The Losers are Winning!

If you’ve been following my blog, you’ll know that I’ve asked readers to give me the names of the worst stocks they know.

I tossed this group of degenerates into a heap–creating a single portfolio out of them yesterday.

I also asked you to give me the names of ten great mutual funds–those with amazing track records and reputations.

Then I made the most preposterous claim: that I think the portfolio of “losers” you created would keep pace with a collection of 10, super duper, super smart, somewhat famous fund managers that you also brought forward, compiling 10 American mutual funds into one portfolio.

Am I completely crazy to think that a bunch of stocks picked purposefully for having terrible prospects would keep up with the collective genius of some of the best pros?!?!

I don’t think I’m crazy–but what crazy person does? I’m a believer in the efficient market theory, suggesting that about 99% of what happens in the stock market is completely random–that there’s no such thing as good stock picking ability.

Let’s test my theory, shall we?

Here are the results from the very first day.

The Loser Portfolio had jumped out of the gate:

Taking more than an $8000 lead on the first day, the $500,000 loser portfolio is off to a great start. Leading the charge after one day are Zion’s Bancorp, up 7.24%; United States Gypsum, up 5.15%; Citigroup, up 5.15% and Ford, up 4.33%.

The Mutual Fund Gods

As the gate opened up, three of these ten funds (again, this is a $500,000 portfolio) got snagged on their way out. With front end loads, the two selected American Funds and the American Century fund tripped, and have to dust themselves off after taking an upfront 5.75% commission sales hit. These three funds will have to make 6.1% this year, just to break even, never mind keeping up with the pack.

The top performing fund for the day was the T Rowe Price Equity Fund, with a one day return of about 1.4%.

In Summary

The loser portfolio is up 1.84% in a single day, beating even the best actively managed fund in our bunch.

But this is going to be a marathon, and not a sprint.

Still, I think the loser portfolio is going to edge out the all stars over the long run, making them look a bit silly.

Time will tell!

I’ll publish the complete portfolio lists soon.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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14 Responses

  1. Lovin' it! Looking forward to reading more posts on this Andrew.

    Further, I'd like to think this testcase and its results would somehow weave its way into your working title…

    Cheers!

  2. Financial Cents,

    Thanks! I'm glad you're getting a kick out of this. Let me know what kind of working title you'd suggest.

    Also, I'm curious to know. Where do you stand on the efficient market theory?

    Cheers,

    Andrew

  3. Peter Cuthbert says:

    The financial machine has done such a great job of brainwashing the last three generations. So much so that individuals who don't buy what they are selling appear crazy. The reality is that the big financial machine is nothing more than the "House" at the Casino – you can play, and while most lose you might just win big – but the house always wins!

    There isn't a day that goes by that I'm not thankful that I attended one of Andrew's gratis seminars which revealed the truth behind all the smoke and mirrors.

    I'm happy to have one of the Loser stocks in my portfolio!

  4. Andrew Hallam says:

    Thanks Financial Cents!

    I'm also open to any creative ideas you would have on the working title improvement.

    And on another note, what's your view on the efficient market theory? I'm hoping to spark some interesting discussions on this topic.

    Meanwhile, it would be hilarious if a grab-bag of stocks picked for their lousy prospects could, after all fees and expenses, beat a collective basket of very well respected mutual funds. So far, the mutual funds have nearly a $10,000 comparable deficit. I'll laugh hard if the "lousy stock" portfolio is ahead five years from now.

  5. Andrew Hallam says:

    @Peter Cuthbert

    Hey Peter,

    Thanks for the comment. The more I read, the more I'm convinced that your analogy of the casino is correct. I think the day might come when this finally gets taught in schools. And if that happens, active managers will have no choice but to lower their fees significantly. When/if that happens, we'll have a greater number of active managers actually able to beat the market after fees. But until then….

    I believe the most laughable fees in the world are Canada's. I have loads of really smart Canadian friends paying 2.5% expense ratio fees—while setting themselves up to be saddled with back end loads when they withdraw. Any new money they deposit has that "5-7 year rule" dictating how much their salesperson/advisor gets when they sell something.

    I'm hoping that, over time, broad education creates some kind of revolution in the professional management fee department. I say that with my friends in mind, because there are a few of them I haven't been able to convince.

    Thanks again Peter!

  6. david hevey says:

    Andrew. I think it is possible for someone to pick good stocks. I say this because I know the reverse is true. Matter of fact, someone could make a lot of money simply by shorting every stock that I own.

  7. Andrew Hallam says:

    Dave,

    That's the funniest thing I've read all day. If you're convinced, maybe you should try it. Know that I'm just kidding!

    Thanks for the comment!

