The Biggest Loser - Financial Update

Here’s a challenge for you and your closest friends.

I’d compile 10 cars requiring tune-ups.  Then you and your friends would work on them to try making them run as badly as possible.  Yeah, you read that correctly.  I’d want you to see how badly you could mess the engines up.

In the second corner, a series of hot shot mechanics would have 10 cars.  They would work as hard as they could to ensure that their 10 cars ended up running as dreamily as possible.

Which cars would run better—the mechanics’ cars or yours?

No, I’m not under the influence of a magical narcotic.  I’m just setting you up for something bizarre.

In April of this year, I started a challenge similar to this on my blog.  But it related to finance.

I asked readers to create a portfolio of the worst stocks they could imagine:  stocks that were destined to find themselves swirling around the porcelain edges of refuse before ceremoniously joining the sewer (or the recycled water drinking treatment plant we have here in Singapore)

Of course, one person’s pariah may be another person’s coveted crown jewel and you may not agree with all the selections they made, but they aren’t professionals.  And they were doing their best to choose the ugliest, smelliest, foulest stocks they could find.

Then I was going to track the portfolio of the 23 stocks they compiled.

What was I going to compare it to?  The metaphorical mechanics, of course.

I also asked readers to find the greatest actively managed funds they could find.  I wanted ten of them.  Then I suggested that I’d track their performances over time.

I had a theory.  After 10 years (yeah, that’s a long time to read a blog, but I’m in this for the long haul) I guessed that the lousy stocks—without being traded—would keep pace with the aggregate returns of the top, selected mutual funds.  In the money management world, that’s entirely possible.  In the real world, however, there’s no way that you and your friends could expect to consciously destroy a car’s engine and expect it to run better than a trained mechanic would, if they were actually trying to tune up the car.

Bill Miller Beats the S&P 500 For 15 Straight Years—But he’s wrecking his engine

I’m actually a huge fan of Bill Miller.  But his fund was chosen as one of the “top 10 to track”.  And since April, his fund’s performance has lagged the aggregate returns of the biggest loser stocks.  Miller’s Legg Mason Value Trust has dropped 3.5% since our contest began.  The biggest loser stocks, on the other hand, have only dropped 2.72%

Mighty “American Fund Mutual A” gets beaten by the losers as well

When compiling these portfolios, I included commission fees for the stock purchases and the fund purchases.  Going with the mechanic’s analogy once again, this is what the American Fund’s mechanic did to his engine.  First, he took a crowbar and then smashed at it five times, before starting to work on it.  That represents the sales fee that this company charges to get into this fund.    As such, this fund is also losing to the biggest loser portfolio.  It’s down 3.67% since the contest began.

Overall, the mutual funds are winning, however

With an average gain of 2.85%, the mutual fund group is beating the loser stock portfolio, which has dropped 2.72%.

But some of the stocks chosen by my readers as certain toilet bowl fodder have gone on to surprise:

• AIG:  +9.41%
• Ford:  +29.42%
• Kimco Realty:  +7.2%
• Krispe Kreme Doughnut:  +46.45%

Have a look below to see what the respective portfolios have done since April.

23 loser stocks
Tuesday December 7, 2010 07:06 PM EST

Selected Super Funds
Tuesday December 7, 2010 07:04 PM EST

And do you agree with me?  Do you think that the lousy stocks will keep pace with the superstar mutual fund managers over a long period of time?