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ONE OF THE MARKET’S worst-performing stocks over the past year was, not long ago, one of its best. Novo Nordisk is the Danish company that pioneered the hugely popular weight-loss drug Wegovy, also known as Ozempic. After it hit the market in 2021, the company’s stock rallied, tripling over the following three years. Since then, however, things have been far more challenging. Over the past 12 months, the stock has dropped 60%.
This highlights a key challenge for investors: On the one hand, picking stocks can sometimes be as easy as it looks. That was the case initially with Novo Nordisk. When Ozempic hit the market, it was clear the company had a winning formula. Patients were routinely losing as much as 20% of their body weight. Sure enough, positive financial results followed. An investor who chose to bet on this trend would have been right.
But if stock-picking can be this straightforward, then why does it often turn out to be so hard? Decades of data tell us that it’s enormously difficult, even for professional fund managers, to beat the market. Why is that?
Recent research sheds light on this question. In a study of more than 20,000 mutual funds over a 35-year period, researchers found that fund managers actually do a reasonably good job at picking stocks. But that turns out to be only half the battle. When it comes to timing decisions, fund managers struggle. In nearly every geography and every time period, timing decisions subtracted value. Stock-pickers, in other words, are good at picking stocks but not very good at deciding when to buy and sell them. A closer look at Novo’s recent history can help us understand why this is often so challenging.
For Novo Nordisk—despite its early success with Wegovy—everything seemed to go wrong at the same time.
First came competition from entities known as compounding pharmacies, which were able to capitalize on a quirk in the law. Under FDA rules, if an important medication is determined to be in short supply, these independent pharmacies are permitted to manufacture knockoffs to help ease the shortage. These custom-made versions are based on the same active ingredients as the branded drug but are usually sold at much lower prices. This was the situation Novo Nordisk faced—and is still facing. Because of Ozempic’s quick success, Novo Nordisk had a hard time keeping up with demand. As a result, in 2022, the FDA allowed compounding pharmacies to begin producing knockoffs.
In the years since, Novo worked to expand its manufacturing capacity and, earlier this year, the government declared that the shortage was over. That meant that compounding pharmacies should have stopped producing their lookalike weight-loss drugs. They haven’t followed the rules, though, and Novo has had a hard time shutting them down. According to a recent press release, Novo Nordisk has filed more than 130 lawsuits, but it continues to be an uphill battle. In one recent case, a judge dismissed Novo’s claim against a compounder, arguing that no patients had been harmed by the knockoff it produced.
Compounders were just the first of Novo Nordisk’s problems. Then came competition from a brand-name drug company, Eli Lilly. It released its own, very similar, weight-loss drug in late 2023, putting additional pressure on Ozempic’s market share. Worse yet, Lilly has been working on a pill version of its drug. This would be a significant advancement over existing treatments, all of which require injections, something that’s off-putting to many people.
The combined effect: Since hitting a peak last summer, Novo shares have lost substantial value, and the stock’s outlook is far from clear. If you’d been an investor in Novo Nordisk over the past five years, you might have made a terrific profit. Or, depending on the timing, you might instead have realized a significant loss.
Stories like this are hardly unique. Consider Microsoft. In the roughly 40 years since it went public, its stock has dramatically outperformed. In round numbers, it’s gained about one million percent. But it hasn’t been profitable every year. In fact, if you’d held the stock over the 14-year period when Bill Gates’s successor, Steve Ballmer, ran the company, you would have realized an 8% loss, even including dividends.
Meta, the company formerly known as Facebook, went through something similar not long ago. When CEO Mark Zuckerberg announced that the company was shifting its focus to the “metaverse,” its stock took a dive, losing more than 60% of its value in 2022. When the company later backed away from the metaverse and instead started focusing on AI, its stock turned around and is up nearly eight-fold over the past three years. Just as with Microsoft, you might have done very well or very poorly with this stock depending on the timing.
The most recent example: Tesla. For a variety of reasons—possibly including Elon Musk’s personal unpopularity—car sales have been sliding. The result: Earlier this year, the stock was down nearly 50%. It’s still down, though less so. What’s next for Tesla shares? It’s an open question.
That brings us back to Novo Nordisk. No doubt, it’s a great company. All of the stock-pickers who recognized the potential of its weight-loss products could see that. But the outlook is entirely unclear. On the one hand, it is working on its own pill-based version of Ozempic, to better compete with Lilly and leave the copycats behind. But at the same time, science advances every day. One recent headline read: “Scientists May Have Identified a Natural Alternative to Ozempic.” Is there validity to that claim? It’s too early to tell.
The bottom line: Stock-picking is tricky because it can sometimes look easy, and that obscures the hard part, which turns out to be the timing. That’s why Warren Buffett has often joked that his favorite holding period for a stock is “forever.” But that’s easier said than done.
