Active Stock Picking vs. Indexing Challenge
 

Since I am so severely outnumbered in the "Another Book Question" thread I have decided to put my money where my mouth is.

This challenge is open anyone (and multiple times - i.e. not just once).

Choose from 1 to 500 stocks in any asset class (doesn't matter - emerging markets, reits, small cap, large cap, mid cap, microcap) other than international small cap (since there is no index).

I will pick an index mutual fund or etf that corresponds to the asset class of those equities (i.e. if you want to pick small caps i would pick IJR, midcaps MDY, micro I would choose IWC, etc)

I will bet I am ahead after any time frame longer than 6 months.

Since I am clearly the underdog here, you must lay me 6 to 5.

Would Marketocracy be good for this? i.e. - do they track trading costs? Are trades executed in real time? Sure they don't use delayed quotes.

The only 2 requirement is that any securities traded must be in the same asset class (we can work out market cap sizes based on S&P/Barra/MSCI indexes) and you must trade long (not shorts, etc).

You will also have to factor in taxes (short term cap gains, dividend taxes, etc) from your winning trades and deduct your losing trades. We can assume 15% on dividends and LT Cap gains, 25% on short term cap gains.

We cannot do this with securities from more than one asset class because my argument is that an index fund will outperfom any security in its index (whether picked randomly or from your laser-like elite stock picking skillz).

My actual argument is that indexing beats active management, but since I believe equity performance is a function of asset class and not some super-duper analysis by you genius stock pickers, this is the only way to decide who is right (but I am open to other ideas).

We can work out amounts and who will hold the money privately.

It's possible we could do sectors - i.e. you want to use knowledged gleamed from Graham and what-his-face to analyze large cap tech firms, I will choose XLK. Think those nobel prize winning economists are confused and you can use your expert knowledge of the health care industry to pummel me? Let's see if you can beat XLV.

PM me if interested or whatever - I am serious about this and since everyone thinks I'm wrong I may need to hire a secretary to keep up with the stampede of stock pickers looking to pluck this low hanging fruit.

Re: Active Stock Picking vs. Indexing Challenge
 

I personally would never pit myself against the mighty XLV, though I do think Ed Owens can beat it (and has). I'm personally looking forward to beating whatever large cap benchmark I get assigned, though, so I'll be PMing you soon.
-web

Re: Active Stock Picking vs. Indexing Challenge
 

Rock:

You need to adjust your bet to state that the stock picker must pick 10 stocks minimum and that you will weight the results based on the market cap of the stocks.

Good Luck

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
Rock:

You need to adjust your bet to state that the stock picker must pick 10 stocks minimum and that you will weight the results based on the market cap of the stocks.

Good Luck

[/ QUOTE ]

Hmmm, but what if you think it's optimal to hold 5 stocks, and that holding 10 stocks is an extreme overdiversification that would degrade your results significantly?

And what if you tend to invest more in your smaller market cap picks than you do in your bigger market cap picks?

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
I will bet I am ahead after any time frame longer than 6 months.

[/ QUOTE ]

How much are you willing to bet???

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Would Marketocracy be good for this? i.e. - do they track trading costs? Are trades executed in real time? Sure they don't use delayed quotes.

[/ QUOTE ]

Marketocracy is a good site to track this, even though small portfolios (<20 stock) will not qualify under the compliance rules for ranking there, they will still be tracked.

In fact, Marketocracy is an excellent site to see some serious outperformance!!!

My marketocracy port, with over 100 stocks and almost no attention from me, has beaten the S&P500 by roughly 1%/month on average over the last 5 years!!!

[ QUOTE ]
You will also have to factor in taxes (short term cap gains, dividend taxes, etc) from your winning trades and deduct your losing trades. We can assume 15% on dividends and LT Cap gains, 25% on short term cap gains.


[/ QUOTE ]

Active Investing is not the same as Active Trading, and considering the time frame you are proposing, the tax impact will be similar for someone buying and holding a few select stocks, as the tax implications of owning an index tracker.

