Although we are proponents of passive investing at Hardcastle Research, it's important to diversify your holdings. Single stocks can provide some diversification and offer substantial potential for returns. Here are some ideas that may be worth looking into for a small portion of your portfolio in 2017:

American Express (AXP)

When the decision is made to purchase a stock, it’s important to analyze both the technical movements of the stock price and the fundamentals of the underlying business. But there’s also a more qualitative, pragmatic element to investing in single stocks: the experience everyday customers have with the business itself. And this includes the experience you have with the business. A positive experience usually drives unwavering loyalty, and loyalty results in increased revenue.

Interacting with the customer service team at American Express (AXP) will undoubtedly leave you in awe. And not in a bad way, like many companies these days tend to do. It’s no surprise, then, that the stock is up about 20% over the past quarter, even as it trades at a forward price-to-earnings multiple of 6.8 less than the industry average of 19.5. So, with a 12.7 PE ratio, you’ll be buying AXP at an exceptional value.

“Don’t leave home without it” is their enduring slogan. We would add that you shouldn’t leave home without looking into both a credit card account and an analysis of what could be a good year for AXP.

Align Technology, Inc (ALGN)

After a one-year increase of 49%, right now may not be the best time to buy shares of Align Technology, but the demand for their product is certainly palpable. Align Technology, ticker ALGN, is the market leader in clear aligner orthodontics; an excellent alternative to braces for those who need just minor adjustments to their smile.

Align Technology designs, manufactures, and markets the Invisalign system for dental patients ranging in age from young teenagers to elderly adults. The stock is trading near its 52-week highs, but with demand surging for its product, this might be one company you should keep on your watchlist. If you’re looking for the stock to pull back a bit to offer a buying opportunity, that may not be a bad idea, but remember, there’s no guarantee the stock price will offer that opportunity any time soon. After all, the stock has returned 332% over the past five years, making it a good risk-adjusted investment, even when compared to the S&P 500 over that same time period.

Intuit, Inc. (INTU)

Intuit (INTU) is well positioned to grow over the next 5 years, especially as the on-demand economy of freelancers expands year after year. By 2020, the workforce of these independent workers is expected to reach 43% of the labor force; a substantial increase from just 6% back in 1989.

Intuit makes great products, but they also have outstanding customer service and they’re relentless in their pursuit to better their product offerings. For anyone looking to simplify their financial matters or improve the efficiency of their business, Intuit has a product that can make this goal possible. Long-term investors who bought the stock five years ago have seen returns in excess of 120%; not bad when compared to the 78% return of the S&P 500 over the same period. Of course, there’s much more risk involved with owning a single stock as compared to an index fund, but the rewards for owning INTU over the past five years have materialized.

GoPro (GPRO)

GoPro (GPRO) has had nothing but trouble over the past year. In November, the camera company announced plans to lay off 15% of its staff and shut down its entertainment unit, which was attempting to monetize the videos that had been shot on their cameras. Moreover, when the CEO was the highest paid in America in 2014, and yet the company is losing substantial amounts of money, you know it’s time to allocate your capital elsewhere. Analysts predict the losses to continue in 2017.

Company executives have cited production issues of the new Hero5 Black, which they expected to be among their best-selling products. Add to this the lack of availability for the company’s Hero4 cameras—all happening around the holiday season—and it’s no wonder the stock has gone from a 52-week high of $18.20 to a mere $9 as of this week.

GoPro is the Fitbit (FIT) of the action camera industry: they essentially offer one product (or a variation thereof), and the company has difficulty competing against companies that offer cameras—or fitness trackers, in the case of Fitbit—as just one of many products in their portfolio. Fitbit has also seen its stock plummet over the past couple years, and probably for good reason as investors are steering clear of one-trick-pony stocks such as GoPro and the like.

Twitter (TWTR)

Twitter (TWTR) has had no love from investors over the past year. And although the stock is up single digits from the beginning of the year, the company still has some work to do in order to get to its 52-week highs and beyond. However, even with all the negative sentiment and organizational shakeups, we still believe that Twitter is undervalued and worth investors’ attention.

