In December of 2017, Dividend Growth Investor (DGI) asked me if I’d like to duplicate the famous Warren Buffett bet. For those unfamiliar, in 2008 Buffett famously challenged the hedge fund industry:
Can you beat the S&P 500 over a 10 year period?
Only one hedge fund accepted the bet and didn’t do well. Buffett, and more importantly index investors, won.
But, I’m a slow learner and still like to play with individual stocks, so I accepted DGI’s challenge. I decided to pick four stocks that I’d hold for the duration of the challenge. No swapping, no rebalancing. Keep it simple.
The stocks I chose were Amazon, Google, Berkshire Hathaway, and Alibaba (for the rationale behind these choices, see this post). Here is how I’ve done so far:
Year 1 was a success. The S&P 500 was down, but I was up:
Year 2: My lead narrowed, but I remained ahead:
Year 3: Now, we’re back to the present day. The broker where I had my account (Motif) ceased operations, so I had to move my performance tracking to a Google sheet. With 3 years or 30% of the bet in the bag, I’ve extended my lead. The S&P 500 is up 39% while my portfolio is up 73%:
Only half of my picks are beating the S&P and Amazon is doing most of the heavy lifting. This is how the stock market works though. You don’t buy an index fund to have a large basket of winners. You buy it so you own the very few stocks that really soar. The always excellent Morgan Housel explains it here:
The S&P 500 rose 22% in 2017. But a quarter of that return came from 5 companies – Amazon, Apple, Facebook, Boeing, and Microsoft. Ten companies made up 35% of the return. Twenty-three accounted for half the return. Apple alone was responsible for more of the index’s total returns than the bottom 321 companies combined.
The S&P 500 gained 108% over the last five years. Twenty-two companies are responsible for half that gain. Ninety-two companies made up three-quarters of the returns.
If you’re going to be a successful stock picker, you must somehow figure out which of the very few companies are going to win over time. Good luck with that.
Storm Clouds Ahead?
I’ve crushed it so far, but the future is cloudy:
- Alibaba: Jack Ma (CEO) ran afoul of Chinese authorities and hasn’t been seen in months.
- Amazon: Will it be regulated?
- Berkshire Hathaway: Buffett’s famous holding company has been underperforming the S&P 500 for years. Perhaps it’s just undervalued, but I also have to consider that both Buffett and Munger will probably die before this bet is over.
- Google: Lawsuit!
I have no idea if I’ll win this thing, but in the meantime, it’s some cheap entertainment.
Despite my occasional stock-picking ways, I invest almost all new money into index funds. Mindy and I just netted a large sum of money from the sale of the trailer park (more on this soon) and it all went into VTSAX:
Index funds are effective, don’t call you in the middle of the night (looking at you rental properties), are self-cleansing, and require almost no attention. No brainer. (See JL Collins’s excellent book for more on the matter.)
DGI Versus Me
DGI is a different kind of investor than I am. He cares about numbers. I care about change and disruption. The quarterly payouts help the dividend lovers sleep better at night while I enjoy watching (and making money off of) the changes that are impacting our world.
*** cough *** Tesla!! *** cough cough ***
I’ have a lot more to say about my Subjective Strategy, but I’ll save that for another day.
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