Who’s Great at Picking Terrible Stocks?

Nobody tries picking a losing stock on purpose, but despite your best (and sometimes greediest) intentions, we find ourselves occasionally face down on the pavement, courtesy of the stock market, aka, “The Great Humiliator”

But when I asked readers to purposefully pick stocks that they figured would stink up a room, some of you found securities’ spawning salmon grounds.

Linda,  who chose Krispe Kreme, is our current champion.  In just one week, her recommendation of Krispe Kreme donuts has fallen 16.84%.

When pushed to find another stock she thought would flop, Linda chose Kimco Realty, which has fallen 8.22% in just seven days.  It appears, Linda, that you’d make a champion “shorter”.

Linda was one member of our blog reading team that threw together 23 of the worst stocks they could think of.

How bad was this collection of stocks?

It was such an ugly portfolio, that if you had invested $3 million in this portfolio of stocks ten years ago, it would be worth roughly $495,000 today, with all dividends included.  I can thank smartmoney.com for the back-testing they allowed, with the click of a button.

The second task

I also asked readers to compile a list of the best 10 U.S. actively managed mutual funds they could.  Many of you went online to find the most respected all stars you could compile into a single portfolio of 10, supercharged actively managed mutual funds.

And how good were these funds?

If you had bought these funds ten years ago, with $3 million, the portfolio would be worth just over $4 million today, including all dividends.  (I know an investment club of schoolteachers who beat them silly, but that’s another issue)

So what’s the point of this exercise?

I want to see if your collection of 23 lousy stocks can keep pace with the top actively managed funds.  Obviously, in the past, they wouldn’t have.  But you don’t drive a car while looking through the rear-view mirror either.  Ten years ago, nobody could have predicted that a $3 million portfolio of these beauties would drop to $450,000.

But going forward, what do you think?  Will these stocks keep pace with the best professionals over the next decade….or more?  When the mutual fund managers—representing these all star funds–get up in the morning, they’ll be researching, looking for what stocks to buy, shuffling their portfolios, and then collecting six (or even seven) figure salaries for their super money making ability.

But will they be able to beat a collection of losing stocks, selected for their hopelessness?

My guess, long term?  Nope.  I don’t think they will.

And in a taxable account, they’ll have to beat the loser portfolio by roughly 1% per year, because they won’t be as taxably efficient as the loser portfolio will be.  Fund managers will be looking for “the edge” with these mutual funds.  And to do that, they’ll be buying and selling.

With the loser portfolio, we’ll sit tight on it forever….no trading anything.  If a stock drops off the chart, thanks to an ugly bankruptcy, then we won’t replace it.

So far, the loser portfolio has taken the lead.  After just one week, it is roughly $7000 ahead of the professionals.

But will it keep pace or beat the pros?  What do you think?  I’d love to hear your comments.

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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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