Twitter is a media platform, despite what many social media experts would like it to be. It’s not merely a “microblog” or a place to just “tweet” your thoughts for the fun of it, although many certainly do utilize it in this way. But in actuality, Twitter has become a place where the day’s events unfold in real time. It has become a platform where campaigns for political office are effectively managed (and won). And it’s a powerful tool for marketing your business, your career, or even publicizing very public attacks, albeit much to the chagrin of Twitter’s largest shareholders.

CEO Jack Dorsey has acknowledged the power of Twitter as a news outlet and has said that the company is “focused on building the most useful, open, and comprehensive news network on the planet.”1 And although the executive team is trying to reign in some of the more destructive behavior users exhibit on the platform, they’d probably do more good for the media giant by allowing its netizens to freely express their First Amendment rights.

The social media site may indeed be sold to a larger, more profitable company, but it’ll still be a part of American culture for years to come, despite who has majority control of the company. The ubiquitous hashtag seen on nearly every television channel and even on highway billboards is not going anywhere, anytime soon.

The bears

There are, however, many analysts who would vehemently disagree with our bullishness on TWTR. Trip Chowdhry of Global Equities Research, has put a price target of less than $10 on the stock, and has claimed the company is “toast.”2 The stock was trading as high as $70 per share just three years ago, but is now in the $17 range. But the decline in stock price is just one of many problems the company faces.

With unusually high turnover in the C-suite, coupled with the fact that it’s been said that many of Twitter’s users are either not active or are outright fake, Chowdhry might have a valid case for downgrading the stock. He has cited “bad data” as a major reason he’s bearish on the stock, effectively making the case that if there are fake users that the company does not know about, then data quality is subpar, and if that’s true, then advertisers will look elsewhere instead of paying Twitter to market to phantom users. That's a lot of “ifs,” but it’s nonetheless an important point because advertisers need to be catered to if Twitter is going to remain a viable business. After all, they keep the lights on at HQ.

The contrarian play

Advertising revenue does have room to grow as well. When compared to Google’s $89 billion and Facebook’s $27 billion in ad revenue, Twitter’s $2.5 billion has the potential to increase over the next few years.1 Many critics of the company have raised concerns that management has done a poor job of making the experience user-friendly and attracting new users via a concentrated effort to market the platform to certain groups that could benefit from its features, such as local publications, small businesses, and freelance journalists. Twitter’s executive team is currently addressing these issues and they’re looking to improve the site’s look and feel.

It’s not all doom and gloom for the company, however, especially with sales up 8% from last quarter and a three-year EPS growth rate of 262%. And of the management that has stayed on, they still own a healthy 11% of the company, placing their confidence in the future of Twitter with their own capital.3 Investors should be jumping ship at precisely the same time as management; if management has their own skin in the game, that’s a good sign for outside investors.

We like Twitter as a long-term, buy-and-hold play, especially at these price levels. Contrarian investing may not be for everyone, but there is a case to be made for owning those stocks that have fallen this far out of favor, especially when the underlying value is as apparent as Twitter’s.




Nothing attracts more investors like the alluring narrative of sizable, past returns. Indeed, money comes flooding in when a fund manager beats the market by even the slightest margin, despite the improbability of repeat outperformance. Despite the narrative in the media that all investment advisors, hedge fund titans, and general money managers are impervious to failure, the truth plays out every year with a considerable number of funds being consigned to the dustbin of history. But rarely are these failures reported, let alone accounted for, when it comes time to publish the investment community’s holy grail of marketing: past performance. There’s a term for this lack of accountability when it comes to measuring and reporting how well investment professionals did over any given year and it’s called survivorship bias.

Conveniently forgotten

Survivorship bias is basically the effect of bad data. But to be more precise, it’s the result of leaving out all the “dead” funds in the data of past performance, essentially skewing the data to the upside, giving the investor an incorrect perception of higher past returns. Just like any other profession, not everyone can be above average; this is a logical certainty. Investment experts are no different, and many simply fail to attract outside capital or produce decent returns or even get off the ground from the outset of the fund’s inception. The good news is the data for conveniently forgotten funds is available, the bad news is your investment advisor or fund prospectus may not be so apt to disclose this information.

