Tuesday, January 4, 2011

Late Entry to Stock-Picking Contest

Nine bloggers had a stock-picking contest for 2010. I decided to see how my actual portfolio would have fared in the contest.

If I had added an entry into this contest, it would have been the index-based part of my portfolio.  It managed a 22.6% return for 2010 helped by a tilt towards small-cap stocks. Adding my indexed portfolio as an entry in the contest would have left me fourth out of ten with a 14% edge over the average of the other entries.  However, when you add my not-so-great stock picks from the non-indexed part of my portfolio (which I'm slowly selling off), my 2010 return drops to 12.9%, which is still fifth out of ten and 4% above the average.

A result of fourth out of ten of is roughly what we should expect when comparing indexes to individual stock picks. The index will rarely be first, but it will be above average most of the time. Stock-picking contests are fun, but aren’t a great way to invest real money as the bloggers in the contest have said.

5 comments:

  1. You're clearly being too modest, as the average return in the contest was 8.6%. Your 22.6% return was far superior. Of course, you are correct, stock picking contests are not a really good indicator of people's real performance, just a bit of fun.

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  2. I fully agree that stock picking contests, due to the timescale and incentives, are just a bit of fun. I'd be interested to hear how the market average (index) can be expected to be above average?

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  3. @Gene: My 14% lead over the average is likely just an aberration. I'm not inclined to gloat because my performance next year may not look as good.

    @Robert: I'd expect indexes to be above the median return just because of the higher volatility of individual stock returns. As for an expectation of being above average, this comes from the fact that stock picks aren't random. I don't know if this is the case with these 9 entrants, but many stock-picking contest entrants make high volatility picks with built-in costs (like triple bull or triple bear ETFs) in an effort to win the contest. This is actually the right approach if you want to maximize the odds of coming in first place. However, it also increases the odds of coming in last place.

    If all stock picks in the contest were made randomly among stocks in the index with probabilities equal to the weights of the stocks in the index, then the average of the stock pickers would be expected to be exactly equal to the index return.

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  4. Nice point :)

    Being an indexer, you'd probably never finish last in any such contest.

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  5. @Financial Cents: Not last and not first :-)

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