Their columnist’s record bests the big indices? Hardly.
I read BusinessWeek. It’s a quick general overview of what’s going on in business, the economy and investing; I can’t imagine that anyone thinks it’s more than that. I certainly can’t imagine that anyone would use it to make individual stock picks. Yet, for 10 years Gene Marcial has been providing his “insights” into individual stocks. I view Marcial’s column the same way I view any investment newsletter–with great skepticism. How does he select stocks for inclusion? How does he select the analysts he quotes? What ties doe does he have to any of these people or their companies (he doesn’t take stock positions in the companies he mentions).
The reason I’m even discussing Marcial’s column is that he frequently discusses biotech companies. He makes it pretty clear to anyone who’s been in or around the industry for a while that he knows this industry less than well–that is to say barely or perhaps not at all. But that’s okay. If he always chooses his sources like a chop house sommelier chooses the red to match your Kobe, he could still make wise calls and followers of his cobbled together advice might still make out.
But he’s no stock-picking somellier.
What irks me about the column isn’t even so much that Marcial doesn’t know a thing about biotech but that BusinessWeek sees fit to tout his long-term performance. Long-term performance? If he’s a lousy biotech stock-picker, as I claim, why would BusinessWeek tout his long-term performance? And there’s the rub. It’s because BusinessWeek lies. Well…not so much lies as distorts, in a way that inflates Marcials’ picking prowess. Here’s how: Marcial’s column is published online on a Thursday afternoon, after the market closes. By the time anyone can act on the column it’s at least Friday (or Monday if it’s a 3-day weekend). By the time the market opens on Friday, the “Marcial effect” has occurred and the stock price at open reflects it. Not surprisingly, when Marcial touts a stock Thurday it frequently bumps Friday. Not that any individual investor could take advantage of the bump, unless he/she knew that Marcial’s column was about to be published. Following the bump, the market settles to reflect the stock’s underlying value. The distortion from BusinessWeek comes from the price they use to reflect Marcial’s total returns. They use as the basis the stock price at close on Thurday, not the price at open on Friday. So, the 1-day return is from the close Thursday to the close Friday.
You can see the “Marcial effect” by reviewing Marcial’s 1-day returns compared with broad indices, as BusinessWeek has published in their August 13th issue. You’ll see that Marcial beats the S&P 500, the DJIA, and the Russell 2000 by 3.8, 3.7, and 3.8%, respectively. Folks, that’s not a sign of stock-picking prowess, that’s a sign of a direct influence on stock market valuations. If Marcial really did pick stocks that beat the indices over a 10-year period as BusinessWeek claim, we would expect that his 1-day returns would closely approximate the indices’ 1-day returns. That’s because a broad selection of stocks will never appreciate measured over any randomly selected 1-day period, because their combined underlying value will never increase significantly over a 1-day period. So, BusinessWeek’s own published data shows that the “Marcial effect” contributed to nearly a 4% transient bump in the value of his picks.
In order for BusinessWeek to claim that Marcial’s “record bests the big indexes,” they would have to show that his picks’ longer-term returns were better. They’ve published only the 1-month, 3-month, and 6-month returns over the 10-year period from 1997-2006. Why not the 1-year returns? If I am correct, the longer the interval over which Marcial’s returns are calculated the worst his performance relative to the indices will be. Let’s just use the Russell for comparison. Over 1-day, Marcial wins by 3.8%. Over 1-month he’s up by 3.5%. Over 3 months by 3.2%. Over 6 months by 2%. Sense a pattern? Marcial’s performance is regressing to the performance of the big indices the longer the study interval. But then, BusinessWeek should really have discounted the one-day return, because no investor could have actually experienced it. Subtract 3.8% from Marcial’s performance, and the Russell is beating him by one month out, and it just gets worse from there.
You can see that the “Marcial effect” has persisted into 2006 by looking at the detailed 2006 data BusinessWeek published. Marcial’s 1-day performance is again skewed towards the winners, with an average 1-day return of the top-10 winners of 15.7% compared with an average 1-day loss from the bottom-10 picks of -3.8% (i.e a 4.1-fold relative difference in the absolute returns of winners and losers). This performance difference disparity tends to even out over time. By six months, his top 10 returns an average of 72.4% and his bottom 10 averages a loss of -52.6%, or a relative difference of just 1.4-fold in the absolute returns. In other words, the tails of performance tend to more closely resemble each other over time.
Finally, to get back to the biotechs. You’ll notice that of Marcial’s top 10 one-day returns for 2006, 8 (80%) are biotechs or life-science firms. Marcial seems to have a particularly strong influence over biotech speculators. If Marcial were a good biotech picker, we would expect that the 1-, 3-, and 6-month top-10 performers would contain a similar percentage of biotechs. Here’s what actually happened. Among the top-10 best 1-month returns, 5 (50%) were biotechs. Among top 3-month returns, 3 (30%) were biotechs. Among top 6-month returns, 3 (30%) were biotechs. So, the proportion of biotechs declines over duration of holdings, as one would expect from a hack stock picker.
And what about the best one-day returners in 2006? Of the 8 life-science picks that made the top 10 over a 1-day period, only 1 (Supergen) was in the top 10 over 6 months, with a 50% 6-month return. And the other 7? Well, you could find two of them over in the worst-10 list at 6 months. Valentis lost 78% and was eventually delisted, and Praecis lost 41% over 6 months; it eventually was acquired by GSK (you would have lost money buiyng with Marcial even if you had held on to the stock after the acquisition was announced). Of the others, Anadys was a dog, dropping like a stone mid-2006; it now trades for a tad over $2, with a market cap of $61 M. Acusphere’s market cap is now under $60 M (under a buck fifty a share) after some disturbing Phase 3 results and a dilutive refinancing. Cortex still has a cap above $100 M, but just barely and trades at $2.50, well down from Marcial’s touted value point. Repligen is the only stock you would’ve not regretted buying. It’s up around $0.70/share since Marcial recommended iton August 2006 with a headline of “Repligen May Hit a Home Run.”
Bottom line: You wouldn’t know it from BusinessWeek’s hype, but Marcial sucks at picking stocks generally, and he particularly sucks at picking biotech stocks. But the broad market hasn’t figured that yet. So, until it does, you can make money shorting Marcial’s picks after their initial one-day bump and holding on to them for at least 6 months, or until after the almost-inevitable bad-news event occurs, whichever comes first.
