Daily Gains Letter

How You Could Have Beaten Markets and Hedge Funds with These Two Stocks

By for Daily Gains Letter | Jan 28, 2013

















DL_Mohammad_280113The Dow Jones Industrial Average rose 10.2% and the S&P 500 rose 13% in 2012. Did your portfolio show the same kind of returns? If it did, then congratulations. If not, here is something you should know: according to a report from Goldman Sachs, 88% of hedge fund managers weren’t able to beat the return posted by the S&P 500. On average, hedge fund returns were eight percent. (Source: Chicago Sun-Times, January 7, 2012.)

Keep in mind, an eight percent return is just an average—there were surely funds that performed much worse and others that posted even better returns.

So, if your portfolio didn’t do as well, what could you have done differently? If you invested in the following stocks in 2012, your returns would be much higher than those reported by the hedge funds—multiple times higher, to say the least.

The Gap, Inc. (NYSE/GPS)

In the beginning of 2012, Gap was trading around $18.00. On the last trading day of 2012, it closed above $31.00—a gain of about $13.00 per share. But that is not all, in addition to the capital gains; you would have also received a dividend of $0.50. Assuming you bought at $18.00 and sold on the last trading day of 2012, your return would be somewhere close to $13.50, or about 75% over the year. This is similar to beating the average hedge fund’s return by 9.3 times and beating the S&P 500 return by almost six times.

 $gps

Chart courtesy of www.StockCharts.com

Whirlpool Corporation (NYSE/WHR)

Similarly, Whirlpool posted significant gains as well, and definitely beat the market—it beat hedge funds’ returns by 15.5 times and the S&P 500’s return by more than 9.5 times. In early 2012, Whirlpool was trading just a little above $46.00. By the end of the year, it was trading above the $101.00 mark. Over the year, the stock paid out a dividend of $2.00 per share. If you held this stock the entire year, your total return for 2012 would be about $57.00 per share, or almost 124%.

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Chart courtesy of www.StockCharts.com

These returns may sound astounding, but you need to keep in mind that these are not the only stocks that performed well during 2012—there were many others with better returns than those posted by the hedge funds.

At the same time, you also need to keep in mind that not every stock performs the way these two companies mentioned above did. When you are planning for retirement, it’s good to have multiple stocks holding in the portfolio. Consider this; what happens if you own one stock in your portfolio and it goes down 20%? Well, you lose 20%, but if you are diversified, your chances of a bigger drawdown will be much lower.

To add more, when you are planning for retirement and investing in order to grow your portfolio, sometimes even a return of one percent higher can make a huge different in the long run. Before making any decisions and jumping into the stock market, consider the amount of risk you are willing to take and make sure you are not risking more than you can lose.

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