What You Will Learn:
- How being scientific can help you improve your investing skills
- The importance of sample size when testing performance
- Performance data of 2 crowd sourced portfolios
Got a nice surprise the other day.
While rummaging through my documents and investing folders, I came across a simple test I ran in 2012 and 2013.
It was a basic experiment where I asked old school value readers to submit and vote for 10 stocks to be tracked over the course of a year.
Do you remember the types of reports you had to write in science class for experiments?
You had to start with an idea, then write the hypothesis, how you were going to do it, get the data and results and come to a conclusion.
The idea was to create a crowd sourced portfolio and see how it would perform against the market.
If two heads are better than one, then a whole group of people voting to decide which stocks make it on the list should create a powerful portfolio.
I read about an experiment on this by a professor. He took a large jar filled with little jelly beans and asked each person to guess how many were in the jar.
The end result was that each student was incorrect, however, the average of all the guesses was the closest to the actual number.
I remembered this when I took my wife out to dinner on valentines day this year. In the reception area was a large jar filled with heart shaped candies and people could win a gift certificate if their guess was the closest.
So I wrote my guess folded it and put it into the other jar that contained all the guesses.
Out of curiosity, I peeked at a few (several actually. Even took a couple out to see…) and some were really wild, but many numbers were clustered together.
Each stock submission had to be a best idea and a simple twitter type thesis.
No lengthy write ups were collected because I figured the voting system would eliminate scammy, over hyped or low quality stocks.
Like the jelly bean experiment, I figured the votes would “normalize” the bad stock picks.
Here’s how it ended in 2012.
Note the returns here.
A total return of 18.76% vs the S&P 16%.
And here are the results for the same experiment in 2013.
A total return of 22.05% vs the S&P 32.49%.
Considerably under performed the benchmark in 2013.
But the whole point of showing these results in the first place is to see how the portfolio is actually doing now.
Remember the hypothesis at the beginning of this article?
The voted stocks should be weed out the weak and low quality ones.
Since FRX and DELL were bought out, that means the portfolio has 22% in cash.
In the portfolio there were no turnovers since the original purchases.
3 years and 1 quarter later, the 2012 portfolio is still doing a fantastic job of out pacing the market even with a big cash position.
But before I continue with the computation, just click on the image below to download my investment scorecard to help you invest like Warren Buffett. You’ll also get exclusive content and resources that we never share anywhere else.
The annualized return over the 3.25 years is 21.61%.
No complaints here.
Let’s see how the 2013 portfolio is doing.
This is a different story.
The portfolio is still fully invested but is losing to the market by a wide margin.
13.92% annualized return isn’t bad when you just mention the number, but when compared to how the market has done, the performance is definitely poor.
A sample size of two portfolios is too small to jump to any conclusions. For this experiment to really prove itself, I’ll need to run it over many more years and keep tracking the results.
I’ll also need to launch a new portfolio each year to see whether a one year holding period would be enough.
In hindsight, what I didn’t consider was that the jelly bean experiment eliminated the outliers. But when picking stocks, you want the positive outliers.
Does the 2013 portfolio show that it’s a portfolio filled with mediocre stocks instead of outstanding ones?
Maybe the sample size has to be greater. 20 stocks instead of 10.
2012 to today has been nothing but a wild bull market so it’s difficult to say just how well these portfolios would be doing if there was a down year mixed in there.
However, it still intrigues me to test some more and see whether this is something that can gain traction.
Some additional takeaways.
- Don’t sell stocks too quickly just because it’s hit fair value. Keep the good ones.
- Low turnover and low fees are awesome.
- Beating the market is tough.
Since 2015 is underway, do you want to participate in one for 2016?
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