Crashing a 2014 Stock-Picking Contest

It’s that time of year again where I compare the return of my real-money portfolio against those of the entries in a stock-picking contest held at Financial Uproar. Because my portfolio is almost completely indexed, I tend to end up somewhere near the middle. The important question is whether I’m above or below the middle.

Back in 2012, my return was trounced, but I made a partial comeback in 2013. Now for 2014 ... drum-roll, please ... I beat the average by 4.6%. I would have placed fourth out of 11 participants. If we look at the three-year results among the stock-pickers who participated in 2012, 2013, and 2014, none beat my portfolio.

What’s the lesson here? It’s certainly not that I’m a great investor. Anyone capable of ignoring the market’s ups and downs can be an index investor. The real lesson is that it’s hard to beat the index over the long term by picking your own stocks. There appear to be some investors, like Warren Buffett, who can do it, but these investors are very rare.

Comments

  1. geneJanuary 12, 2015 at 10:10 AM

    I think your point is valid. Also consider that people picking stocks for a contest might pick a stock that is likely to either crash or excel. Also, people are more likely to pick something interesting. I'm thinking I'd pick some risky penny stock over something like BMO just to intrigue people and also have a chance of shooting out the lights.

    Still, indexing is a good strategy for real money, and the more I read your blog, the closer I get to indexing my own portfolio.

    Further, I'd guess picking risky stocks in a stock contest is foolish since such risky strategies could creep their way into one's own portfolio.

    ReplyDelete
    Replies
    1. Michael JamesJanuary 12, 2015 at 10:13 AM

      @Gene: Good points. It's certainly true that if you want to win a stock-picking contest, you should make some insanely risky picks. I think the biggest danger in a stock-picking contest is the effect it has on novice investors. They are left with the impression that this is the way to invest.

      Delete
  2. My Own AdvisorJanuary 13, 2015 at 7:21 PM

    I wouldn't equate the stock picks as to actual personal picks or holdings Michael, although you make some great points, in any given year, good luck beating the market and over many years, it's likely a war you'll never win.

    Mark

    ReplyDelete
    Replies
    1. Michael JamesJanuary 13, 2015 at 7:57 PM

      @Mark: I'm aware that this stock-picking contest is just a game to the entrants and that few if any of them actually invest solely in their picks. However, I'm more concerned with naive followers of stock-picking contests. I don't want them to think that this kind of stock-picking is a good idea. I want them to know that picking stocks like this is very likely to lose out to much more boring investing approaches.

      Delete
  3. My Own AdvisorJanuary 13, 2015 at 8:17 PM

    I've learned from you and others that boring is VERY good when it comes to investing. :)

    Hence the need for me to index more in 2015. My wife said it was a good idea. Happy wife, happy life.

    Mark

    ReplyDelete
    Replies
    1. Michael JamesJanuary 13, 2015 at 8:23 PM

      @Mark: My wife's more of a fan of cash in checking accounts. Maybe she'll breathe easier after we retire and we have 5 years of spending in GICs.

      Delete

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