Can you beat Rafael Nadal AND Roger Federer?

You’re playing tennis with an invisible opponent.  It doesn’t matter whether you’re good at the game or not, because you’ve been given some odd instructions.

When the ball comes to you, hit it into the net. Or knock it out of bounds.

Ok—you’ll “mess up” the odd shot and it will land “in” on your opponent’s side, but don’t fret.

Your job is to let your opponent beat you badly.  Sound strange?  Sure it is—but play with me on this one.

After an hour of playing, the truth is revealed.  You’ve been playing different invisible players—ten of them, to be exact.  They’ve rotated through every seven minutes or so.

If these guys can fog a mirror, you’d imagine that they’ve all kicked your butt, right?

 How could they not?

But they haven’t beaten you by much.  Two of them, in fact, have produced scores very similar to yours.

These must be lousy players, you figure.  After all, you were trying to lose every point.

Let’s reveal the players.  The best ten players in the world. And they were trying their best. 

Rank
Name & Nationality
1
Nadal, Rafael (ESP)
2
Djokovic, Novak (SRB)
3
Federer, Roger (SUI)
4
Murray, Andy (GBR)
5
Soderling, Robin (SWE)
6
Davydenko, Nikolay (RUS)
7
Del Potro, Juan Martin (ARG)
8
Berdych, Tomas (CZE)
9
Roddick, Andy (USA)
10
Verdasco, Fernando (ESP)

Not to embarrass them by name, but two of them played almost as badly as you did.  And you were trying your best to lose as badly as possible.

Is this scenario at all realistic? In tennis, it isn’t.

But in finance—it is.

In April of last year, I asked my readers to suggest the worst stocks they could think of:  stocks that they figured were heading downwards in a hurry.

I put those lousy stock selections into a portfolio that I was going to track.

At the same time, I asked my readers to come up with the ten best mutual funds they knew.  My readers were pretty resourceful.  Many of them admitted that they just googled what the most respected mutual funds would be for 2010, and they picked some top performers from the list.

Well, 4 months have passed.  Since April, 2010, the stock markets have dropped.  This is the kind of climate that suits mutual fund professionals, relatively speaking.  They’re supposed to be able to predict market drops, and keep money in cash so their entire portfolios don’t plunge with the market.

Those super mutual fund managers must have seen this coming, right?  Unfortunately, they didn’t.

As of today, the selected Superfunds are down 6.87%, as an agregate.

Selected Super Funds        
           
10/08/10          
           
Company Name Cost Current Value Gain / Loss Gain / Loss % Today’s Gain / Loss
           
American Funds Mut;A $25.90 $40,237.65 ($4,254.01) -9.56% $171.81
Amer Cent:Hertge;A $18.47 $48,024.36 ($4,849.78) -9.17% $343.44
Dodge & Cox Stock $104.50 $45,999.79 ($4,137.63) -8.25% $172.72
FMI:Large Cap $15.19 $47,423.31 ($2,566.98) -5.13% $263.28
Fidelity Puritan $16.98 $48,787.15 ($1,462.21) -2.91% $88.76
Fidelity Sel Energy $45.57 $46,139.82 ($3,850.47) -7.70% $164.55
LM CM Value Trust;A $39.72 $45,225.10 ($4,742.66) -9.49% $264.18
American Funds NWld;A $52.57 $50,149.50 ($2,684.05) -5.08% $271.35
T Rowe Price Eq Inc $22.99 $47,078.86 ($3,117.44) -6.21% $283.87
Sound Shore $30.62 $46,396.75 ($3,789.12) -7.55% $295.00
    $196.04      
      $1,112.68    
    $465,658.34 ($34,341.66) -6.87% $2,318.95

 

They’ve done slightly worse than the U.S. stock market index which has lost 6.62%. 

So much for the super mutual fund manager’s ability to protect you during a downturn. 

U.S. Index          
           
10/08/10          
           
Company Name Cost Current Value Gain / Loss Gain / Loss % Today’s Gain / Loss
           
Vanguard T Stk Idx;Inv $30.14 $466,878.98 ($35,088.43) -6.99% $2,998.15
    $22.55      
      $1,989.96    
    $466,901.53 ($33,098.47) -6.62% $2,998.15

But that’s not the really interesting part.

If the Superfunds represent those top invisible tennis players, and if my readers’ selections of “lousy stocks” represent you—trying your best to miss every shot.  Then would any of these Superfunds have come close to my readers’ purposefully lousy performance?

 The answer is….yes.

To carry on with the thematic tennis analogy—-yes, two of the Superfunds would be going into “tiebreakers” with a bunch of stocks selected for their “junk” factor.

