Article by Investment U
I’m going to demonstrate a few key principles of investing using randomness… Including how it trumped the performance of the S&P 500 by five-fold.
“The game is rigged…”
That’s the lament from a lot of investors over the last few years.
I feel for the people who share that view. It means they got burned… And probably pretty bad.
But the sad reality is they more than likely got burned because they made mistakes. They either over-leveraged themselves, they didn’t do their research, they took some bad investment advice from someone, and ultimately didn’t have an exit strategy or plan.
It’s an unfortunate situation. Though an avoidable one.
Small investors still have yet to enter the market in any significant numbers. They’ve been sitting on the sidelines for years, happy to gain a fraction of a percent interest in their money market accounts in lieu of taking a chance in stocks. They’re scared away by the volatility or flat returns of the broader markets… They believe it’s rigged.
But the fact of the matter is, none of that really matters.
Ask any finance or economics professor and they’ll tell you flat out randomness can’t outperform the market… At least not consistently.
Well, I’m going to demonstrate a few key principles of investing using randomness… Including how it trumped the performance of the S&P 500 by five-fold.
I began this experiment early in 2011. It was just a silly experiment that came up in conversation around the office. And the portfolio I created became some what notorious.
To start, all I needed was a way to randomly select companies.
I could blindfold myself and lob darts at the stock pages… I could randomly type letters into a terminal… I could draw letters out of a Scrabble bag… But none of those seemed like much fun.
So, what I decided was I needed a system that was built on two-, three- and four-letter words. I chewed on this for a while, and decided there was no better basis for my experiment than this ground-breaking idea: Using the names of hip hop artists and rappers as ticker symbols.
It’s kind of perfect since there are a number of artists in the genre who use short, bite-sized names. I scooted over to the Wikipedia list of “Rappers” and started typing in names. Whenever I got a hit, I added that company to the portfolio.
Thus was born, the infamous “Hip Hop Portfolio…”
| Company | Symbol | Entry Date | 2011 Total Return | Musician |
| Duke Realty | DRE | 1/3/2011 | -.024% | Dr. Dre |
| Telecom Italia | TI | 1/3/2011 | -14.07% | T.I. |
| Grupo Aeroportuario Del Pacifica | PAC | 1/3/2011 | -14.41% | Tupac |
| Deltic Timber | DEL | 1/3/2011 | 2.71% | Del the Funky Homosapien |
| Bob Evans | BOBE | 1/3/2011 | 4.38% | B.O.B. |
| EV Energy Partners | EVEP | 1/3/2011 | 75.25% | Eve |
| Big Lots | BIG | 1/3/2011 | 24.17% | The Notorious B.I.G. |
| Mosaic Company | MOS | 1/3/2011 | -33.67% | Mos Def |
| IntercontinentalExchange | ICE | 1/3/2011 | 1.18% | Ice Cube/Ice T |
| Combined Total Return | 5.09% |
As you can see, the outcome was actually pretty spectacular. (I fully plan on copywriting and patenting this portfolio into a Hip Hop ETF…)
But not only could I pull from old school, new school and underground artists – the portfolio itself ended up with a level of diversification that’s pretty amazing. Some of the companies are very solid, though admittedly a few were oversold in 2011.
Here’s the crazy part: The S&P 500 had a terrible year last year. Its return for 2011 was a mere 0.97%. The Hip Hop Portfolio returned a hair over 5%.
That’s not really spectacular, but it was at least positive. And it was five times the performance of the S&P.
Keep this is mind every time you hear some market bear or anti-equity guru mention that the stock market returns over the last several years have been basically flat or negative. They’re talking about the indices.
Well, we don’t typically invest in broad indices (and if you do, we recommend Alexander Green’s full Gone Fishin’ Portfolio).
At Investment U, we recommend investing in a diverse mix of individual, fundamentally sound companies.
If five of the randomly selected companies in The Hip Hop Portfolio outperformed the S&P, imagine what your performance looks like with actual technical and fundamental analysis…
Good Investing,
Matthew Carr
Article by Investment U