[Update: You can view the three-year results of the contest between the stock-picking monkey and the “best” investors in my June 2021 post.]

I’ve made the case in previous articles that attempting to pick individual stocks is mostly a loser’s game.  That’s because the vast majority of individual stocks fail to substantially increase in value over the long term.  Some miserable statistics that I’ve cited before include:

• A Longboard Funds study showed that in the period from 1989 to 2015 about 80% of all U.S. stocks collectively had a total return of 0%.  All of the gains of the stock market came from just 20% of the best-performing stocks.
• Researcher Hendrik Bessembinder found that just 4% of stocks accounted for all of the net wealth earned by investors in the U.S. stock market from 1926 to 2015.
• He also found that less than half (42%) of the stocks were able to outperform short-term Treasury bills (a virtually “risk-free” investment).

Stock Picking Is Hard

All this means that your chances of picking stocks that perform well are likely no better 1-in-5.  And picking the very best stocks is probably more like a 1-in-20 proposition.  So, you’ll need truly exceptional stock-picking skills to sort the wheat from all that chaff.

These stock performance studies include huge numbers of short-lived small-cap stocks and even so-called “penny stocks”.  Consequently, critics point out that the chances of picking a good stock are better than these studies would suggest because most investors won’t even consider buying obscure small-cap stocks.  But this critique feels conveniently optimistic about stock picking in several ways:

• Over many periods small caps (as a group) have actually outperformed large caps for long periods.  So, won’t many stock pickers try to select some winners from this enticing small-cap group?
• Many of the huge well-known stocks of today started out as almost unknown small-cap companies.  So, won’t many stock pickers attempt to find the next big winner out of all those small-cap losers?
• If it’s so obvious that investors should ignore all these inferior small caps, why do most small-cap stock prices take several years to fall to zero?  Many investors must be buying them along the way.

Further, the implied flip-side of this critique is that buying large well-known company stocks is some sort of slam dunk.  But history is littered with once large companies that withered.  For example, here’s a list of the most valuable “internet companies” from 1995:

1. Netscape
2. Apple
3. Axel Springer
4. RentPath
5. Web.com

Even if you were an adult in 1995, I’ll be surprised if you’re familiar with any of these names other than Apple.  While all of these companies weren’t complete losers in later decades, plenty of other stocks performed better.

I’m dubious of the implication that effective stock picking is simply a matter of choosing from a smaller subset of large and well-known companies, such as those in the S&P 500.  Don’t forget that the components of the S&P 500 and similar indices change substantially over time.  For example, about half of the companies in the S&P 500 in 1999 are absent from the S&P 500 today.  This means that either half the S&P 500 stocks started to falter after 1999, or at best, they were outpaced by better performing mid-sized and small stocks that were marching into the S&P 500.

Stock Picking Ideas

I thought of all this when I saw a couple of MarketWatch articles on May 18 of this year:

• Here Are Morgan Stanley’s 30 Top Stock Picks
• Here Are The 20 Stocks That The Biggest Hedge Funds Love Most

On just one day in May, one finance news website had two major stories about stock picking ideas.  I’m sure these articles attract plenty of clicks from individual investors who are mulling over “safe” stock picking ideas.

On the surface, investing in stocks from these sorts of lists appears logical.  After all, if anyone can pick stocks, it should be firms with huge research budgets like Morgan Stanley and the big hedge funds.  Many investors probably view these lists as a way to shortcut the laborious process of researching thousands of individual stocks by themselves.  But of course, the articles that track the subsequent performance of these lists are much harder (but not impossible) to find.

The Challenge

I thought it would be fun to track how these stock lists performed for at least a year to answer two related questions.*  One, how successful are the “best” stock pickers’ recommendations?  Two, what does the success (or failure) of the “best” stock pickers tell us about our own likely success as stock pickers, particularly given that we don’t have the benefit of a research staff with a huge budget?

The “challenge” will compare the performance of these stock lists to a low-cost indexing approach, as represented by Vanguard’s S&P 500 fund (VOO).  And to make the challenge a little more interesting, I also picked 10 stocks randomly from the S&P 500 on May 18, 2018.  This random portfolio represents the individual investor, who due to a lack of time and resources, often can’t pick stocks any better than a monkey throwing darts at a list of well-established companies.  Many have noted that randomly selecting stocks sometimes beats standard indices like S&P 500, which spurs my interest in stock-picking monkeys.

[Update: You can see the one-year results for the challenge in my follow-up post dated June 17, 2019.]

The Details

Specifically, I’ll track how the following portfolios perform over the next year:

1. Morgan Stanley Top 30 Portfolio – equal-weighted
2. Big Hedge Fund Top 20 Portfolio – equal-weighted
3. The Monkey Top 10 Portfolio – equal-weighted
4. S&P 500 – as represented by the market-cap-weighted VOO

Here’s a table listing the stocks contained in the first three portfolios.

