Chicks' Picks Come Home to Roost
The Chicks have laid an egg. And I have egg on my face. On Oct. 6, 2000, I wrote in this column about Chicks Laying Nest Eggs--10 far-flung female friends and relatives who used cyberspace to organize what turned out to be a successful investment club. Their 10-stock portfolio handily beat the Standard & Poor's 500-stock index by 30 percentage points from October, 1998, through September, 2000. That led them to launch a Web site (www.chickslayingnesteggs.com) a year ago. The group's founder, Karin Housley of St. Paul, Minn., even wrote a book imparting the women's wisdom, Chicks Laying Nest Eggs: How 10 Skirts Beat the Pants off Wall Street...And How You Can, Too, published by Random House earlier this year. These Chicks, I wrote, "have proved to be no financial birdbrains."
Today I'm thinking that I am the birdbrain. "Everyone is a great investor with great returns during a bull market," notes Russell Kinnel, head equity analyst at Morningstar Inc. It's after the bull has had its run that investing prowess is determined. The Chicks' portfolio--which includes Yahoo!, Coca-Cola, and General Electric--has lost 35% from its inception nearly three years ago through Sept. 17, vs. a loss of 16% for the S&P 500.
CRAVING AOL. So what went wrong? For starters, the Chicks had 12 rules, gleaned from the teachings of such investment lions as Peter Lynch and Warren Buffett. But they ignored some of them. For instance, the Chicks' first and second rules--"Buy what you know" and "Be able to easily explain the company's industry and product"--were overlooked in the purchase of Sun Microsystems and EMC, down 78% and 70%, respectively, since their purchase. Housley admits that "maybe we should have understood a little better what they did."
Another rule--"Buy only when the stock price is lower than its 52-week average"--also was broken. "When we bought AOL, we were so hungry to get our hands on it, we didn't care what the price was," writes Housley in the book.
While they might have had a well-defined, if sometimes ignored, buy strategy, their sell strategy was murky. When a stock fails to meet the Chicks' performance requirements for two quarters--such as gross margins of 50% and net margins of 8%--the rules said the group should consider selling it. A year ago, that rule put the Chicks' 34 shares of Gap on the table. They voted, but never came up with the six votes needed to sell. Margins continue to decline, and the stock is off 72% from when they bought it in June, 1999.
TECH-HEAVY. Granted, even many investors who are savvy buyers trip up on the sell side. "Selling is often the harder part to execute because people fall in love with their stocks," says Morningstar's Kinnel. "That's why professional investors have stringent sell disciplines." In her own defense, Housley says: "We've been using the club as a learning tool, not to make us rich." Housley takes comfort in the fact that many portfolio managers, more experienced and financially astute than any of the Chicks, have been pummeled in today's markets. She believes that when the market comes back, the Chicks' portfolio will bounce back even stronger.
For my part, I managed to overlook the fact that risk and asset allocation were not mentioned at all, either in the Chicks' investment strategy or on their Web site. It turns out that a robust 56% of the Chicks' portfolio is now invested in technology stocks; the S&P, meanwhile, has only 20% in tech companies. The women chose stocks with little regard to portfolio diversification.
Humbled by my experience, I now recall an old Wall Street bromide: "Don't confuse brains with a bull market." Had I remembered that saying a year ago, I might have thought differently of the Chicks.
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By Toddi Gutner