[ QUOTE ]
My actual argument is that indexing beats active management, but since I believe equity performance is a function of asset class and not some super-duper analysis by you genius stock pickers, this is the only way to decide who is right (but I am open to other ideas).

[/ QUOTE ]

By definition, indexing only provides AVERAGE performance, and in the case of market cap weighted indexes, not even a great measure of average. Because of this, the simplest and easiest way to beat the average is to select stocks with higher than average growth rates and smaller than average market caps from within the index.


Finally, it is worth noting that even the process of selecting appropriate indexes to invest in, is Active management of your investments!

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
Rock:

You need to adjust your bet to state that the stock picker must pick 10 stocks minimum and that you will weight the results based on the market cap of the stocks.

Good Luck

[/ QUOTE ]

Actually I like taking 6 to 5 and letting someone pick any stock from an index since I believe the index is roughly a break even proposition versus any security in its index.

The problem with the index fund is trading costs (small for ETFs but still a factor), tracking error and of course taxes.

Re: Active Stock Picking vs. Indexing Challenge
 

Sniper -


"In fact, Marketocracy is an excellent site to see some serious outperformance!!!"

Outperformance of what, exactly??

Beating the S&P 500 is not a worthwile comparison. As I pointed out there are at least half a dozen sectors and asset classes that have done so in the past few years.

I'd put up 10k to your 12 if we could get the details worked out. Its possible you could bet more but I couldn't commit to it at this time.

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
I personally would never pit myself against the mighty XLV, though I do think Ed Owens can beat it (and has). I'm personally looking forward to beating whatever large cap benchmark I get assigned, though, so I'll be PMing you soon.
-web

[/ QUOTE ]

Can't tell if you are serious about the XLV comment but its funny the way you put it either way.

Berkshire is hard too clasify so I would probably throw that out let the rest of your picks duke it out against IVE or VFIAX.

Let me know if you are interested.

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]

Actually I like taking 6 to 5 and letting someone pick any stock from an index since I believe the index is roughly a break even proposition versus any security in its index.

[/ QUOTE ]

What if my usual picks aren't in any indexes? I can't pick stocks out of bankrtuptcy, liquidation, or that are too small to even make the Russell?

Re: Active Stock Picking vs. Indexing Challenge
 

Good challenge. I don't want to deal with the hassles of betting real money with a stranger on the internet, but here are my picks to outperform the appropriate indices:
PRAA
MMM
STX
RSTI
CREE
SIRF
MIK

We'll use the closing price today as the basis cost. No trading. In 6 months, if I'm ahead, I'll bump the thread to brag. If you're ahead, you can bump it. [img]/images/graemlins/smirk.gif[/img]

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
Outperformance of what, exactly??

[/ QUOTE ]

I would suggest that 1 year returns of greater than 100%, would be considered excellent outperformance against any benchmark you choose!!!

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Beating the S&P 500 is not a worthwile comparison. As I pointed out there are at least half a dozen sectors and asset classes that have done so in the past few years.


[/ QUOTE ]

Your point on this issue is still not clear, as once you get past the point of simple passive S&P500 index investments, you are already in the realm of active management. The simple selection and timing of any other index would have to involve some thought process.

[ QUOTE ]
I'd put up 10k to your 12 if we could get the details worked out. Its possible you could bet more but I couldn't commit to it at this time.

[/ QUOTE ]

So, are you saying that if 20 people in this forum took you up on your challenge, you would put up 200K ???

Re: Active Stock Picking vs. Indexing Challenge
 

I am interested, but I'd like to get a few questions answered first.

What do you consider active management? Does this mean that the challengers are required to have at least some turnover rate?

Would you allow the challenger to trade in and out of ETFs that represent your baseline index? For example, say that as a challenger I choose large-cap US equities. And, your matching asset-class index would be the S&P500. Would the challenger be allowed to trade in and out of stocks that are in the S&P500 in addition to the SPY ETF? Or, are the challengers limited to stocks only?

Must the challenger always be fully invested? Is there some % of funds that the challenger is allowed to store in money market while awaiting better opportunities?