The alternative? As you might guess, I see this as another reason investors are generally well served by index funds, which hold stocks through thick and thin, unaffected by the headlines of the day.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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I recall a corporate strategy course in the 1990s where one of the assignments was to compare the competitive strategy of American giant General Electric with that of Swedish conglomerate ABB, and to predict which one would meet with more success going forward.
At the time, GE was firing on all cylinders and was among the top firms in the United States, so very few MBA students favored ABB. But GE fell on hard times within only a few years, and it almost failed. It had to shed units and it went through a handful of CEOs. Meanwhile, while ABB has had its share of fluctuations, it is still chugging along, with a share price close to its 20-year peak, if not longer (20 years was as far back as I could check).
The moral of the story: Nothing is forever, and the marketplace will constantly surprise investors.
And just like that, per CNBC this morning, Novo Nordisk shares pop 5% after Wegovy receives U.S. approval for treatment of liver disease, MASH.
The bottom line: Stock-picking is tricky because it can sometimes look easy, and that obscures the hard part, which turns out to be the timing. That’s why Warren Buffett has often joked that his favorite holding period for a stock is “forever.” But that’s easier said than done.
The above is correct and should be implemented by most, but Buffett also said “diversification is a protection against ignorance”
First point, a friend of mine invested $3K in 10 stocks in the early 90s and never sold any. All his other investments were accumulated with the SP500. 9 stocks did worse than SPY, MSFT made him over 1.5 million and more than the rest.
Second point, performance is important, but for many investors, especially retirees, risk-adjusted performance is more important. I developed a model that does it. Meltdowns and Black Swans don’t scare me anymore. I actually love them
Below is our performance since retirement in 2018. It is a direct copy from Schwab, where we have 99+% of all our money of all banks, brokerages, MM, cash.
It’s invested in about 95% bond fund, and I use timing. It took me “only” 15 years to tweak it and I enjoyed every moment of this passion. The model is easy to execute with minimal time consumption. The volatility and risk are extremely low.
See https://ibb.co/zT6QGzSs
“Since 1980, 36% of S&P 500 constituents have turned over during the average 10-year period,” Goldman Sachs’ David Kostin has observed. About a third of the S&P changes every 10 years. In recent years this spiked at 45% in 2004 and has averaged about 31% since 2015.
Companies move off the index for a variety of reasons, some good and some bad.
This data implies that if one simply picks 30 stocks from the index, about 2/3 may do well. These are not the best odds. By owning the index fresh blood is added each year.
My perspective has always been to pick a company based upon products and management. I avoid companies with narrow or singular product pipelines (e,g. Novo), or those that rely upon government largesse (e.g. Solar companies). I also avoid things called “sin” stocks, although many of these have done well. I have never owned Apple or Meta.
A problem which one faces when stock picking is to avoid the hype. It does take some effort on my part. I’m a “buy and hold” investor, but not forever. Since 1995 my CAGR has been about double that of the S&P, including dividends. I do not consider myself to be a sophisticated investor; no options, short duration trades, bitcoin, etc. Nor do I consider myself to be an exception to the rule. However, I am aware that most won’t put in the time or the effort. For me, stock picking has been like running a business, which I also did well.
A portion of my holdings is via ETFs and these provide ballast; think of it as establishing a floor. The 15 companies I currently own do the heavy lifting.
Give me an index fund, every single day of the week. Market returns, zero thought and effort.
Owning individual stocks can be a way to build wealth. You can also own your index funds at the same time if this is what you prefer.
Over the years, there are so many good companies in front of our eyes. Do your homework, pick some and hold for the long term. It has been keep my retirement life interesting.
I was interested to see that Warren Buffett recently bought about $1.7 billion of United Health Care, which had fallen 50% due to regulatory issues – they were found out to be crooks. I had been thinking about the stock myself – big companies that are making lots of money seldom die no matter how much trouble they get themselves into. I wouldn’t hold it for long, it would be a trade. The dead cat bounce can make you rich if you play your cards right.
I used to do utility-merger arbitrage, but I haven’t had any good opportunities lately.
I solved this problem 30 years ago when I learned that stock splits, on average, out performed the market by up to 12% over the two to three years after the split announcement. I like index funds and have much of my retirement in the standard Vanguard funds, but my 2 for 1 portfolio has out performed the rest of my portfolio to the tune of 11% annualized, 13.7% over the last 5 years. Beating the market is not impossible.
“For every thing, there is a season.” There are many charts out there that can readily show how the top performers (say, 25 companies) in any decade can and do shift dramatically in their place holding. Some seemingly come out of nowhere and some drop out just as quickly. In the days of yore, there were decades where the Exxons of the world stayed pretty high on the list. I bought many shares of Apple back in 2010 for today’s split equivalent price of about $9/share (and scared to death). Fifteen years later, I believe I’m at a 2,400% gain. Is that good? For years, it’s been a snooze fest. I’ve peeled off shares over the years when at the time, it’s seemed like a good time to do so. No regrets. Same basic story and timeline for J.P. Morgan, just not as “sizzling”. Out of 20 or so stocks I currently hold, 18 of them have 5 or less years time in my hands. The good news is that I’ve somehow managed to squeak out more substantial winners than less substantial “uh-oh’s” over time (and there were plenty).
