Find a Broker with a Good Track Record

Physician's Money Digest, March15 2004, Volume 11, Issue 5

In the sports world, maintaining successin the long run is the mark of atrue champion. It's also a good benchmarkfor rating brokerage houses. Havingthe best track record for a year is no smallaccomplishment, but what did that firmdo over the previous 2 or 3 years?


A recent article in highlightsthe importance of being the best overthe long run. If you're looking for thebiggest bang for your buck over the longhaul, you'll want to find out which werethe top-rated brokerage houses over thepast several years in terms of their stockpickingprowess.

Long-term Winners


Working with data compiled by ZacksInvestment Research, an independentoutfit that analyzes broker research, helps to delineate between thewinners for 2003, the best over a 3-yearperiod from 2001 to 2003, and the 5-yearwinners, from 1999 to 2003. Interestinglyenough, the top brokerage house in2003 didn't make the top 10 for the 2001to 2003 period.

According to Zacks, Lehman Brothersreturned 53.9%, including dividends, for2003. However, when considering the 3-year span from 2001 to 2003, LehmanBrothers finished 12th at -36.7%. Instead,Charles Schwab finished on top for the 3-year period, returning 18.3%. If youexpand the scope to focus on the 5-yearperiod from 1999 to 2003, Credit SuisseFirst Boston topped the chart, returning29%. These performances are in contrast tothe S&P 500 that finished the 3-year periodat -12% and the 5-year period at -2.7%.

Solid Analysis


According to the article, Zackshas spent the past 11 years monitoring theperformance of the stock recommendationsmade by America's major brokeragehouses on a monthly basis. Zacks examinesthe brokers' best ideas and lists them overvarious periods. It then puts a stock in ahypothetical portfolio when a broker addsit to the list or takes it out of the portfoliowhen the broker removes it.

In its methodology, Zacks ranked thebrokers on an equal-weighted basis. That'simportant to note because the S&P 500,which is weighted according to the capitalizationof its component (small, mid, andlarge cap) stocks, returned 28.3% in 2003.However, if each of the 500 stocks in theS&P 500 were weighted equally, the indexwould have risen even higher, to 39.6%.Therefore, the performance of the brokers'lists probably benefited similarly.

Playing the Hot Hand

An important lesson to be learned isthat the focus lists' performances duringany given period were determined bywhat sector was hot during that timeperiod. For example, exposure to defensivestocks, such as consumer staples andhealth care, pumped up returns in someperiods but dragged them down in others.That's a major reason why no brokeragefirm stands out for consistentlyleading performances in both the shortand long term.

Lehman Brothers, which finished firstin 2003, returning 53.9%, credits its TenUncommon Values List for providing themomentum. The list, which was one of thesmallest and most concentrated, includingtech picks like Cisco Systems and NextelCommunications, was buoyed when themarket recovered from lows last Marchand the stocks rose sharply.


So, if you're thinking of jumping on thebandwagon with last year's hottest broker,you might want to look more long termbefore making a decision. Pastreturns aren't necessarily predictive offuture performance.