How not to pick stocks

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Ethan Wu (0:38)

Pushkin.

Every year on the Unhedged newsletter, myself and Robert Armstrong, we pick stocks. And in 2022, we did a pretty good job. Last year, though, 2023, we really screwed it up. Today on the show, what went wrong last year, and how we're gonna get it so, so right in 2024 So right.

This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined by the man who picks the stocks, the good stocks, the ones that go up. Robert Armstrong.

Robert Armstrong (1:11)

I love the ones that go up.

Ethan Wu (1:13)

We avoid the ones that go down, pick the ones that go up.

Robert Armstrong (1:15)

Not last year.

Ethan Wu (1:16)

Not last year. That was the problem.

Robert Armstrong (1:17)

Not last year. Last year, I think the metaphor I used is we did not crash the car. We loaded the car with dynamite, drove it off a ski ramp, and landed it in an active volcano.

That was my metaphor for our stock picks.

Ethan Wu (1:33)

We were in the bottom, I believe, quintile of, so there were a few hundred FT stock pickers. We were in the bottom quintile of total respondents, and among FT journalists, we were dead last.

We ran the numbers on just how bad we did, and if you had taken the inverse bet to us, if you had bought the inverse unhedged ETF, you would have been up 40% in 2023, more than double the S&P 500's performance, which really in itself is an accomplishment.

Robert Armstrong (1:59)

I know, they should have. We should get paid for that.

Ethan Wu (2:02)

That's rare performance.

Robert Armstrong (2:03)

Yes. So let's go through the carnage.

Ethan Wu (2:07)

Yes.

Robert Armstrong (2:08)

One corpse at a time.

First terrible stock pick, which I will take full credit for was short Netflix. Here is my view. There is going to be a 2023 consumer recession.

Netflix is a very good company, but the streaming video space is crowded with competitors. There's gonna be a squeeze, it's gonna get hurt. Opposite happened. Consumers have oodles of money, added subscriptions, Netflix thrived, Armstrong blows up.

Ethan Wu (2:36)

The stock goes up around 60% in 2023

Robert Armstrong (2:40)

The horror. Okay, moving on.

Ethan Wu (2:43)

The second one we got totally wrong, and I'll take credit for this, was short Coinbase. We thought, well, it ires out of the crypto balloon, the Fed is shrinking its balance sheet, there's less liquidity in the system. If and when there's a recession, it's going to be the next leg down in crypto. And the opposite happened.

There was actually a bit of a pick up in liquidity almost, more interest in Bitcoin. The price doubled last year. And so Coinbase stock 3X.

Robert Armstrong (3:08)

And we should note that the winner, Khadim, our colleague who won the stock picking contest, I think he owned like all Bitcoin miners. That was the pick that actually won the contest.

Ethan Wu (3:18)

He bought the dip in crypto. Yeah.

Our third short, and this one was a little more subtle, ended up being a big lesson for a lot of people markets. Short Pulte Group. What is Pulte Group?

Robert Armstrong (3:27)

Pulte Group's a home builder. We've talked about this on the show before, but I'll just run through. This was a legit screw up, not just of the recession call.

We thought interest rates going up, housing affordability down, pricing pressure on home builders. What happened though is that because rates went up and everyone who has a mortgage at a low rate, like a legacy mortgage, just decided not to move.

Ethan Wu (3:59)

Yeah.

Robert Armstrong (3:59)

Because they're like, if I move, I'm going to go from paying a two and three quarters mortgage to a 7% mortgage. No way I'm staying in this house forever. That means the only houses that are available to buy are new houses. And Pulte Group, which makes new houses, has a great year.

Sound of car falling off cliff and crashing on the ground.

Ethan Wu (4:19)

And more broadly than Pulte, home builder stocks in general were one of the big trades of 2023