There are just so many factors involved, even when you buy into seemingly solid firms. I could never have imagined, for example, a president basically extorting money from U.S. companies. I guess now you have to pay to play.
For me, I believe we are well past the Ron Popeil, “set it and forget it” mindset. The cost however of paying close attention, is time. And there are still no guarantees.
Things always change. Intel, IBM, GE, and GM were major success stories for a while….. NVIDIA’s success today is attracting a lot of competition that will affect their margins in the long term.
The article is either a good argument for index funds or for getting in and getting out fast!
Bill
A pill for a quick fix for a problem rooted in self-control? Brave New World stuff. Apparently, many who try this gain weight again after they stop. A good case study for unsystematic risk apart from competition and physiological risks.
Like market index funds, discipline and patience wins the day.
Thanks for another great article In the last 10 years I have changed from 50 stocks to 16, and 80% of my holdings are in 3 major index ETF’s. I still try to time the market with a couple of stocks, and it rarely happens, I do it well. It seems like when I sell, I should have bought, and when I buy I should have sold! Correct, no one can time the market, everybody has losers and hopefully more winners than losers. Thankfully the S&P ETF has served me very well.
I never would have sold my Cisco Systems stock on that beautiful day in March 2000 if I hadn’t needed the money for a down payment on the California house requested by the woman I was foolishly about to marry. Adjusted for splits, the tech powerhouse had soared from $5 when I bought it to $81, and I was absolutely certain it was heading even higher, but I wanted the house. So I very reluctantly sold it.
Two years later CSCO was at 13. For the next 15 years it drifted along in the 20’s like a ghost ship. It didn’t see 50 again until the pandemic, and only this week did it touch 70.
Cisco has never ceased to be a solid, successful company, but as an investment it has been a disaster since the day I sold within a few cents of the all-time high. You just never know.
There is some nuance missing here. I come from 40 years working in healthcare.
1) the emergence of compounded versions was a given
2) the availability of similarly effective meds developed by competitors was a given
3) the high cost of these meds for such a widespread and heretofore unsolvable problem – obesity – suggested that something would have to give, and quickly. Big Pharma, rightly or wrongly, are considered a close second to large health insurers as bad actors within our very high cost healthcare system quagmire. The public and government would not/will not shore up protections for Novo in this situation.
The arena of GLP-1s and weight loss treatment generally will continue to evolve in ways that cannot be foreseen.
I read this, “In a study of more than 20,000 mutual funds…” and thought about the people just starting out in investing and cringed at the amount of options they have to wade through to come up with a plan (or turn it over to a broker). It’s complexity on top of excess choices.
Great article. I agree, index funds are great, but you never realize the entire dividends, and they can fluctuate. We are fortunate to be working with someone who has a very conservative long-term approach to dividend stocks, and thanks to his research, will recommend when we need to sell. We’ve been very fortunate.
Another trend against the retail investor is that companies are staying private longer resulting in early private investors getting most of the early gains of a new companies. By the time they go public, retail investors are left with crumbs while the private investors are long gone.
In 1989 my daughter scored a lucrative role in a Broadway play. I was very new to the world of investing, so I secured the help of a broker from a very well known company. He in turn selected a portfolio of some very well known companies, all good dividend payers, as well as some individual bonds. I was never impressed with the stock returns and moved some of the money into a few managed mutual funds that beat the pants off of the stocks, (I didn’t even know what an index fund was at the time). One stock in particular, Bristol Myers Squibb, took an incredible beating before I finally directed him to dump it.
I agree. I’ve been a marketable securities investor for over 50 years. I learned long ago that I simply can’t outperform the market. I currently spread my investments equally in SPY, VUG, SCHD, and SGOV. I own one stock BRK.B which I initially invested in when B shares were offered. This slovenly approach has served me well.
I’m more VT and SCHD for the stock, but no need to quibble.
My question is, why SGOV? Why not buy Treasuries or CDs directly, and a high quality gov’t money market fund to use for immediate expenses?
I’ve done laddered CD’s and Treasuries and just got tired of the process.
I remember buying a small about of MSFT (Microsoft) during the Ballmer years. Barron’s would have articles about how undervalued it was, revenues increasing, etc. etc. and the stock would go nowhere. You know who didn’t sell his MSFT stock? Ballmer. He’s sold very, very little of it after he left and profited mightily from Satya Nadella’s success as CEO. He still believed in the company. How ironic.
Great article Adam. I concluded long ago that I have no ability to pick stocks, but it’s probably fair to say I have no ability to time the market.