How are the biggest losers doing?

Readers, I asked you to create a portfolio of stocks that you thought would be hopeless. You put together 23 big, bad and ugly businesses which we compiled two weeks ago. Of course, as mentioned before, one man’s junk can be another man’s treasure. That said, the stocks you selected have had (as a group) a dismal track record over the past 10 years. 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.

You also selected 10 great mutual funds that you felt would make great gains in the years to come. Then I created two portfolios with $500,000 each (one portfolio representing an even allocation in the great mutual funds and the other portfolio an even allocation in the 23 lousy stocks). We decided to track them forever. They would compete: the $500,000 portfolio of super mutual funds vs. the $500,000 portfolio of terrible stocks. You can see the respective portfolios here: … Read More

Do you believe in the efficient market theory?

If you’re a firm believer in the efficient market theory  you’ll reckon that the professionals can’t pick a financial dog from a financial star. You’ll believe luck and chance play the biggest role in success, and not stock selection.

There could be something to that. After all, the mutual funds you selected are all “low turnover”, “low expense” funds—except for the 5.75% front end sales load associated with 3 of the ten.

And studies have suggested that the only reliable determiner in predicting future mutual fund performance is a low fee structure—and low portfolio turnover. The funds you selected all fit the bill.

So if low fees are the only reliable, determining factor in predicting mutual fund performance, then the actual “stock picking skills” of the fund managers don’t count for a hill of beans. But is that true? We hope to find out.

The portfolio of losers has taken a huge early lead in the past two weeks

The $500,000 professionally run mutual fund portfolio would now be worth $498,832.86

The $500,000 “loser stock” portfolio would now be worth $514,595.29

The losers are beating the professionals by $15,762.43

But it’s hard for me to believe that the markets are entirely random. My guess is that they’re probably 95% efficient, and from time to time, you can take advantage of discrepancies between value and price.

That said, I’m going to stick to my early hypothesis: the portfolio of 23 “lousy” stocks created by my readers will still beat the collection of professionally managed funds my readers put together. I believe in the efficient market theory enough to surmise that fees will anchor the professionals, and that many of the stocks you chose had prices that reflected their worth—perhaps even understating their true worth (which is why I only believe the market is 95% efficient)

So what do you think? Will this collection of lousy stocks still be ahead of the pros after 5 years? Do you think you can beat the market over the long term? With all due respect, beating it over a short period of time proves nothing. Can you really stay ahead of the market with your own stock picks? If not, do you believe that you can beat professionally managed mutual funds? As a group, we know that they can’t keep pace with the market.