Even a Random Portfolio is Up 200% in this Bull Market. How Much is Yours?

Over the years, I've come to believe the only way to win at the investing game is to read, read, read, and hope to have a few insights.

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Now, talking of insights, I came across an interesting one in the latest edition of Breakout Wealth.

Did you know that the last 15 months have been so good for the stock market that even a random portfolio is up 200%?

Yes, you heard that right.

This means if you haven't multiplied your corpus more than 3x since the lows of March 2020, you've done worse than a dart throwing monkey.

Surprised? Shocked?

All the chest thumping and big boasts about stock picking skills seem foolish, don't they?

Well, mine certainly do.

You see, I have a stock recommendation service called Exponential Profits. I recommend the most fundamentally strong penny stocks with the risk-reward ratio in my favour as much as possible.

It has done well since the lows of March 2020. Last I checked, it was up 120%. Not bad at all when considered in isolation.

But stack it up against the performance of a random portfolio and the skeletons start to tumble out.

How come a research analyst who worships at the altars of Warren Buffett and Benjamin Graham, who doles out value investing sermons at the slightest provocation, not been able to outperform a dart throwing monkey?

Is something awfully wrong with his stock picking skills? Is he out of sync with the modern realities of the stock market?

Well, not so fast! I am not ready to throw in the towel yet.

Here are a few reasons why.

You see, the random portfolio may have outperformed big time but the real test of any portfolio is how it does across a complete stock market cycle.

Can the random portfolio hold its own in a bear market? Just as it has risen so much in a bull market, can it lose less than the other investors in a bear market?

Well, there's a strong chance the random portfolio may underperform my Exponential Profits service in a bear market.

Why?

Simply because my service has a significant fixed deposit component.

You see, you can either have a strategy that outperforms in a bull market or outperforms in a bear market but never both.

The high cash component or the fixed deposit component (to the tune of 50%) in Exponential Profits ensures it outperforms in bear market at the expense of a little underperformance in a bull market.

Thus, while the random portfolio is winning the game currently, I am confident that Exponential Profits will strike back in a bear market and bridge the gap.

Secondly, since the random portfolio is well, random, stocks have come in based on no fundamental filters of any kind.

This is akin to playing with fire in my view. One of the most important things to consider while investing is ensure that your stock is an attractive investment candidate and is not a wild speculation.

Thus, you need to have a definite buy rule.

A rule where you allow only those stocks where you are confident they are trading at a discount to their intrinsic values. You need to buy a Rs 100 note for Rs 80 or below.

And this is exactly what I try to do with all my recommendations in Exponential Profits. I try to ensure all recommended stocks are at a discount to their intrinsic values.

Of course, one could argue the concept of intrinsic value is not definite and certain and a lot of errors could creep in.

However, one can at least ensure the value is adequate to justify a stock purchase or is significantly lower than the market price.

A portfolio constructed with this rule has a much better chance of outperforming the random portfolio over the long term.

Why?

Simply because a random portfolio can also have stocks trading at big premiums to their intrinsic values instead of discounts.

Also, Exponential Profits also believes in periodically cleaning up the portfolio. Overvalued stocks make way for undervalued stocks on a regular basis.

I am strongly of the view that any stock picking strategy has to have a definite sell rule.

For if you don't, you are letting underperformers stay in the portfolio for too long or you are running the risk of your winners giving up all their gains in the next bear market.

And both these things pose a big risk to your long term performance.

Which is why there is a definite SELL rule in place in Exponential Profits. We have utilised this rule to book good profits across and also move money into more undervalued stocks.

If the random portfolio has no such rules, then it's at the mercy of the vagaries of the market. This is certainly not a good position to be in.

Thus, with a pretty detailed blueprint in place, I am of the view that the current streak of underperformance vis-a-vis the random portfolio has a strong chance of being an aberration instead of the norm.

Or you can say this is a battle that the random portfolio may keep winning from time to time.

But as long as you are confident of winning the war, you should stay the course in my view.

And this is certainly what I am going to do.

What do you think? Do you have rules in place to outperform the random portfolio over the long term?

You can write to me here.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter