Two years ago my stock-picking monkey challenged the best stock pickers in the world to a contest.  Today’s post is my annual update on how the contest is going.  You can see the results of the first year of the contest in this post from June 2019.

But first, here’s a brief recap of the reason I set up this contest in 2018 and how the contest works.

The Reason

I provided some stark statistics in both my 2018 and 2019 contest posts showing that, although stock-picking sounds easy, it’s very hard.  This is because the large majority of individual¹ stocks are likely to be future losers—they will produce negative returns over the long term.  Depending on how you measure it, something like 40% to 80% of stocks in U.S. history were long-term losers.  (See the past posts for more specific statistics and references.)

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

To represent random² uninformed stock picks, my monkey picked 10 individual stocks in May 2018 for his portfolio in the contest.  The best stock pickers in the world communicated their stock picks to me 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 my 2018 post.  In summary, the winner is determined by the total returns (price changes plus dividends reinvested quarterly) expressed as percent annualized return.  Total return results were calculated from June 1, 2018, through May 31, 2020, using Portfolio Visualizer data.

And the Winner Is…

Which portfolio had the highest returns over the last two years?  This graph and table show the results.

Portfolio	Annualized Return (CAGR)	Average Volatility (Standard Deviation)	Return-Risk Ratio
Morgan Stanley Top 30	14.5%	27.0%	0.54
Big Hedge Fund Top 20	11.5%	29.7%	0.39
Monkey Top 10	4.7%	30.4%	0.16
S&P 500	8.2%	19.9%	0.41

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

The performance of these four portfolios over two years is an almost complete reversal of the results for the first year of the contest.  At this same time last year, the Monkey and Morgan Stanley portfolios were in a virtual tie for the lead, and the Hedge Fund portfolio was posting negative returns.  But now after two years, the Monkey portfolio is badly lagging the expert portfolios, as well as the S&P 500 index fund.  Further, the volatility of the Monkey portfolio was relatively high, resulting in a dismal risk-adjusted return.  It’s also noteworthy that both of the expert portfolios outperformed the S&P 500 index fund over the last two years.

While my monkey looked brilliant last year, this year he looks more like the stupid monkey from the fable of the Miser and The Monkey, popularized by Jean de La Fontaine in the late 17th century.  In the fable, a monkey gains access to a miser’s gold stashed in a tower by the sea.  The monkey has great fun throwing the miser’s gold out the tower window and into the ocean below (see illustration at the top of this post).

What Happened?

I took a closer look at the three stock-pick portfolios to find out what caused the Monkey portfolio to falter so badly over the last year.  I noticed that both of the expert portfolios are riddled with well known mega-cap names including all of the glorified FAANG stocks: Facebook, Amazon, Apple, Netflix, and Google.  In contrast, I don’t expect that you know much about any of the companies in the randomly selected Monkey portfolio, with the possible exceptions of Expedia or Walgreens.

My criticism of the expert’s stereotypical big-name stock picks probably sounds like sour grapes.  Regardless, I point this out because the last two years have been remarkably good for U.S. large-cap and mega-cap stocks as shown by this Portfolio Visualizer data:

• U.S. Mid-caps underperformed large-caps by 5.0% annualized
• U.S. Small-caps underperformed by 10.7%
• Foreign Developed Markets underperformed by 12.4%
• Emerging Markets underperformed by 13.6%!

Perhaps more importantly, this trend has been firmly in place for the last 10 years.   Although my evidence is circumstantial, it seems like the success of the expert portfolios could easily be the product of several cognitive biases, particularly confirmation bias, recency bias, and the bandwagon effect.  In other words, it seems like the experts were heavily influenced by recent history and the perceived public interest in a few of the most exciting big-name stocks.  For the last two years, those biases have boosted returns, but there’s no guarantee that the next two years will be the same.  There may be hope for my monkey yet, but only if the decade-long superiority of these mega-cap tech companies starts to wane.

Bonds Over Stocks?

Evaluating these portfolios through the coronavirus stock market crash in March (and subsequent recovery so far) illustrates something else that’s mostly unrelated to this contest.  The conventional wisdom is that all kinds of stocks are much riskier than holding government bonds, and individual stock picking is much riskier than holding more diversified stock index funds.

So, I was curious about how these risky stock portfolios performed relative to a “safer” combined portfolio that includes some bonds.  The most popular example of a combined stock/bond portfolio is 60% U.S. stocks and 40% U.S. 10-Year Treasury bonds (known as the “60/40” portfolio).  The performance of the 60/40 portfolio from June of 2018 through the end of May 2020 is shown in this table.

Portfolio	Annualized Return (CAGR)	Average Volatility (Standard Deviation)	Return-Risk Ratio
60/40 Portfolio (U.S. Stocks/10-Yr T-Bonds)	8.6%	11.2%	0.77

The 60/40 portfolio produced a slightly better return than the S&P 500 index fund, but with much less volatility.

Based on similar data, many commentators have suggested that bonds “worked perfectly” this year.  In this case, the bonds in a 60/40 portfolio helped cushion some of the stock crash in March, but those same bonds are now slowing the recovery of the 60/40 portfolio.  We’ve seen that some very risky portfolios of individual stocks have easily outperformed the 60/40 portfolio over the last two years, even though early 2020 economic conditions were supposed to favor bonds.  And if the stock market continues to recover, the S&P 500 index fund will likely soon surpass the 60/40 portfolio too.

So, I guess bond investors got a fleeting warm and fuzzy feeling in March when their portfolios held up relatively well for the short term.  But in contrast, whatever anxiety the stock pickers had in March, it quickly evaporated and was replaced with a feeling of vindication less than two months later.  Early 2020 was a good example of how difficult it is for combined portfolio investors to claim that their emotional rollercoaster feels “better” than the rides experienced by even the most adventurous stock investors, though the two experiences are undeniably different.

Conclusion

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

1. The “best” stock pickers’ recommendations may outperform random chance and even market benchmarks over specific periods.
2. Given that the process behind the experts’ stock picks appears qualitative and even biased, individual investors probably have a similar shot at generating decent performing stock portfolios, even without a huge staff and research budget.

These conclusions are nearly the opposite of last year’s conclusions, which tells me that this contest is unlikely to ever finally prove that stock picking is a loser’s game, even if I continue to track these portfolios for ten more years.  While stock pickers may outperform in any given period, it will always be hard to tell the extent to which that outperformance was due to skill versus unpredictable market conditions.

Saying that stock pickers “may outperform” in specific periods implies some probability of success, but this particular contest won’t ever be able to quantify that probability.  This contest also can’t quantify how long any outperformance might be reasonably expected to last.  Fortunately, we know from other data that consistently outperforming index funds year after year is almost impossible, regardless of whether you’re an expert or an amateur.

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 1 – As opposed to mutual or exchange-traded funds, which represent baskets of stocks.

2 – My monkey wants you to know that he strongly disagrees with the notion that his stock picks are random.  But his recent track record undercuts this claim.