The “lousy stock” portfolio has fallen 9.83% since April. 

But remember, my readers picked stocks that they hoped would go down.

23 Loser Stocks        
           
10/08/10          
           
Company Name Cost Current Value Gain / Loss Gain / Loss % Today’s Gain / Loss
           
Alcoa Inc. $14.34 $17,710.90 ($4,069.64) -18.68% $106.33
American International Group Inc. $40.17 $22,527.24 $796.10 3.66% $384.11
AOL Inc. $28.52 $17,228.82 ($4,505.79) -20.73% $129.54
ATC TECHNOLOGY $18.21 $28,739.58 $6,998.79 32.19% $11.94
Bank of America Corp. $18.68 $16,191.24 ($5,550.63) -25.53% ($58.20)
Burger King Holdings Inc. $21.82 $17,197.49 ($4,607.47) -21.13% $189.86
Citigroup Inc. $4.62 $19,196.40 ($2,550.69) -11.73% $94.10
Ciena Corp. $18.07 $16,505.16 ($5,231.01) -24.07% $348.87
Ford Motor Co. $12.80 $22,171.95 $431.75 1.99% $16.99
GameStop Corp. Cl A $23.67 $19,241.28 ($2,488.59) -11.45% ($9.18)
Goodyear Tire & Rubber Co. $13.96 $17,293.80 ($4,450.29) -20.47% ($77.90)
Juniper Networks Inc. $31.26 $19,863.10 ($1,865.64) -8.59% $410.05
Kimco Realty Corp. $16.47 $20,321.23 ($1,629.98) -7.43% $253.18
KRISPY KREME DOUGHNUT $4.88 $17,905.08 ($3,840.43) -17.66% $0.00
Eli Lilly & Co. $36.94 $21,732.48 $13.53 0.06% $52.92
Microsoft Corp. $30.46 $18,259.93 ($3,460.91) -15.93% $42.78
NUTRISYSTEM INC $19.02 $21,979.89 $241.47 1.11% $331.47
News Corp. Cl A $15.48 $19,838.60 ($1,906.74) -8.77% $28.10
Pfizer Inc. $17.18 $20,998.72 ($971.67) -4.42% $230.19
BANCO SANTANDER SA ADR $14.58 $20,484.98 ($1,493.12) -6.79% $75.37
Textron Inc. $22.56 $20,246.37 ($1,521.10) -6.99% $154.41
USG Corp. $18.87 $14,549.76 ($7,186.95) -33.06% $714.24
Zions Bancorp $24.58 $19,306.56 ($2,423.31) -11.15% $176.80
    $1,365.50      
      $2,128.38    
    $450,856.07 ($49,143.93) -9.83% $3,605.97


Two of the SuperFunds have performed nearly as badly:  The Great American Funds Mutual A and Bill Miller’s Legg Mason Value Trust

Miller, in case you’re curious, is one of history’s greatest mutual fund managers.  But like Federer (or more likely, Tiger Woods) he has fallen from the perch recently. 

In tennis, if you’re trying to lose against the top players in the world, you’ll lose. Badly. 

That’s a silly statement, but I want to juxtapose it with the financial one:

In Finance, you can try to lose as badly as possible, but you might still threaten the results of some of the best professionals in the business.

Stay tuned.  I’m going to stand by the original statement I made when I posted this ‘Biggest Losers’ contest in April, 2010. Worst Stocks vs best Mutual Funds  

Over a few years, I think the lousy stocks will actually beat the collection of super mutual funds.  The fees on the funds will pose a drag.  Kevin, at Investitwisely, describes it well here: How Mutual Funds Rip You Off with Extra Fees and Charges  







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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13 Responses

  1. I laughed when I read this post, Andrew. It's funny that things work out that way, but you made your case pretty well! I'm looking forward to seeing how the "trash" portfolio of stocks does over the next few years versus the collection of the "best" actively managed funds.

    Thanks for the mention!

  2. @Kevin@InvestItWisely

    Thanks Kevin,

    It's a funny thing. There are actually a handful of stocks in there that I wouldn't consider "trash" at all, which is what makes the whole process so interesting. All of these stocks were chosen by readers who figured they were "lousy" based on recent performance, slumping economic charactersitics, etc. But some of them are great business that are currently riding a rough, current road. Pfizer is an example. The very interesting thing about the stock market is that one man's junk really could be considered another man's treasure. And without the fees dragging this portfolio down, I figure that it has a fighting, long term chance against those top mutual funds. I look forward to writing about this comparison in the years to come.