Take the five years ended December 31, 2011, for example. Data from Vanguard Research indicate that for large-cap value funds, 62% outperformed their benchmark index. But this doesn’t take into effect those funds that went out of business during that time period. Accounting for those funds would reduce this outperformance percentage to 46%.1 With less than a 50% chance of selecting a winning fund manager, it’s no surprise that many people have turned to passive investing. And the longer the time period, the more incidents of liquidation occur, which skew the data even further. Marketing executives within the fund industry are loath to disclose long-term performance because the longer these money managers are in the business, the more difficult it becomes to consistently beat the market. And broadcasting failure is bad for business.

If you take the fifteen years from January 1, 1997 to December 31, 2011, investors had just a 22% chance of picking a fund (or fund manager for that matter) that survived, outperformed, or was merged with another fund and resulted in outperformance.2 A less than one-in-four chance of picking a winning fund manager is not the sort of data that entices investors to part with their hard-earned money.

Actively beating a dead horse

There are two schools of investment thought: active investing attempts to “actively” beat a particular benchmark index after incurring substantial costs to do so, while passive investing endeavors to match benchmark returns by incurring minimal costs.

For a visual depiction of the survivorship bias phenomenon, Figure 1 highlights the underperformance of actively managed funds over a 10-year period ended December 31, 2013. Actively-managed funds lost to passively-managed index funds on average about 75% of the time for each of the five asset classes listed below. Moreover, there’s a 5 to 20 basis point gap between surviving fund performance versus non-surviving funds, as depicted from the graph.3

Figure 1. Active mutual fund underperformance, for the 10-year period ended December 31, 2013

Nowhere is active management more prevalent than in the hedge fund industry. The sole purpose of hedge fund managers is to produce superior performance no matter the timeframe or the general trend of the market, and they’re paid lots to do it. But oftentimes, the exact opposite happens. In 2015, hedge funds as a whole, measured by hedge fund research firm HFR, Inc., lost more than 3%, while the S&P 500 returned 1.4%, including dividends.4

The HFRI Fund Weighted Composite Index is an index of hedge funds, which is used to gauge how the industry as a whole is doing against its competition. The index is down against the S&P 500 by 3% annually over the last ten years.5

The Buffett bet

Proponents of hedge funds will point out that the HFRI Composite Index is merely an average and there are many funds that have outperformed the S&P 500 over these past ten years. There are undoubtedly many funds that have beat the S&P, and that’s probably why a money management firm by the name of Protégé Partners could not sit idle and watch the hedge fund industry not defend itself. They made a million-dollar bet with Warren Buffett (proceeds donated to charity) that they could pick five of the best “funds of funds” (i.e. a collection of hedge funds within a fund), and it would beat the fund selected by Buffett: a basic S&P 500 index fund.

The ten-year wager was made at the beginning of 2008, so there’s still some time left, but to date Buffett’s index fund is up 65%; Protégé’s hedge fund picks are up only 22%. Even the greatest active investor of all time sees the value in indexing, and unlike actively-managed mutual funds, hedge funds, and exchange-traded funds, survivorship bias is not a factor since an index fund as large and enduring as the S&P 500 is not going to liquidate any time soon.

1. Vanguard Research. The Mutual Fund Graveyard: An Analysis of Dead Funds, January 2013.

2. Vanguard Research. The Mutual Fund Graveyard: An Analysis of Dead Funds, January 2013.

3. Notes: The actively managed funds are those listed in the respective Morningstar

categories. Index funds are represented by funds with expense ratios of 20 basis points

or less as of December 31, 2013. All returns used were for the investor share class. Data reflect

the ten-year period ended December 31, 2013. Sources: Vanguard and Morningstar, Inc.

4. Copeland, Rob. Wall Street Journal. Wasted Opportunity: Hedge Funds Falter, January 1, 2016

5. Kaissar, Nir. Hedge Funds Have a Performance Problem, Bloomberg March 2016

There’s an excellent example from Warren Buffett that illustrates how long-term investors should tackle market volatility. It perfectly encapsulates the mentality of what the ultimate purpose of investing is: to sell an asset at a price higher than what you initially paid for it. I’ll let Buffett explain in his own words:

“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”1

Buffett is right, it defies common sense to hope for rising prices for something you’re going to be buying. Only when you’re looking to sell should you hope that prices rise, so you can abide by the most basic investing rule: buy low, sell high.

