In 2012, a wild ride will lead to profits

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FILE - In this Dec. 20, 2011 file photo, traders Gerard Farco, left, and Richard Cohen, right, work on the floor of the New York Stock Exchange. Asian stock markets were mostly lower Thursday, Dec. 29, 2011, as traders shied away from riskier assets as the year drew to a close, but hopes for a successful bond issue in Italy boosted shares in Europe.(AP Photo/Richard Drew, File)

Updated: February 2, 2012 9:50AM

“It’s a stock picker’s market.” I heard that dreaded phrase the other day and cringed.

It’s a lie. It’s a scam. And the next time you hear it from a talking head on CNBC, throw your shoe at the TV. (OK—not a good idea in this age of delicate flat screens, so throw a stocking instead.)

When an investment professional declares a “stock picker’s market,” it’s an assertion that they have a handle on it, that they are most to be trusted with your money and that poor ignorant you can’t hope to match their performance.

Research shows they are wrong on every count. The investments of most fund managers don’t match the performance of the most comparable index and, when you think about it, the reason is clear. An index is a passive grouping of stocks, but a money manager with a large asset base and a need to spread the risk must make many decisions about stocks to include.

Above all, they need to put money to work, knowing that customers don’t seek them out to hoard cash. So they invest in, say, 100 companies, but how much conviction do they really have once they get to their 90th best investment idea?

The year 2011 was tough on most stock pickers, but it’s not their fault. Nobody could truly grasp the depth of the European financial trouble, the biggest drag on U.S. equities during the year. There’s no way to anticipate something like the Japanese earthquake, which disrupted the supply chain, or the extent of partisan battles in Washington.

The greater truth is that surprise is normal. The unexpected is part of the routine.

In trying to discern the unexpected, many economists and market analysts have conjured negative scenarios for 2012. Most of them still try to be positive — they’re usually selling you on trading, after all—but they are being explicit about danger. It is CYA—cover your analysis — at its best.

Moody’s (MCO), for example, detailed at length five market downsides for 2012, which are mostly extended versions of the worries already mentioned. The account made me want to run and hide until I read this sentence from Moody’s: “The probability of each coming to pass is greater than negligible.”

It’s like those disclaimers about drug side effects. You can’t say they didn’t warn you.

For 2012, avoid the stock pickers and attend first to the relative risk in what you own. Decide if you are comfortable with the breakdown of stocks, bonds and other assets, such as commodities or real estate. Invest only in companies that are among the best in their field, or in funds that shine brightest in down markets.

It’s important not to chase past returns. For 2011, the highest performing stock in the Dow Jones industrial average was McDonald’s (MCD), up about 31 percent. In 2010, it was Caterpillar (CAT), up 64 percent that year. But CAT was a net loser in 2011.

In 2009, the best Dow stock was American Express (AXP), up 118 percent, and it has made little headway since.

The best stocks were safe choices such as blue chips and utilities, fine ports to find when there’s a global storm. But now it’s time to venture out a bit more, looking for opportunity in financials, energy, tech and communications, health care and basic materials.

I believe the markets will have an excellent year, with gains of 15 percent in the major indexes within reach. The main reason is that investors want to put money to work, but there is no place else for them to go. Europe is a dead zone, China is a bubble, Treasuries are out on a low-interest limb waiting for inflation to saw it off.

A report by Northern Trust Corp. (NTRS) on its outlook for 2012 provides a proxy for the thinking of big-time money managers. The report goes through 10 categories of investments. Northern Trust assigns a bullish “overweight” ranking to just three of them. Two of them, gold and high-yield corporate debt, are fairly small parts of most portfolios. The third is U.S. stocks.

What are the surprises that await investors? I’ll spoil three for you (note the confidence there).

1. Housing will stay on the sidelines. Investors bidding up the prices of homebuilders will be disappointed, but nothing suggests a revival in construction.

2. The U.S. will be Europe’s great stabilizer and recession reliever.

3. Volatility, prominent in stocks for 2011, will increase in 2012 as the presidential election nears and partisanship digs in.

Fasten your seatbelts. It’s going to be a bumpy year, but a good one for most investors.

Happy 2012. Its probability is greater than negligible.

CLOSING QUOTE: In 2011, “even if you were trying to play both equities and bonds, the most extreme weeks of performance occurred thanks to [Federal Reserve Chairman Ben] Bernanke. The rest of the year was pretty much a snoozer relatively speaking. It also means that 2011 was perversely the year of buy and hold, since buy and hold works best when exposed to extreme up moves which result from price spikes explaining performance and not momentum.”—Michael Gayad, chief investment strategist, Pension Partners, writing at MarketWatch.com