    Thanks Kevin,

    Andrew

  3. I think you've made your point in this short sample period that a portfolio of "superstar" funds will have trouble beating an index due to higher costs and taxes paid on capital gains. The "lousy company" portfolio might actually do pretty well if the US economy actually start turning in some meaningful growth. If you do this exercise again, include one of my favorite funds MDISX.

  4. DIY Investor says:

    It is interesting that you point out Bill Miller. He is obviously a super smart guy who ran into a wall. My take is that like a number of managers, he did pretty well (not as spectacularly as many people think) when he had a lot less money, but when he attracted big money he ran into problems. You just can't move around big blocks in a volatile market that easily.

    He was a guy who, at one time (maybe still), could get any CEO in America on the phone. It is hard for a mere mortal to understand the access people like him have to info.

    Great post. I always like real time data.

  5. @The Biz of Life

    Hey Biz,

    It's going to be interesting to see what happens over time. There's an interesting further component that we won't be able to measure: taxable liability. Studies suggest that most actively managed mutual funds (in taxable accounts) produce a drag of about 1% in taxes annually, based on annual turnover. Of course, there will be no annual turnover with these "lousy stocks". I'll just leave them "as is". But if they come out even after 5 years, we'll know that the "lousy stocks" would actually be miles ahead. A further 1% annually (compounding) is a lot of money—and slightly more than 65% of the money in American mutual funds is in taxable accounts, so it's realistic enough to discuss as a comparative albatross.

  6. @DIY Investor

    Thanks Robert,

    You're right about Miller–he's probably brilliant. His fund suffered from "Elephantitis"–getting too big to really manage well. I doubt he has that trouble today. So many of his bandwaggoners are gone. The guy is probably relieved.

    Most of the people in his fund joined the party late. They read about his outperformance and jumped into the fund–very shortly before it crashed.

    As a contrarian, if I believed in actively managed mutual funds, I'd be looking at his fund right now.

    And a question for Biz:

    Tell us about your fund, MDISX.

  7. Hi Andrew,

    MDISX is Mutual Global Discovery Fund, started by famed value investor Michael Price of the Mutual Series of funds. John Bogle cited the older Mutual Shares fund in his book "The Little Book of Common Sense Investing" as one of the three funds that had outperformed the index over the long term, but I think MDISX has more potential. MDISX is a value fund, and according to Morningstar (as fickled as they are) is low risk, high return. They invest in undervalued companies around the world. Their portfolio is typically 20-25% cash, 5-10% distressed debt, the rest undervalued stocks and arbitrage situations. They perform better in bear markets, and sideways markets than bull markets. As the most recent financial crisis was beginning, they went heavily into cash, saving the shareholders a lot of money. I've been in this fund since inception. The downsides are: 1) since it was bought by Franklin-Templeton they now impose a front-end load, 2) they've had some manager turnover, and 3) they are not always tax-efficient.

    As for Bill Miller, I agree he is a very smart man, but he's always been too much of a gunslinger for my tastes….. when he's hot, he's hot, and when he's cold, he's cold. The level of risk he takes is too much for me.

  8. Hey Biz,

    Best of luck with MDISX. There's always a possibility that they can beat the index long term, but to match the market, they'll have to beat the index by about 1% annually (in a taxable account). Do you own it in a taxable or non taxable account?

    There's no doubt that the market can be beaten. But trying to do it with actively managed funds is a bit like wanting to be the one to take Medussa's head. Most of those who try, get frozen out of the game.

    But there's a fun spirit in trying to beat the market as well. And it is possible.

    I hope MDISX kicks butt over the next twenty years!

    Cheers,

    Andrew

  9. Great post Andrew and thanks for revisiting this!!! With fall coming soon (I will miss summer), it should be interesting to watch the "losers" even more; mid-late October is usually a time for the market to shed some weight as you well know. Cheers, Mark

  10. Hey Mark,

    I'm curious to see what a bull market could do to these stocks. As mutual fund managers hoard a bit of cash, they usually get caught trying to pull up their pants as the market is surging. The indexes should pull even further ahead. I'm wondering if these stocks will too.

  11. Mike says:

    Andrew,

    I am glad to see this series coming up. I've always had an interest in living in a second location for anywhere from 2-5 months of the year. This is something I have only started to explore a little more seriously now. A lot of people speak highly of Thailand as being a great place to live. Being in Florida, I also know some people who have relocated to Costa Rica or Panama. These 2 places are desirable as they offer a beach lifestyle with little or no threat of hurricanes.

    This is a great topic and I look forward to reading the series.

    Mike

  12. @Mike

    Cheers Mike,

    I'd love to hear your feedback on the posts.

    And welcome back!

    Andrew

  13. Barry says:

    How the portfolio going now?

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