Taking a "Haircut"

As I waited at my barber's this morning, the result of a half hour's difference in our understanding of my appointment time, I had the occasion to skim through the most recent issue of Fortune Magazine. Most "haircuts," in the financial sense, cost you money. This morning, since I do not typically read Fortune, I got a free bonus- the theme for this piece.

This issue, the first in March, contained the magazine's "most admired companies." Naturally, I was surprised to see Jeff Immelt's face on the cover. When I think of companies I admire, my thoughts turn to those rare gems which can consistently outperform the S&P500 for several years- often up to five. When I read of a current survey, I assume the performance in question must be recent.

GE is not one of these companies. Go check its return versus the index on one of the free finance sites, such as Yahoo. It isn't even close. Not for the past 12 months. Not for 2 years. Not for 5 years. No contest- the race goes to the index.

I read a few more passages from the article, and noticed IBM was also touted. The phrase "turnaround" caught my eye.

So I checked IBM's return over the last five years versus the S&P500 Index. Care to guess whether this well-known information processing hardware, software and services titan did any better than GE?

IBM also failed to best the index over 1, 2 and 5 years in terms of total return. So much for a "turnaround."

Why would a business magazine such as Fortune waste so much ink and effort on "admired" losers? Is this what we have come to regard as business success in America? Maybe I'm the one who is out of step. I just can't see glorifying companies, and their managements, for underperforming an index you can buy for no more than two-tenths of a cent on the dollar from Vanguard.

My research and continuing portfolio management demonstrate that it's a rare, and "admirable" characteristic just for a company to consistently outperform the S&P500 over several years. As an investor, I could not care less what else the company does for the time I hold their stock, or how widely admired it is for other reasons, so long as they beat the index.

Did I mention that I don't subscribe to Fortune? Does it surprise you that this morning's quick read through their latest issue makes me feel I've made a wise decision?