Last year around this time, my stock-picking monkey challenged the best stock pickers in the world to a contest.  (My cheeky monkey is pictured above taking his daily bath, where he concocts his best stock ideas.)  Today’s post is a follow-up on last year’s post to see who won the contest.  [You can also read about the two-year update to the contest in this post from June 2020.]

First, let’s recap the whole reason for the contest.

The Reason

As I pointed out in last year’s post, stock picking sounds easy, but in fact, stock picking is very hard, as these statistics show:

• A Longboard Funds study found 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 less than half (42%) of all U.S. stocks were able to outperform short-term Treasury-bills (a virtually “risk-free” investment) from 1926 to 2015.

And I recently found another study by JP Morgan of individual stocks in the Russell 3000 index.  This graph shows the distribution of the individual stock returns in the index since 1980.

These results were summarized nicely by David Schawel in a recent article:

• “Over this nearly 40 year time period, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value.
• The return on the median stock since its inception versus an investment in the Russell 3000 Index was -54%.
• Two-thirds of all stocks underperformed the Russell 3000 Index
• And the absolute returns were negative for 40% of stocks.”

Given the difficulty of consistently picking winner stocks, I intended my contest to help answer two questions:

1. How successful are the “best” stock pickers’ recommendations?
2. What does the success (or failure) of the “best” stock pickers tell us about our own stock-picking abilities, given that we don’t have the benefit of a staff of researchers with a huge budget?

The Contest

My monkey picked 10 individual stocks last May for his portfolio in the contest.  The best stock pickers in the world didn’t want to be seen associating with a low-life like me.  So, they communicated their stock picks through the media, specifically via these two articles in May of 2018:

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

I also added a simple low-cost index fund of the S&P 500 to round out the final roster of contestants:

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 fund VOO

If you want to know more about the set up of the contest and the complete list of the stocks in each portfolio, see last year’s post.  In summary, the total returns (price changes plus dividends reinvested on a quarterly basis) normalized to percent annual return for each portfolio determine’s the winner.  Also, I simplified my reporting of the results by shifting the purchase date for each portfolio slightly from May 18, 2018, as I reported last time, to May 31, 2018, with the contest ending as of June 1, 2019.  This shift allowed me to use the total returns reported from Portfolio Visualizer rather than gathering all the data and doing all the calculations myself.

And the Winner Is…

Which portfolio had the highest returns over the last year?  Here’s a table of the results.

Portfolio	Percent Annual Return	Average Volatility (Standard Deviation)	Return-Risk Ratio
Morgan Stanley Top 30	8.4%	25.5%	0.33%
Big Hedge Fund Top 20	-4.6%	29.2%	-0.16%
Monkey Top 10	7.8%	25.8%	0.30%
S&P 500	3.7%	17.6%	0.21%

The third column of the table shows volatility, calculated as the average standard deviation of all the stocks making up the portfolios.  And in the fourth column, I calculated the return-risk ratio, which is the annual return divided by the volatility.  This ratio measures how much return you get for each percent of volatility you experience and is sometimes called the “risk-adjusted return”.

OK, I’ll admit it.  Morgan Stanley beat my monkey by 0.6% return for the year.  But if you hired an expert to pick your stocks, wouldn’t you hold them to a higher standard than slightly beating a monkey’s portfolio?  And if you had hired an expert, they most likely would have charged you more than the nominal trading costs included in the above results.  Such experts typically charged at least 1 to 2% annually, which would totally wipe out Morgan Stanley’s slight margin of victory.  I concede an entirely Pyrrhic victory to Morgan Stanley.

The booby prize in the over-thinking-it category clearly goes to the hedge funds who underperformed the S&P 500 by more than a whopping 8%.  Ouch!  It’s also interesting that all these stock-pick portfolios had substantially higher volatility than the S&P 500 index fund.  Although mindful investors don’t care much about routine volatility, the results illustrate another common advantage of using index funds.

Conclusion

Going back to the main two questions that started this whole contest, we can now say that:

1. The “best” stock pickers recommendations are unlikely to consistently perform any better than random chance* and might perform a whole lot worse.
2. Our own chances of stock-picking success are pretty dismal, given we don’t have a huge staff and research budget.

This entire exercise validates the mindful conclusion that low-cost index funds are the best way to invest in stocks.  Although the S&P 500 fund here performed worse than both the Morgan Stanley and Monkey portfolios, one year does not make a life of successful investing.  We know from other data that consistently outperforming index funds year after year is almost impossible.  Assuming I continue to track these portfolios in future years, I would bet that the returns from the three stock-pick portfolios will be worse or no better than the S&P 500 index fund returns over the next decade.

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* My monkey wants you to know that he strongly disagrees that his portfolio’s excellent performance is due to anything other than his innate skills and daily baths.