Some stocks perform better than other stocks during recessions. We have been telling our readers not to invest in the S&P 500 ETFs and instead invest in the top 5, top 10, or top 20 hedge fund stocks because these large-cap stocks historically outperformed index funds. Warren Buffett doesn’t like hedge funds because of their high fees and recommends index funds. However, investors don’t have to pay hedge funds anything to invest in their top 10 stock picks. Let’s take a look at how our approach fared recently.
In 2019, the top 10 hedge fund stocks returned 41.4% and beat the S&P 500 Index funds by 10.1 percentage points. You could have been 10% richer if you had followed our recommendation in 2019. Things didn’t change much in 2020. The top 10 hedge fund stocks returned 1% in 2020 (through May 1st) and beat the S&P 500 Index funds by an additional 12.9 percentage points. If you had been listening to our advice, you wouldn’t have noticed the effects of the coronavirus crash in your portfolio at all. Also, you would have been 12.9% richer.
The Walt Disney Company (NYSE:DIS) was among the top 10 stocks among hedge funds in 2019 and ranked 12th at the end of December. Legendary value investor Bill Miller’s 2020 Q1 investor letter mentioned The Walt Disney Company (NYSE:DIS), The Procter & Gamble Company (NYSE:PG) and The Clorox Company (NYSE:CLX) among the 7 “quality” recession stocks that investors should avoid. Disney and Procter & Gamble shares are trading at a discount compared to their end of 2019 prices, whereas The Clorox Company shares are among the best performing stocks in 2020. In the following video you can watch why Bill Miller thinks it doesn’t make sense today to invest in Disney, Procter & Gamble, Clorox and 4 other “quality” recession stocks that performed well so far this year.
Bill Miller’s thesis makes perfect sense to us. Bill Miller is no ordinary investor. His hedge fund returned 120% in 2019. Bill Miller came to fame for beating the S&P 500 Index for 15 straight years when he was at Legg Mason. Even if you feel like investing in quality stocks like DIS, PG, and CLX, Bill Miller is probably right that these stocks will significantly underperform the market over the next 12-24 months.