-RMJ

Re: Active Stock Picking vs. Indexing Challenge
 

I found this oldie-but-goodie thread just now as I was trying to remind myself of who rockrock is.
[ QUOTE ]
Can't tell if you are serious about the XLV comment

[/ QUOTE ]
Yeah, I was serious. Being restricted to this sector has been a great tailwind for Ed Owens over the years, but if my recollection is correct he has still managed to beat it over most meaningful timeframes. I wish I had his skills.

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
Good challenge. I don't want to deal with the hassles of betting real money with a stranger on the internet, but here are my picks to outperform the appropriate indices:
PRAA
MMM
STX
RSTI
CREE
SIRF
MIK

We'll use the closing price today as the basis cost. No trading. In 6 months, if I'm ahead, I'll bump the thread to brag. If you're ahead, you can bump it. [img]/images/graemlins/smirk.gif[/img]

[/ QUOTE ]

Nice work so far. Assuming you have equally weighted investments, you are up 10.0% so far (vs. S&P 1.6% and NASDAQ 0.1%):

PRAA +27.4%
MMM +1.1%
STX +19.7%
RSTI +7.4%
CREE <font color="red">-2.5% </font>
SIRF +12.0%
MIK +4.5%

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
So, are you saying that if 20 people in this forum took you up on your challenge, you would put up 200K ???

[/ QUOTE ]

The more people that are interested, the less I would bet. I know you want to put some of yourself and some of your IRC ringers in. Only 1 person responded to me via PM btw, and I think this would be tough for me to win against you and your day trading pals but I'd love to take on a basket of mutual funds or someone just doing low-turnover occasional trading.

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
I am interested, but I'd like to get a few questions answered first.

What do you consider active management? Does this mean that the challengers are required to have at least some turnover rate?

Would you allow the challenger to trade in and out of ETFs that represent your baseline index? For example, say that as a challenger I choose large-cap US equities. And, your matching asset-class index would be the S&amp;P500. Would the challenger be allowed to trade in and out of stocks that are in the S&amp;P500 in addition to the SPY ETF? Or, are the challengers limited to stocks only?

Must the challenger always be fully invested? Is there some % of funds that the challenger is allowed to store in money market while awaiting better opportunities?

-RMJ

[/ QUOTE ]

The logistics make this hard if not impossible.

For instance, I could never disclose my portfolio until it was over because if you ever pulled ahead, you could just sell everything and duplicate my portfolio and be guaranteed to win.

Re: Active Stock Picking vs. Indexing Challenge
 

Rock... are you signed up for the Forum's 2006 stock competition yet?... go setup a Marketocracy port and join the club. (see the sticky)

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
Rock... are you signed up for the Forum's 2006 stock competition yet?... go setup a Marketocracy port and join the club. (see the sticky)

[/ QUOTE ]

Doing so now and thanks - looking forward to it.

Re: Active Stock Picking vs. Indexing Challenge
 

so is this real money or fake money rockrock?

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
so is this real money or fake money rockrock?

[/ QUOTE ]

His challenge was a "real money" bet, results to be tracked on a "play money" site!

Rock is the Favorite and you are the Dog
 

I'm not taking Rock's bet. He's the clear favorite.

About 70% of return in not individual security selection but rather the fractional allocations to stocks, bonds, cash.

Ditto within the Stock segment. There about 70% of return is not individual stocks but rather sector exposure.

It follows that in any sector the possibility exists for outperformance by a hand-picked basket of individual issues.

But, since the individual issues picked are also typically members of the overall ETF sector index, over time the individual issues will tend to regress to the sector mean. This is especially true of the leading issues in the sector, of which the ETF is typically overweight.

I like his reasoning. His is a strong argument for focusing attention on sectors and not individual issues.

The structure of the market also supports this idea. There is an enormous amount of money- hundreds of billions-- that will leave the stock market only stubbornly. If at all. This money switches from offense to defense but rarely exits the market.

Instead the money rotates among the many sectors.

One strategy is to make a sector bet and place a small portion of the total bet in 1,2 or 3 of the leaders in the sector.

