This Wall Street guru was outsmarted by his own childhood stock picks

Do you ever get the feeling that we’ve overcomplicated this entire investment process? Do you ever wonder if managing investments successfully might be simpler than Wall Street — including most of us in the media — make it sound?

If so, here’s another intriguing data point for the optimist in you.

One of Wall Street’s brightest, cleverest and most respected investment thinkers has just revealed that few, if any, of his brilliant and sophisticated strategies have done as well as the simple, “gut” stock picks he made.

The twist: He made them at summer camp when he was 12 years old.

No kidding.

Cambria Investments’ co-founder and head Meb Faber, author of widely read research on asset allocation, stock picking, trading and risk management, has published a postcard he sent to his father in the summer of 1989 in which he described the portfolio he wanted.

Four investments.

All stocks.

All U.S., household name blue chips.

They were Coca-Cola














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Anheuser-Busch, McDonald’s and Disney.

Crazy. No diversification. Not even different sectors. Four consumer stocks. At the time the U.S. was actually heading into a recession, too.

He admits he picked the four companies because he knew their products and could see the strength of their brands. In three cases, he says he knew them directly himself, and in the case of the beer company he recalls he could see how popular Budweiser was with older relatives.

Net result? Spectacular.

All four of the stocks have produced double-digit returns per year, on average. Coca-Cola is up 2,100%. McDonald’s














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4,000%. Disney














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nearly 1,800%. Anheuser-Busch














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 is a bit harder to calculate, as it was taken over in 2008 by Belgian brewer InBev to form Anheuser-Busch InBev.

But from 1989 through the takeover, Budweiser’s stock produced total shareholder returns of just over 900%, according to FactSet data. If you’d rolled your money into the new company immediately after the takeover was completed you’d be up another 285% since, FactSet says. (All these numbers include reinvested dividends, but, yes, exclude taxes and trading fees.)

Overall, those four stocks since then have produced an average annual return of 12.44%.

The S&P 500 over the same period produced an average annual return of just over 6%.

Put another way, $1,000 invested equally in those stocks would be worth around $30,000 today.

That same money in the S&P 500: Less than $6,000.

You will struggle to find hedge funds, mutual funds, or other investors who have done this well over this period. Warren Buffett’s Berkshire Hathaway is among the few.

You will struggle to find hedge funds, mutual funds, or other investors who have done this well over this period. Warren Buffett’s Berkshire Hathaway














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is among the few.

As index fund junkies now say it’s impossible to beat the S&P 500 at all, the news that a 12-year old kid could beat it by 100% a year is worth a double-take.

Yes, it’s only one data point and it’s random. Meb Faber, contacted by MarketWatch, laughed about the success of his picks and observed dryly, “The best lesson to be drawn is to be lucky!”

For every concentrated portfolio of a few stocks that has crushed the market indices over time, he adds, he could find “a thousand examples why it’s not a good idea.”

And a kid picking popular stocks in the 1990s, he pointed out, would probably have lost his shirt in tech disasters like Lucent (now Alcatel Lucent, for shareholder returns since Dec. 31, 1999 of minus 93%).

But this investment success may not be quite so random as Faber modestly suggests.

Faber’s childhood stock ideas resemble the investing strategies pursued very successfully over many years by three Wall Street legends: The late Philip Fisher, author of Common Stocks and Uncommon Profits, former Fidelity Magellan














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 manager Peter Lynch, and Berkshire Hathaway’s Warren Buffett.

Here’s what they said about how to win in stocks

First, invest in companies you know and understand, they said. Maybe this means you dealt with the company directly or bought its products (as Lynch suggested). Or maybe you’ve just done a lot of homework (Fisher called this “scuttlebutt”).

If you’re investing in companies you really understand, this usually means they are in relatively stable and simple industries. (But just because you use them doesn’t guarantee they will outperform the market. Look no further than the rise and fall of BlackBerry














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 stock.)

Look for companies with strong balance sheets and powerful brands, and the ability, as Warren Buffett likes to say, to raise their prices 10% without losing business.

Second, look for companies with strong balance sheets and powerful brands, and the ability, as Warren Buffett likes to say, to raise their prices 10% without losing business. Modern research has been able to demonstrate mathematically that so-called “quality” stocks, which have many of these features, have been much better investments than the rest.

And third, look for companies that have the potential for long-term growth and then just hang on. It’s the compounding that makes you rich. Buffett, citing Fisher, says his favorite time to sell a great stock is “never.” (Faber admitted that if he had bought this portfolio, he’d probably have been subject to the same cognitive biases of anyone else and he’d have been tempted to cash out along the way).

In short, buy really, really good growth companies you understand, and then hang on forever.

Yes, it looks easy in retrospect and no one is suggesting anyone go out and put all their money into four stocks. On the other hand, it’s a salutary reminder that maybe it’s not always quite as complicated as we make it either.

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