Dumb Luck Stock Index Clobbers Top Wall Street Fund Managers
Here's how I put it together. I took the spelling of my last name and punched each letter into the DailyFinance quote engine. Then I selected the first two stocks that appeared for each letter. My only criteria was that the stocks were listed on a U.S. stock exchange.Here's the list of stocks in the SRSI:
1. Sprint Nextel (S)
2. Sirius XM Radio (SIRI)
3. Realty Income (O)
4. Oracle (ORCL)
5. Loews (L)
6. Las Vegas Sands (LVS)
7. Intel (INTC)
8. International Business Machines (IBM)
9. Netsuite (N)
10. Nvidia (NVDA)
Why would investors even care about the SRSI?
That's precisely my point: 90% of individual investors rely on the advice of brokers and advisers who tell them they can put together a portfolio of stocks or actively-managed mutual funds that will "beat the markets." However, there is precious little data to support the existence of this skill. Nevertheless, investors chase returns every day, to the detriment of their returns. While the SRSI is an imperfect benchmark, it will give you a measure of how a random portfolio stacks up against the "expertise" of your brokers and fund managers.
I was inspired to create the SRSI by Lusha, a chimpanzee in Russia. According to an article in the U.K. Daily Mail, Lusha's stock picks outperformed 94% of the country's investment funds. Her portfolio increased in value by 300%, leading to this insightful observation by the head of monetary policy at the Institute for the Economy in Transition in Moscow: "It shows that financial knowledge does not play a great role in giving forecasts to how the market will change."
The ten randomly-selected stocks in my index would have clobbered the top Wall Street fund managers in 2009 (if it had been in existence then). Look at these results:
The SRSI gained: 106.19%
The S&P 500 index gained: 26.46%
The DJIA Index gained: 22.68%
But here's the real stunner:
The SRSI ranked 22 out of 14,132 mutual funds listed in the Morningstar database of domestic stock funds. That placed it in the top 1%!
Does that mean you should run out and buy the stocks in the SRSI? Absolutely not. Remember, past performance is not an indication of future performance.
However, there is a valuable lesson here. If a fund manager had posted these returns, you would be reading about the emergence of a new stock-picking guru. Money would flood into the fund. Can you imagine the interviews where the manager explained his "expertise"? Talk about "alpha." This index has it in spades.
Wall Street's specialty is in making luck seem like skill. The SRSI performance was obviously luck.
Your financial future is too important to place in the hands of brokers and advisers who don't know (or care about) the difference. Here's a far better plan: Buy a globally-diversified portfolio of low-cost stock and bond index funds in an asset allocation suitable for your investment objectives and tolerance for risk.
I think the SRSI deserves a 5 banana rating!