In the good years, everyone thinks they can pick winning stocks. Some advisors even claim to have a “special system” to beat the market. Unfortunately, many people learn the hard way that systems to beat the market often fall well short of the goals.
A few years ago, I read about how some Playboy Bunnies beat a professional investment firm in a stock picking contest. The article made me laugh for a week!
I have a financial advisor friend who has a dog named Charlie and last year, Charlie thought he had a knack for picking stocks so my friend let him do the picking, just to see how well he did.
My financial advisor friend printed out 30 8-by-11 pieces of paper. Each piece had printed on it the name of one of the companies that make up the Dow Jones Industrial Average (The DJIA is comprised of 30 companies). On top of each piece of paper, he placed a dog treat. The idea was that the first 10 dog treats Charlie ate would be the stocks selected for his portfolio. Here’s a list of the stocks Charlie picked in 2012:
• JPMorgan Chase
• Home Depot
• Bank of America
• Hewlett Packard
• Johnson and Johnson
• Exxon Mobil
Now we had to measure how good of a job Charlie did picking stocks. So we decided that we should, at a minimum, compare his portfolio’s results to the Dow Jones Industrial Average as a whole. But Charlie demanded more of a challenge than that.
So we decided to also compare his results against the best mutual fund of 2011, the Sequoia Fund. Now we had a passive portfolio to compare him against (DJIA) and an active manager to compare him against (Sequoia). The portfolios were set up, and the race began.
Here we are a year later, and the results are in.
• The Dow Jones Industrial Average (all 30 companies): 7.3 percent
• The Sequoia Fund: 14 percent
• Charlie’s Portfolio: 19 percent
Charlie is the clear winner!
Well, you can imagine how Charlie has gotten a bit of a big head over this. In fact, he is now telling everyone that he should be served steak for dinner versus Alpo. I think it’s time we put him back in his place.
So this year,, we are going to give Charlie a bit of a tougher challenge. Again, he will be selecting his portfolio using his tried-and-true practice of eating dog treats. But this year, Charlie will have a little more competition. My dog, Duchess, and I will be throwing our hats into the ring, as well. This year, I am going to select my own portfolio of 10 stocks from the Dow Jones Industrial Average using a very special, sophisticated stock selection strategy. Charlie and Duchess will have to beat me.
But that’s not all. We are also going to compare everyone’s 2013 picks (Charlie’s, Duchess’, and mine) to none other than Warren Buffett’s Berkshire Hathaway portfolio (BRK-A). Let’s see how the dogs do in light of this stiff competition.
Let the race begin.
Oh, by the way, since I don’t know any Playboy Bunnies, I guess they won’t be in the running for this year’s top honors. I know I probably dodged a bullet on that one!