Jeff Vinik’s fund returned 640% in the four years after he was fired from Fidelity.
He was fired for not chasing fashionable investments. In 1996, he decided technology stocks were overvalued and dumped them from his portfolio. This move infuriated his investors and managers, so Fidelity replaced him.
But Vinik had the last laugh. Not only did he outperform his old fund by hundreds of percent, but when the stock market turned lower in 2000, crushing the Magellan fund and all its super-trendy holdings, Vinik’s fund turned in another top performance, returning 46% after fees.
Last week, Fidelity fired Vinik’s replacement, Robert Stansky...for not chasing the fashionable investment.
Stansky ran Magellan for nine years. He liked to buy big stocks – companies you might find in the Dow Jones index. His top holdings were Exxon, Microsoft and General Motors.
But big stocks have performed badly over the past five years, especially when you compare them to the performance of small stocks. Take a look at the table below…
Five for Five |
Small cap "value" stocks have crushed large cap "growth" stocks in each of the last five years |
|
Small Cap Value Stocks (1) |
Large Cap Growth Stocks (2) |
Margin of Victory (%) |
2000 |
22.8% |
-22.1% |
44.9% |
2001 |
14.0% |
-12.7% |
26.8% |
2002 |
-11.4% |
-23.6% |
12.2% |
2003 |
46.0% |
25.7% |
20.4% |
2004 |
22.3% |
6.1% |
16.1% |
1) Russell 2000 Value Index
2) S&P/Barra 500 Growth Index |
|
This trend continued in 2005... small cap “value” is still crushing large cap “growth.”
Now enter Harry Lange, Fidelity’s new Magellan fund manager.
“Lange has made his name by delivering 58% over 3 years in the Fidelity Capital Appreciation Fund,” writes one Wall St. analyst. “He has promised to be much more aggressive, to shift to small, to mid-cap and to buy more non-US stocks. It is also interesting that his turnover ranged from 70% to 120%, compared with 6% to 30% for Robert Stansky.”
You could say Harry Lange is straight out of the ‘buy what’s working’ school of investing and once again, Fidelity is chasing past performance by appointing him.
Here at DailyWealth, we appreciate Fidelity for firing Stansky. Because, you see, we want to follow the guy that Fidelity fired. The strategy that cost him his job is the one that’s likely to work over the next few years.
The last time Fidelity fired a guy from Magellan on the basis of investment strategy, he made 640% in four years after he left. Now, nine years later, they’ve just fired his replacement… because of his investment strategy.
In the table above, small stocks have beaten big stocks for five years running (and if things keep up, 2005 will make it six years in a row).
Small stocks have been working. So Fidelity wants a small stock guy.
We take the opposite tack. After six straight years, it’s time for small stocks to under-perform.
The trend of small stock out performance hasn’t ended just yet (as the chart here of large cap growth versus small cap value shows.) So we’re not piling in to bet against small stocks yet.
When the time is right to be aggressive, there is one particularly aggressive way to play it... the ProFunds UltraShort Small Cap ProFund (UCPIX). You earn twice the INVERSE return of small stocks. If you time it right, you’ll make a bundle. But if small stocks keep going up… ouch!
We’ll let you know in these pages when that time comes. Thanks again, Fidelity, for letting us know that time is near…
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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