	Name	Ticker	Price Per Share on May 18
Morgan Stanley Top 30 Portfolio
	Accenture	ACN	$               155.26
	Amazon.com	AMZN	$            1,575.43
	Activision Blizzard	ATVI	$                 71.41
	BNY Mellon	BK	$                 56.99
	BlackRock	BLK	$               538.18
	Salesforce.com	CRM	$               127.19
	Dollar General	DG	$                 97.02
	Walt Disney	DIS	$               104.24
	Dominos Pizza	DPZ	$               244.83
	Estee Lauder	EL	$               143.97
	First Republic Bank	FRC	$                 98.45
	Alphabet	GOOG	$            1,064.62
	IQVIA Holdings	IQV	$               100.10
	Intuitive Surgical	ISRG	$               454.43
	Gartner	IT	$               134.98
	J.P. Morgan Chase	JPM	$               111.89
	Marsh & McLennan	MMC	$                 81.29
	Microsoft	MSFT	$                 96.73
	NextEra Energy	NEE	$               156.60
	Northrop Grumman	NOC	$               329.10
	Prologis	PLD	$                 62.99
	Philip Morris International	PM	$                 80.82
	Raytheon	RTN	$               211.89
	SBA Communications	SBAC	$               158.02
	Charles Schwab	SCHW	$                 59.10
	Sherwin-Williams	SHW	$               383.64
	Constellation Brands	STZ	$               220.68
	Thermo Fisher Scientific	TMO	$               213.34
	United Health	UNH	$               242.91
	Visa	V	$               130.13
Big Hedge Fund Top 20 Portfolio
	Apple	AAPL	$               187.50
	Adobe Systems	ADBE	$               238.84
	Aetna Inc	AET	$               176.68
	Amazon	AMZN	$            1,575.43
	Broadcom	AVGO	$               238.22
	Bank of America	BAC	$                 30.64
	Booking Holdings	BKNG	$            2,070.71
	Electronic Arts	EA	$               131.23
	Facebook	FB	$               183.36
	21st Century Fox	FOX	$                 37.27
	Google	GOOG	$            1,064.62
	Mastercard	MA	$               191.68
	Monsanto	MON	$               125.95
	Microsoft	MSFT	$                 96.73
	Micron Technology	MU	$                 53.37
	Netflix	NFLX	$               325.25
	Constellation Brands	STZ	$               220.68
	Time Warner Inc	TWX	$                 93.61
	United Health	UNH	$               242.91
	Visa	V	$               130.13
The Monkey Top 10 Portfolio
	Air Products & Chemicals Inc	APD	$               168.11
	Expedia Inc.	EXPE	$               115.14
	Fastenal Co	FAST	$                 52.95
	Kimco Realty	KIM	$                 14.10
	Lockheed Martin Corp.	LMT	$               320.46
	Alliant Energy Corp	LNT	$                 40.38
	Nasdaq, Inc.	NDAQ	$                 90.14
	Vornado Realty Trust	VNO	$                 65.95
	Waters Corporation	WAT	$               194.00
	Walgreens Boots Alliance	WBA	$                 64.26

I’ll assume an initial $1,000 investment in each of the stocks from these three portfolios on May 18.  So, this will give a starting value of $30,000, $20,000, and $10,000, respectively.  Similarly, I’ll just assume that $10,000 was initially invested in the S&P 500 index fund.  This funding method creates different starting portfolio values.  But I plan to report everything in terms of percent annual returns, which will keep the performance comparisons on an even playing field.

I’ll track both the price changes and returns from dividends.  Because free dividend reinvesting plans exist for most large companies, I’ll reinvest the dividends from each company by buying more stock of the same company on a quarterly basis.  Because the initial period of comparison is just a year, I won’t rebalance the portfolios.

Some may note that VOO is market-cap weighted, while I set up the other portfolios as equal weight, meaning that the same amount is initially invested in each member of the portfolio.  Although this adds an extra variable to the comparisons, it’s probably a more accurate reflection of the likely choices of most retail investors.  For example, in my past life as a stock picker, I never once determined the amount I wanted to initially invest in an individual company based on a comparison of its market capitalization to other stocks in my portfolio.  And I certainly never tried to maintain a portfolio of individual stock picks in proportion to their market capitalizations.

Many people contend that equal weighting outperforms market-cap weighting in general.  Although I think there is good reason to distrust that generalization, if it’s true, the setup of this challenge will give an advantage to the equal-weighted stock portfolios, not the cap-weighted index portfolio.  So, we’re giving the stock pickers the benefit of any doubt regarding the difference in weighting approaches.

Initial Status Report

It’s only been three months since I set this up, but for the record, here are statistics for the challenge so far.

Portfolio	Starting Value	Current Value	Percent Return to Date	Annualized Return
Morgan Stanley Top 30	$30,000	$31,897	6.3%	25.3%
Big Hedge Fund Top 20	$20,000	$21,183	5.9%	23.7%
Monkey Top 10	$10,000	$10,883	8.8%	35.3%
S&P 500	$10,000	$10,661	6.6%	26.5%

The “current value” includes dividends to date, which I assumed were reinvested on August 24, 2018.  I calculated “annualized returns” by assuming that the same return for the first quarter occurs again for the next three quarters.  Of course, that scenario is unlikely, but it’s still a consistent comparison of the portfolios.

While you can’t say much about long-term performance in just three months, it’s already looking a little scary for Morgan Stanley and the Big Hedge Funds.  Their returns to date are slightly less than that achieved by simply investing in an S&P 500 index fund.  It’s perhaps even scarier that the Monkey portfolio is performing the best by a substantial margin.  [Update: See how the monkey performed over the last three years at this June 2021 post.]

If this trend keeps up, I’m thinking about putting out an advertisement to employ a monkey.  I think it would read something like: “Monkey wanted to pick stocks.  No previous experience necessary.  If you have your own darts and can use them on the job, that’s definitely a plus.  The pay is peanuts.”

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* I may continue tracking these lists after one year is over, depending on my enthusiasm for this whole exercise at that time.