About six months ago, I started a random stock picking experiment. I wanted to randomly select (method explained in link) 10 stocks a week, and judge their performance against those of investing newsletters I planned to review. My hypothesis was that as long as a large number of stocks was picked, the random stock portfolio would perform roughly the same as the market. And this, I thought, would be better than the majority of the investing newsletters out there. (Basically, can a monkey pick stocks better than professionals? Or, are you better off just buying an index fund?)
I only did the experiment for six weeks, picking 60 random stocks. The process of picking the stocks, noting their prices, etc, was somewhat tedious, and I slacked off. However, 60 stocks is a pretty good number. My original goal was to hold each stock for a year and a day. While I don't know what I'll be doing six months from now when the first batch matures, I thought I'd update the random stocks' (all six batches) performance since then, and compare it with that of the S&P 500. The details are in the spreadsheet below.
The results, as expected, so far hold with the first part of my hypothesis. The random stocks' performance matches that of the S&P 500. The random stocks are up by 1.28% on average. The S&P 500 is up 1.14% on average (the prices for the S&P are taken from the same dates as when each batch of the random stocks was picked). The first batch, picked at market close on January 18, is kicking the S&P's butt. The second batch is underperforming quite a bit.
Although the random stocks are up slightly more than the S&P, investors would have been better off just buying the S&P, because commissions would lower the random stocks' returns. If commissions didn't play a role, buying the S&P would still be better, as it would be much easier. An even better investment would have been a six month CD. They were around 5% back then.
We'll see what happens in six months.
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4 comments:
Random stock picking sounds risky at first glance but after reading your article I think it is worth a try instead of buy the S&P for this time.
I didn't read your whole article, but I see that you've discovered some kind of miracle stock-picking method that beats the market.
People would pay good money for such expertise. I certainly would.
There are no miracle stock picking methods, just better and worse indexes. I picked stocks randomly (no index at all), and at the six month mark they were slightly outperforming the S&P 500. I will update the random stocks soon. I don't know if they're still beating the S&P, but they are all down for the year--a lot.
Let me stress again, there are no miracles in investing. If anyone claims to have a sure method and have past results to back it up, they are either very lucky or are a fraud.
I have a web site where I give investment advise on penny stocks. I would like to comment about the selection of stocks at random. I do not believe that picking stocks at random is anything but total nonsense. if you do not have the time knowledge and experience to pick stocks yourself than you would be better of being in some kind of index fund.
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