Stacking Probabilities to Advantage

CIO Robert Zuccaro discusses how there are no guarantees in the investment business, only probabilities.


Welcome to the Golden Eagle Eye - Eye on the Stock Market segment featuring macroeconomic and stock market commentary. We have Robert Zuccaro with us, Founder & CIO of Golden Eagle Strategies. Today Robert shares his latest commentary.

There are no guarantees in the investment business, only probabilities. And the probability of the very best managers, we're talking about top 1% managers, generating superior performance is not very high. We've done three separate studies on this, and we've looked most recently at the 40 top funds over the past 40 years, and we found that on average the very best have only outperformed on an annual basis 53% of the time.

Now in studying the top funds, and you have to keep in mind that there are approximately 9,000 mutual and exchange traded products on the market. So, you have a lot of opportunity from a very broad universe to outperform, but over the last 20 years, only 3% of all managers have been able to outdistance the S&P 500 average, which is an oxymoron, because the average is beating 97% of the contestants.

In any other type of data, when you're dealing with averages above average or below average, you have half of the data points that are below 50% and the other half that are above 50%. But we are in a very unusual business where only 3% of managers are capable of getting the S&P. So, what we have done historically over my 50 years in the business, we've looked through things that work. And anything that has a probability of taking place above 50% is positive because it gives you a good chance of becoming a top manager and outperforming the S&P 500.

What we have done is we have found that there is a very high correlation between powerful profits growth and stock price performance. Superior stock price performance. Explicitly top decile stock price performance. And in the first study which we did, 1985 to 2000, we looked at approximately, or specifically, 276 stocks, and we segmented the performance into under 50% and above 100% and we found that the stocks with the highest rate of profits growth, in excess of 100% per year, return on average 114%.

Now, on the surface, this sounds very simple. But it's not. Because every year, you start out with earnings expectation. And every year... there is a profound difference between the final earnings number and the preliminary estimate at the beginning of the year. Michael O'Higgins did a very interesting study in the 1990s, and he studied 3,500 earnings estimates made by 2,000 analysts across the entire spectrum of industries, and he found that the typical earnings estimate was off by 50%.

So what you typically expect at the outset of any year is going to be entirely different. It's going to be one of two things. The company is going to way overshoot the expectation or they are way going to undershoot the expectation. So instead of forecasting, what we try and do is we track the fastest growing companies, which has historically given us a high probability of outperforming the market.

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This transcript was generated by software and may not accurately reflect exactly what was said.

Please note, that the thoughts expressed in this podcast are those of the presenter. This is not, nor should it be considered an offer or a solicitation of an offer for investment.

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Stacking Probabilities to Advantage

CIO Robert Zuccaro discusses how there are no guarantees in the investment business, only probabilities.

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