For example for a single sector bet, the structure may be:

Sector ETF = 90% of total bet,
IssueA = 5% of total bet and
IssueB = 5% of total bet.

This makes you overweight in the leaders in the sector. It's a fairly aggressive approach whose additional risk can be managed via the use of stops.

If you have an interest in focusing more investing attention on sectors, take a look at John Murphy's daily Market Message service. It is a good tool and a great value.

Reference:
http://stockcharts.com/corp/MurphyDetails.html

Re: Rock is the Favorite and you are the Dog
 

Dan, your theory, however, doesn't take into account the weightings of individual stocks in particular indexes.

Re: Active Stock Picking vs. Indexing Challenge
 

ok... i'll take the bet if were trading with real cash...

Re: Active Stock Picking vs. Indexing Challenge
 

Here's the 4 month update:

MIK -1%
PRAA +35%
MMM -1%
STX +74%
RSTI +43%
CREE +22%
SIRF +42%

average: +31%

vs. VFINX, which is up 6%

I know bragging is bad karma and all, but... WOOT!

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
Here's the 4 month update:

MIK -1%
PRAA +35%
MMM -1%
STX +74%
RSTI +43%
CREE +22%
SIRF +42%

average: +31%

vs. VFINX, which is up 6%

I know bragging is bad karma and all, but... WOOT!

[/ QUOTE ]

You would have been up against a lot more than VFINX

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
[ QUOTE ]
Here's the 4 month update:

MIK -1%
PRAA +35%
MMM -1%
STX +74%
RSTI +43%
CREE +22%
SIRF +42%

average: +31%

vs. VFINX, which is up 6%

I know bragging is bad karma and all, but... WOOT!

[/ QUOTE ]

You would have been up against a lot more than VFINX

[/ QUOTE ]

Rock, which indexes would you use to map against that port?

Re: Active Stock Picking vs. Indexing Challenge
 

Uhh... yeah, that's part of why I didn't take the bet, because you didn't want to define which index would be the benchmark. Anyway, which index would you choose that has gone up more than 30% in 4 months?

Re: Active Stock Picking vs. Indexing Challenge
 

Bump. So I can learn what is Rockrock's strategies against AvivaSimplex's picks [img]/images/graemlins/smile.gif[/img]

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
Bump. So I can learn what is Rockrock's strategies against AvivaSimplex's picks [img]/images/graemlins/smile.gif[/img]

[/ QUOTE ]
Looking at AvivaSimplex's picks is like looking at the small percentage of fund managers who happened to beat the index in a particular short time period. Rockrock was opening this up to everyone. Look at the 2006 stock challenge. More than 50% of the traders are underperforming the S&amp;P 500 this year. If Rockrock was getting 6 to 5 from everyone, he'd be making a killing.

-Tom

Re: Active Stock Picking vs. Indexing Challenge
 

LOL at Aviva.

These are all Cramer picks. Every single one of them from what I can tell. I'll need 7 to 5 since you want me to beat a guy pumping and touting these stocks on the Internet, TV and radio every day.

All the stocks he picks get that big pop the next day and the hilarious thing is I wouldn't even be that far behind if I was getting 6 to 5. From my brief look at these, I had 2 wins and 1 tie believe it or not...

Nice try. Why don't u make some picks right now, I'll make mine and we find someone to hold the money?

Good luck.

Re: Active Stock Picking vs. Indexing Challenge
 

Why laugh at someone who just pwned you in the contest you made up?

[ QUOTE ]
These are all Cramer picks.

[/ QUOTE ]
Are you kidding? Cramer gives opinions on like half the market. Anyway, the contest started for all the picks on one date. If Cramer had picked them before I chose them, they should have been at their pump &amp; dump peak, and gone down because of Cramer. If he pumped them after I chose them, then that has nothing to do with my stock picking ability.

[ QUOTE ]
Why don't u make some picks right now, I'll make mine and we find someone to hold the money?

[/ QUOTE ]
Great picks don't come along every day. When I have them I post them on this board. Check out the other two that weren't included in this contest:

Silvercorp is up more than 75% since I recommended it a month ago.

