6/7/08

Random Stock Picking Experiment Update

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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