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In January 2011 I wrote about a little experiment on stock market.  Well it has been one year and so here’s the result of the experiment.  In Dec 2010, I selected 5 stocks on the Toronto Stock Exchange (S&P/TSX) using nothing but darts to see how the performance of the stocks would stack up against the index in one year’s time. I made no changes to the stocks during the year even as the stock market experienced a “correction.”  So here’s the data from Dec 21, 2011.

Security Shares Opening Price Opening Cost Ending Price Ending Value Return
Encana Corp 35 28.7800 1007.3000 18.8900 661.1500 -34.36%
Fairfax Fiancial Holdings Ltd Subordinate Voting Shares 2 407.9400 815.8800 437.0100 874.0200 7.13%
Minefinders Corp Ltd 95 10.6900 1015.5500 10.8300 1028.8500 1.31%
Royal Bank of Canada 19 51.6900 982.1100 51.9800 987.6200 0.56%
Silver Standard Resources Inc 46 24.7400 1138.0400 14.1000 648.6000 -43.01%
Dividend 87.1500
Total 4958.8800 4287.3900 -13.54%
total before Dividend 4958.8800 4200.2400 -15.30%
TSX Index 13443 11955 -11.07%
TD Dividend Growth -0.30%

So the dart test did not beat the index in my test.  Including dividends, my annual return is -13.54% while the TSX returned  -11.07%.  Considering I didn’t include the trading costs of $99.95 to buy the shares my overall return on the investment is more like -15.30% , 4.23% less than the index.

The main contributor of my negative return were my heavy weighting in Encana during a year where oversupply for natural gas depressed all stocks related to the industry and the fact that Silver Standard lost 23% of its share price in one day after announcing reduction in reserve (how much silver is available to mine) and increases in production costs.

I have also included one of my favorite Canadian mutual funds in the table to illustrate how a different weighting (heavy in financials) would have impacted your returns. In 2011, while still negative this fund did significantly better than both my darts or the index.

So what conclusion can you draw from this experiment?  As anyone knows one year’s data isn’t worth much in the grand scheme of things.  Had the darts outperformed the index in 2011, I would have to reach the same conclusion.  I think what’s illustrative in this little demonstration is that by overweighing in specific stocks, you can skew the results significantly.  However, as you add stocks in your drive to diversify you will also drive your returns to match the index which means that if you are aiming to beat the index you won’t succeed (remember that there are always fees  even with ETFs).

So what to do?

“Don’t play the stock market” has always been my conclusion.  You don’t have enough time to be looking at the stocks, doing the research that’s required to “beat the market.”  If something like that exists then why are there so many advisors and analysts around?

Go back to your financial plan and see what return you need to grant you the goals you have set for yourself.  Create a portfolio that matches your risk profile and monitor it.  If need be, add more money into the pot, because savings are the best way to reach your goals.

Now if there is only a mutual fund out there that can give me 12% return….

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I have been pretty skeptical of the abilities of stock pickers for decades now.  I remember when I was still in business school, the Toronto Star used to run this stock picking exercise where they pick 5 stocks by darts on Jan 1 and also have a bunch of portfolio analysts make their own picks. At the end of the year they would review the results.  Over the few years they ran this experiment the darts seemed to always do pretty well. They weren’t always number one but they were always in the top five.  Unfortunately, the paper no longer does this experiment. I think it’s because no analyst wants to lose to a bunch of randomly tossed darts :).

I have finance degree. But nothing I have learned in business school’s finance courses gave me any better feelings about the abilities of technical analysis to pick the right stocks.

This year, after talking about this dart experiment for many years, I have decided to put some real money behind my belief and run my own dart experiment.  I have done this once before as part of a virtual stock game with some friends, and it went incredibly well (but that’s a whole different post).

So tonight I picked the five stocks, well, the darts did actually.  I printed the TSX charts by sectors onto one sheet of paper, but due to a lack of access to dart boards (they seem to have disappeared from pubs) I improvised by dropping a pen onto the sheet of paper on the floor.  The board was turned,  by my husband, my eyes were closed, after each drop to enhance randomness.

So what did the ‘darts’ choose? My stocks are:

  • Fairfax Financial Co
  • EnCana Corp
  • Minefinders Corp
  • Silver Standard Reso
  • Royal Bank of Canada

Tomorrow I will purchase $1000 each (minus fees) of stocks and see how my little dart portfolio do by the end of the year.

It should be interesting.  Nothing like putting real money down.

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