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You’ve heard of the Magnificent Seven. The stocks that dominate the Australian stockmarket. Well this year they really went to work.

As I write the stockmarket is up 13.85% year to date. Pretty good you might think. But let me strip this number back a bit for you.

If you take BHP out of the equation the ASX 200 index isn’t up 13.85%, its up 7.6%. If you haven’t held BHP this year you have missed out on 40% of the market’s performance. Without BHP the market would have performed in line with the Dow Jones (not twice as well).  

Take out the main resource stocks including BHP (up 66%), RIO (up 87%), Fortescue (up 309%) plus Woodside and Newcrest and the market is only up 4.7%. The Australian stockmarket would be underperforming the US market without resources. Pretty damning considering the sub-prime and credit market trouble they have had.

More incredible, take out the top twenty point contributing stocks from the ASX 200 and amazingly enough the market would have fallen 0.4% this year. In other words just 20 stocks in the ASX 200 have accounted for the whole of the market’s rise this year.

The Australian market is a rock in a sock. There are all these big stocks that create all the action in the index. But beyond that the performance of the tail, the performance of the vast majority of the stocks by number, is hardly noticed and for this year anyway, hasn’t really been that good.

So when your spouse busts down the study door next month clutching the Financial Review telling you what a good year the market has had and prodding you for what you did wrong you can show them this article. It’s your excuse for underperformance. Just point out to them that it’s unfair to measure you against the index because if you missed out on just one of the Magnificent Seven (you’re only human) your benchmark is significantly less than the newspaper’s lazy declaration. Even better, you can tell them that the fact you have made a return at all is almost miraculous considering you didn’t hold any of the Magnificent Twenty. And many people, especially traders, simply don’t.

Then there’s this calculation. The best twenty performing stocks in the ASX 200 have averaged a rise of 146% year to date. The bottom twenty performing stocks in the ASX 200 have fallen an average of 36%. In other words the difference between picking the right twenty stocks and the wrong twenty stocks in the ASX 200 so far this year has been 226%.

The opportunity to make and lose money in the Australian stockmarket is fantastic. The top ten performing stocks averaged a massive 190% return. There were 15 stocks you could have picked in the ASX 200 that went up over 100%, five time more than the ten year average return of 9.3%. This year you have had 15 opportunities to make ten times that much.

Averages suggest stability. Averages suggest a lack of risk. But the truth is the Australian market has no depth and the averages only apply to people who hold the whole market. The rest of us, we happy few, we band of brothers, we optimists who invest directly into the equity market ourselves cannot, I’m afraid, achieve or hide in the average. For someone with a 10 or 20 stock portfolio there is no average. For us there is a huge spread of volatility and risk. It is wild out there. If you think your benchmark for a 20 stock portfolio is the average, think again. You are holding an independently minded clutch of heroes and shockers.

On that basis you have to realise that in Australia more so than the mature markets of the UK and the US, from which most portfolio theory emanates, you have to pick stocks. You will live or die on those few selections and you cannot expect average. The opportunity is big. The chasms are deep.

Invest direct and every trade counts. Every pick matters. Leighton Holdings is up 202% this year. The National Bank is down 3%. Which one did you have and why?

Marcus Padley is a stockbroker and the author of the daily stockmarket newsletter Marcus Today. Subscribers have access to the full list of stocks he refers to in this article. For a free trial of the Marcus Today newsletter please go to www.marcustoday.com.au

Reprinted with permission from the office of marcus Padley