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Can You Do Better Than A Chimp? End Of Year Portfolio Results

chimp at computer

In a StockTalk posted on Seekingalpha.com on August 27th, I mentioned an article published by two Italian researchers who found that investing at random worked out just as well or better than using a well-defined stock selection strategy and with less volatility, too. In light of this article, several of my readers thought that it would be interesting to see how some random portfolios as well as some strategy-defined portfolios fared against each other as well as to the overall market.

To this end, eight portfolios each consisting of ten stocks were presented: four of them were randomly selected (using a few different random stock generating schemes) and the other four were based on a single selection criterion, each of a completely different flavor. All stocks were purchased in equal dollar amounts using the end of day prices on August 30th. We checked in on these portfolios in late October and I said that I would do the same at the end of the year, so here are the final results. For comparison purposes, note that the S&P 500 returned 13.2% since 8/30.

In descending order of return:

#1. TruffelPig's Biotech Pix: +26.2%. SA reader and biotech investor, TruffelPig, managed to root out a lot of winning stocks as all three of his portfolios topped the leader board. His hand-picked biotech portfolio was the winner with seven out of his ten picks returning over 20%. He hit a home run with Mako Surgical (NASDAQ:MAKO) which got acquired at $30/share on December 17th at double the position price. (For reference, the biotech etf (NASDAQ:IBB) gained 17.2% in this time period.)

#2. TruffelPig's Growth Pix: +24.2%. Mr. TP's hand-picked portfolio of growth stocks included three big winners from his biotech portfolio including Mako Surgical, making it a shoo-in for second place. The second biggest winner in this portfolio was 3-d printer maker 3D systems (NYSE:DDD) which gained over 75%.

#3. TruffelPig's Random Pix: +18.5%. Not only does Mr. TP have the Midas touch when it comes to companies with innovative/disruptive technologies, but his random stock selection algorithm is pretty good, too. He got dealt a winning hand with Solar City (SCTY, +81%), Novavax (NVAX, +63%), and Yahoo (YHOO, +49%) which helped offset the 27% loss in Dex Media (NASDAQ:DXM).

#4. Wheel's Random Pix: +13.1%. SA reader Wheel's randomly generated portfolio produced only one minor loser (COLX, -5%). Its two biggest winners were Kingold Jewelry (KGJI, +37%) and Pacific Biosciences (PACB, +25%).

#5. Weed's Random Pix: +8.9%. SA reader Weed's randomly generated portfolio suffered a small loss with Ford (F, -5%) and a larger one with JC Penney (JCP, -27%). Those losses were more than offset by gains in Lockheed Martin (LMT, +21%) and Western Digital (WDC, +35%).

#6. My Yearly Lows > $2: +6.8%. This portfolio was generated from stocks hitting new yearly lows that were greater than $2 as of 8/30/13. I picked these in order of increasing price, selecting those nearest $2 first. I wanted to focus just on stocks and eliminated exchange-traded vehicles (etfs, etns) and closed-ended funds from consideration. I hit a ten-bagger with LTX Credence (LTXC, +97%) but took a big hit with Tower Group (TWGP, -76%). Sure, this portfolio didn't do nearly as well as the S&P, but it still managed to beat the "Best of the Best" which is...

#7. SA Pro-Long Ideas: +6.7%. As an SA contributor, this result is really embarrassing. One would think that these stocks--featured in articles written by analysts and other industry professionals and hand-selected by the SA editors to be "Pro-worthy"--would significantly outperform the overall market. But if any portfolio can lend credence to the thesis that a chimp can do better than an active money manager, the performance of this portfolio should do it.

#8. My Random Pix: 3.6%. A few months ago this portfolio was doing very well. Despite coming in last, it's still not doing too badly considering there were no big winners to offset the losses put in by Alamos Gold (AGI, -26%) and biotech stock Stemline Therapeutics (STML, -43%). Ah well, that is the luck of the draw...

Conclusion

Is there anything to be learned from this limited exercise? We saw that some of the best performing stocks were those with innovative/disruptive products in hot industry groups (biotechs, 3-d printing, electric cars, solar energy, etc.) or they were badly beaten down and ripe for a comeback (YHOO, LTXC). Those that professional stock pickers thought would do well were unable (as a group) to outperform the broader market.

So, maybe Jack Bogle got it (mostly) right when he said that investors should just buy the S&P 500 and sit back and fuhgettaboutit. I'd like to modify that recipe by adding the element of market timing: when the market starts to fall, either exit or hedge the position. When it turns back up again, re-enter the position. The trick-naturally!--is when to do this...but that's the subject of another article.

Happy New Year!

*To see the composition of all eight portfolios, please check my 10/24/13 blog.