Flashes In The Pan: Inconsistent Total Returns

Lest you be overly-impressed by the recent year's returns of some equities, take a longer term perspective.

For example, here is a price chart of the remaining four large 'real' US commercial banks (excludes Goldman and Morgan Stanley), and the S&P500 Index, for the past 12 months.

Looks impressive, doesn't it? BankAmerica up nearly 100%, Wells up over 50%, and Chase even with the index. Even Citi is positive.

Trouble is, my proprietary equity performance research found that one- or two-year outperformances of the S&P are actually pretty common.

Given that the index hit bottom last March, then rocketed upward over the next 8 months, the past 12 months are going to look good for a number of firms.

Looking back five years, those same four banks, and the S&P, look quite different, don't they?

The index has been flat. Only one bank, Chase, has been positive. The other three banks were not, two having appalling losses in shareholder wealth.

Chase, of course, looks better simply because, as usual, it was late to the CDO and mortgage party, and, though anemic in absolute terms, managed to avoid the crippling losses of its more agile competitors.

I chose a handful of large commercial banks, but you can probably construct similar charts in other sectors right now.

Being fooled by 1-year performances can lead to unpleasant surprises for the longer term. Much of the current hoopla over the recent gains in the equities of many firms amounts to little more than backward-looking timing plays. Buying into a firm's equity now, on the strength of just the last year, is the epitome of rather naive momentum investing.

Whether all of these firms can actually maintain fundamental performances and total return outperformance for the next few years is an entirely different matter. Last year's March low in equities provides a handy comparison for so many equities this quarter.

Investor beware.