LunaticTrader

Investing with the Moon

About buying random stocks

Posted by Danny on February 16, 2011

“A 73% gain on SBIB, 63% profit on KEYN, 51% on LINTA, 49% on EP,… in less than 9 months.”

It could be the opening lines in a teaser mail for some expensive stock picking newsletter.
But the point is, this are some of the random stocks we bought for our 2 experimental portfolios on tickerspy.com
Since we started them on May 28th last year, portfolio 1 has gained 19%, portfolio 2 is up 25.2%

What we try to do is simple.
Start with 10 random stocks in each portfolio ( I use a spreadsheet with all the tickers for that purpose).
Once per month the worst performing stock (over the previous 4 weeks) is sold and replaced by another random stock.
The idea is that one lagging stock is removed every month, while the new random addition has at least 50% chance to be a better stock.
The result is that losing positions do not stay in the portfolio for too long, while the winners are automatically kept until they end up being the worst stock of the month. So profits can run.

How did this pan out?
Here are the quity curves (blue line shows the portfolio return, grey = S&P500):

Portfolio 1 Portfolio 2

As you can see the performance does not differ very much from the overall market, but in the last few months both portfolios are doing better than the benchmark. Maybe it takes some time for the ‘natural selection’ effect to kick in. We will see how it continues.

Anyway, there are already a number of things I have learned from this experiment:

1) Buying random stocks may be better than buying the ‘names’ the media or newsletters are touting.
I was quite skeptical about some of the random picks that came out (unknown = unloved?), but they ended up being good performers. I would never have chosen some of these stocks on my own initiative.
It always feels safer to buy familiar names or the stocks that Jim Cramer mentions, but is it?
If other small investors feel equally tempted to buy the same stocks they see in the same media, doesn’t that make these stocks less safe?

2) Buying random stocks has the advantage of not being emotionally attached to (some of) *my* choices. So there is no internal resistance to selling them as soon as they do poorly for one month. This is what often causes people to ride a stock all the way down.

3) I don’t need any mutual fund or etf. Most of them underperform the market, so I am not going to do any worse if I run my own random portfolio. Buying a mutual fund only means throwing away 1% per year because of the fund management fees.
Given today’s low brokerage fees, small investors can easily run their own portfolio and reinvest that 1% year after year.
1% accumulated over 20 years becomes 22%, over 40 years it becomes almost 50%. That’s how much money you throw away if you invest in funds.

We will continue these experimental portfolios on tickerspy.com
Any changes to the portfolios are also mentioned on our Twitter account

Danny

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