Nitromed is down nearly 50% since I recommended buying puts three months ago, and my puts have more than doubled. (by the way, Cramer said this one was going up)

In any case, I don't want to bet with you. I'm betting on these picks with the market, and the market is offering much better odds than you are. Thanks for the excuse to brag, though.

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
Looking at AvivaSimplex's picks is like looking at the small percentage of fund managers who happened to beat the index in a particular short time period. Rockrock was opening this up to everyone. Look at the 2006 stock challenge. More than 50% of the traders are underperforming the S&amp;P 500 this year. If Rockrock was getting 6 to 5 from everyone, he'd be making a killing.

-Tom

[/ QUOTE ]

I have no doubt that I'm running very hot right now, and I can't expect 100+% annualized gains in the future. (Though Sniper might disagree that this is impossible [img]/images/graemlins/smile.gif[/img] ) Still, I think reasonably smart people can use value investing strategies to beat the market in the long term.

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
[ QUOTE ]
Looking at AvivaSimplex's picks is like looking at the small percentage of fund managers who happened to beat the index in a particular short time period. Rockrock was opening this up to everyone. Look at the 2006 stock challenge. More than 50% of the traders are underperforming the S&amp;P 500 this year. If Rockrock was getting 6 to 5 from everyone, he'd be making a killing.

-Tom

[/ QUOTE ]

I have no doubt that I'm running very hot right now, and I can't expect 100+% annualized gains in the future. (Though Sniper might disagree that this is impossible [img]/images/graemlins/smile.gif[/img] ) Still, I think reasonably smart people can use value investing strategies to beat the market in the long term.

[/ QUOTE ]

You mean cramer is running hot right now.

The funny thing about you injuring your arm trying to pat yourself on the back is that your picks would have been 2-4-1 versus mine and you'd be plus 1.6 units after vig.

It also hasn't been 6 months and I'm sure that we'll have more clarity on PRAA when the 6 months is up ( see chart )

What I don't understand is why you and no one else want to take up my challenge. Sounds like free money.

Congrats to Cramer and yourself for owning me!!

Re: Active Stock Picking vs. Indexing Challenge
 

Did you even read my post?

Re: Active Stock Picking vs. Indexing Challenge
 

[ QUOTE ]
your picks would have been 2-4-1 versus mine

[/ QUOTE ]

WHAT THE [censored] ARE YOU TALKING ABOUT????

Re: Active Stock Picking vs. Indexing Challenge
 

rock... we are still waiting to hear what indexes you would use to match up against Aviva's picks.

Until then, any comparitive statements you make, simply don't hold any weight!

Re: Active Stock Picking vs. Indexing Challenge
 

sniper it isn't that hard to figure out - go to yahoo, click profile, see the index that security is in, and that is respective ETF I would probably choose for each stock.

if you read my OP, you'll see I am either going to pick the index ETF or sector ETF that corresponds to each security. In most cases, SPY, MDY or IJR.

please relax.

Re: Active Stock Picking vs. Indexing Challenge
 

rock,

I think you are asking for trouble here. The edge that passive investing has over active picking is small, and needs time to make a huge difference. If your challenge was at least 5years than I would say you'd probably win.

However, this challege is more of a roulette game than a statement about passive vs active investing.

Re: Active Stock Picking vs. Indexing Challenge
 

rock,

So are you saying...

MIK vs MDY
PRAA vs IJR
MMM vs SPY
STX vs IYW (?)
RSTI vs ??? (Scientific &amp; Technical instruments)
CREE vs MDY
SIRF vs ??? (Scientific &amp; Technical instruments)

Re: Active Stock Picking vs. Indexing Challenge
 

These stocks should be considered as a portfolio. Rockrock made it clear in his OP that he was talking about a competition vs. a basket of actively picked stocks.

The whole sector fund thing is a red herring anyway. Why should a stock picker be evaluated vs. a sector rather than vs. the market as a whole? If I could pick hot sectors, that's just as good as picking hot stocks.