Active Stock Picking vs. Indexing Challenge

[rockrock]

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.

[buffett]

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

[rockrock]

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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

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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.

[buffett]

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

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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.

[midas]

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

[DesertCat]

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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

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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?

[rockrock]

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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

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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.

[DesertCat]

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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.

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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?

[Sniper]

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

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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.

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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!!!

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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.


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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.

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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).

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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!

[rockrock]

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.