Formula-driven investing

Michael Edleson wrote the book Value Averaging back in 1991 in which he argued that people should employ a "formula" to increase the chances of success when investing in the stock market. One such formula is called Dollar Cost Averaging (DCA) and it sounds a lot more complex than it actually is. All DCA does is reduce the average cost of your equity holdings because when prices drop you’re acquiring more shares at cheaper prices. This assumes, of course, that the market doesn’t trend upwards indefinitely, which it doesn’t.

Edleson was an advocate of formula strategies that are nothing more than passive guidelines, much like active traders who use charts and other technical indicators to time the market, or at least try to. Edleson said these strategies are meant to be “automatic and mechanical, the very antithesis of the emotional involvement inherent in timing strategies.” He continues on with a very poignant message to the aforementioned day traders attempting to time the market: “Remember that if timing systems were developed that could truly consistently beat the market, they would not be viable for very long. If we all jumped on the same bandwagon, we’d all get the same return—the average return.”2

DCA is an excellent buying strategy over relatively long periods; however, when it comes time to sell, DCA really doesn’t help investors because under the strategy, there’s no periodic plan to trim equities for cash, which essentially means that the investor had better be selling at a time when prices are higher relative to what their cost basis has been. Enter value averaging.

Value averaging (VA) is a formula-driven strategy whereby an investor sets a return that he or she wants to earn in the market, say 10%. Instead of putting their investment strategy on autopilot and investing equal sums each month (DCA), he or she sells a bit when profits rise above their 10% target, and when the market isn’t living up to the 10% goal, additional purchases are made, thus adhering to the buy low, sell high strategy, but in this case, you’re selling point isn’t a guessing game, and your increased buying is further reducing the average cost of the stocks you own.

For example, take that 10% annual return target, which equals about 0.79% monthly, accounting for compounding. If you had $500 to invest on a monthly basis, after the first month the value of your account would be $503.95 at a 0.79% rate. If, in that first month, you check your account and you actually had $520, you would’ve earned a rate higher than your target of 0.79%, thus you could sell the difference of $16.05 and use it to perhaps buy more securities in a down month. It must be said that this one-month hypothetical example is neither long term nor is it taking into account transaction costs or the tax recognition of capital gains, both of which would negate the increase in returns.

If the market happened to decline over that first month, you would add more than $500 to obtain an expected growth rate on target with your 10% goal. The assumption is that markets fluctuate and instead of trying to time the ups and downs of the market, investors can simply sit back, trim some holdings during market highs, buy more during market lows, and ultimately achieve a return higher than you would if you were merely dollar cost averaging. During the Dotcom bust, had you been value averaging with a Nasdaq index fund from 1991 to 2005, you would have made a 15.2% return, as compared to a 9.6% return using DCA.3

No perfect plan

Another pitfall to the value averaging strategy that Edleson described is that it doesn’t take into account cash drag, which is the lagging performance of having some capital sitting in cash awaiting for a market decline to buy more than your predetermined monthly stock purchases. After all, you could have that cash working for you in the market, instead of simply sitting on the sidelines earning next to nothing.

Overall, DCA is a very effective method of investing and the simplicity of it makes it attractive to those looking to invest over the long haul. Likewise, value averaging can provide investors with another way to increase returns over extended periods of time, albeit with more attention to monthly returns and perhaps increased costs associated with tax liabilities and transaction fees.

The key takeaway is that both strategies attempt to provide the investor with a method to increase the chance that they're buying low and selling high, irrespective of what the market is doing.

1. Berkshire Hathaway Inc., 1997 Chairman’s Letter

2. Edleson, Michael E. (2008-04-21). Value Averaging: The Safe and Easy Strategy for Higher Investment Returns

3. Hallam, Andrew. Is Value Averaging Your Answer To Stock Market Timing? August 11, 2014