    Andrew

  8. Hey Andrew – I like the working title of your book actually. I obviously haven't seen the content, but it would suggest it includes what you've learned, applied and also modified, from Buffett's financial strategies to achieve your own financial security and independence. Again, I could be off on this one 🙂

    As for EMT (efficient market theory), I only know the premise of this, not all the details. That is, there is somehow (..I don't know how…) perfect information and knowledge to be gained from the stock market – via technical analysis; fundamental analysis and from stock prices. The market is “informationally efficient”; the market adjusts quickly and correctly to new information all the time. I don't buy it…

    Like your lil' game going-on should demonstrate, markets are only moderately "efficient" because they should only allow investors to earn above-average returns with above-average risks; and that's in the short run. Instead, I'm a firm believer that in the long-run, markets are efficient because its value that reigns supreme and no investor or expert could reliably or possibly know all market anomalies and be able to exploit them. Managed funds are regularly outperformed by the broad index over time and any funds that do produce substantial returns in one period, say five years, are certainly not likely to do so in the next. I learned this lesson by really getting into the nuts and bolts of my mutual funds years ago. I've been "converted" to an index investor, and to date, I'm loving those iShares holdings like XIU and XBB for its long-run trending and juicy distributions.

    I'm certainly curious about your upcoming post on this…I'm convinced you could get The Rat, MDJ, Mike from Four Pillars and other professional bloggers and true financiers like yourself really going on this topic for months!

  9. Financial cents,

    I'd put you in the same revered category as the other blokes. You've obviously done your reading on the efficient market theory and it sounds like you've married your own mutual fund practical experience with the academic realities of actively managed funds versus indexes.

    It's not a light read, but I think you'd love (as did I) reading David Swenson's book, called Unconventional Success. He's the market-beating endowment fund manager from Yale University–a true legend in the investment world. His book is amazingly well-researched, and he suggests that people buying actively managed retail funds have virtually no chance of keeping pace with indexes. This is one heck of a thorough book that I think you'll like having as a cool reference.

    Thanks for the kind words about the post. I think this could give some fun quarterly "blog fodder" for years to come.

    Go big losers go!

    Thanks for the comment Financial Cents!

  10. Chris Emerson says:

    Hey Andrew,

    I think your comment to Pete is spot on in regards to the lack of education in the realm of financial understanding. Who would knowingly choose to give away ridiculous amounts of their lifetime investments to the person or company that is supposedly "working" to make them money? People who don't comprehend that the system is designed not to ensure their long term financial health but that of the advisor or financial institution. The New York Times had a recent blog about where to start that was an interesting read: .

    Go big losers, show the winners that their "winning" formula is a sham.

  11. Andrew Hallam says:

    Hey Chris,

    What a fantastic thread you led me to above, from the New York Times. I have been trying to put together a useful book on personal finance and investing with students in mind, because the average high school kid knows about as much as the average adult–so by thinking of kids, perhaps I can broaden my audience.

    In talks with my friend, who teaches business at the school I'm at, we're trying to determine exactly where the personal finance course should go. And philosophically, we differ a bit.

    His view sees the importance of teaching PE ratios, return on equity, relative strength, the habits of great, historical active investors etc. But my view is that people don't need to know any of that stuff. If you teach the basics at the 10th grade level (keep costs low, diversify, don't trade and don't borrow money to buy depreciating assets) then you can do better than the average CFA.

    If you're a CFA, and if you have beaten the market indexes over the past 15 years, I salute you as a rarity. But despite their credentials, most CFAs aren't going to be any better at investing in the stock market than a 5 year old with an index fund.

    So—I think we should teach kids how to think about market madness(to stay the course and not get caught up in the euphoria and madness of the market when it acts irrationally) keep spending in check, keep costs as low as possible and diversify. And I think it should be taught thoroughly so that the Wall Street Fleecing Machine (so aptly referred to by Ben, in the linked thread above) can't influence these kids. That will take a lot of time and training, because "hope springs eternal". By that, I mean that everyone wants to think that they can find "an expert" who can truly add value. But they can't. They can only find salespeople with big promises, selling products run by CFAs, in most cases, who end up, after fees, losing to the market badly as an aggregate.

    My feeling is that if we keep personal finance classes simple, we'll churn out financially responsible kids who can make money in the stock market–while keeping their greater financial "house" in order. Teach them like mini CFAs, and they'll think they can outsmart the market. And there……..they will fail.

    Thanks Chris!

    Andrew

  12. Peter Cuthbert says:

    Earlier we were using the casino analogy…take a look at what Goldman Sachs is now being compared to!

    By David Weidner, MarketWatch

    NEW YORK (MarketWatch) — More than anything else, the Securities and Exchange Commission's fraud case against Goldman Sachs Group Inc. has illustrated the fall of the firm from Wall Street's preeminent bank to riverboat casino.

    http://goo.gl/bqgJkf

    Wow!

  13. Laszlo says:

    For Some one like me who does not know much about investing its good to have honest advise, like to stay away from mutual funds. Great comments, thanks for sharing this Andrew.

  14. Cheers Laszlo,

    It's my pleasure!

    Andrew

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