the letter 'W'. 

At the end of the day the market does a good job of rewarding long term investors who focus on a long term, well diversified, buy and hold approach to investment. 

Posted by: Scott Francis AT 01:26 am   |  Permalink   |  Email
 
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