The 2021 Monkey Dartboard Investing Invitational

We’re going to run a stock-picking competition in 2021. You can follow along. I’ve asked my patrons to make their stock picks. And I’m putting my real money on the line. Welcome to the 2021 Monkey Dartboard Investing Invitational. Here’s the link to the Google Sheet.

P.S. If you’re looking for a 2021 New Year’s resolution, I’d suggest you try out the 2021 Savings Goal Calculator. It’ll help you calculate how much money you should aim to save in the coming year.

Monkeys and a Dartboard

This story starts in Burton Malkiel’s seminal work A Random Walk Down Wall Street. In that book, Malkiel writes:

A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.

-Burton Malkiel

Surely Malkiel is bananas…right? Dartboard investing sounds…well it sounds dumb!

Actually, Malkiel’s bold statement was based on academic market research. Malkiel found that picking winning stocks is extremely difficult, even for experts. The question of “luck vs. skill” in the stock market has been answered. Consistent positive results—the result of skill—rarely occur. It’s mostly luck. And that means random monkeys can compete with seasoned “experts.”

If a few monkey throw a few darts, they’ll create a semi-diverse portfolio. That’s what we’ll be doing today.

But we could go a step further and take the monkey business infinite. With enough monkeys throwing enough darts, your portfolio would begin to look like a balanced distribution of the entire stock market. Ah-ha! We have a name for that concept. It’s an index fund. And that’s exclusively what I utilize in my personal investments.

That’s right. I don’t pick my own stocks. I don’t let another person pick my stocks. I let a million monkeys pick my stocks via dartboard investing. Why? Because the math predicts it’ll work, and history has proven those predictions true.

Sounds crazy, I know. Here’s how it worked out in 2020.

But if everyone invested in index funds, surely that’d lead to problems?!

Some investors argue that index funds are causing an asset bubble. Let’s dig into some quick details.

An efficient market, they claim, needs intelligent investors making informed decisions. Index funds, however, are “stupid.” An index fund does not make decisions for itself, but rather purchases stocks based on what everyone else in the market is doing. It’s just monkeys following the crowd. Dartboard investing misses obvious opportunities and therefore is inefficient. This is a reasonable argument.

Another index fund bubble argument points out that the stock market is like a “big theater with a small door.” Small trouble can lead to big panic. When baby boomers begin sell their stocks to fund their retirements, it could cause a mad dash for the exit door. “Sell stocks now, or else they’ll tank even further in price.” The prices will drop and drop and drop. Thus, they claim, the bubble will pop.

My two cents: the index fund bubble arguments are hogwash.

Asking My Patrons to Throw Darts

Let’s get back to today’s monkey business.

I reached out to the wonderful Best Interest patrons to help me with this year-long experiment. I asked them to give me a number 1 through 1000. Little did they know, their numbers would dictate which stocks I bought in this experiment.

The Russell 3000 is a stock market index, similar to the S&P 500 or Dow Jones. The Russell 3000 contains 3000 American stocks. It attempts to benchmark, or track, the entire U.S. stock market. Each patron’s chosen “dart” would hit three of these Russell 3000 stocks to add to my portfolio.

So let’s take a look at patron Craig, who picked 501. Great choice, Craig. Because of that pick, I’m going to include stock #501, #1501, and #2501 from the Russell 3000 in my portfolio. As of this writing, those stocks are:

• 501: RPM International, an American multinational company with subsidiaries that manufacture and market high-performance specialty coatings, sealants and building materials
• 1501: Zentalis Pharmaceuticals, a clinical-stage biopharmaceutical company focused on developing clinically differentiated, novel small molecule therapeutics that target fundamental biological pathways in cancer.
• 2501: Preferred Apartment Communities, is a Maryland-based REIT corporation that acquires and operates multifamily properties in select targeted markets throughout the United States.

And then I’ll do the same for all the other patrons. We’ll have 33 total darts thrown onto our dartboard investing portfolio. This Google Sheet breaks down the portfolio and will be used to track the portfolio’s performance over the next year.

Link: The 2021 Monkey Dartboard Investing Invitational Google Sheet Tracker

How Will We Rate the Portfolio’s Performance?

There are a few ways we can consider evaluating this portfolio’s 2021 performance.

The first way is to compare it against the market in general—will our random picks outperform the market as a whole? Will they perform better than the S&P500? Better than the totality of the Russell 3000?

The second comparison is against some “expert” hand-picked mutual funds. For example, here are the first five “alpha mutual funds” I found via a Google search. (“Alpha” in this context refers to fund performance that is uncorrelated to general market performance. These mutual funds are trying to beat the market, not just mimic the market the way an index fund would.)

Below are the mutual fund ticker symbols, their net asset values, and their expense ratios. We’ll track these over time in the Google Sheet for comparison.

• NEXTX, NAV = $44.53, Exp = 1.34%
• ATRFX, NAV = $8.98, Exp = 3.02%
• ALFAX, NAV = $26.32, Exp = 1.53%
• IQDAX, NAV = $12.45, Exp = 2.46%
• TTDAX, NAV = $13.04, Exp = 1.31%

The goal of these funds is to outperform the rest of the market. At the very least, they ought to beat the Best Interest monkeys patrons, right? Time will tell.

Small Cap vs. Large Cap

Of the 33 stocks in our portfolio, 6 of them are considering “large-cap,” having a total market capitalization (e.g. total value of all their stock shares) of $10 billion or higher. Another 13 are “mid-cap,” with a market cap between $2 billion and $10 billion. The remaining 14 are “small-cap,” with market caps less than $2 billion.

That means about 80% of our portfolio is associated with small-cap and mid-cap stocks. Historical precedent suggests that these small businesses tend to be higher risk/higher reward investments when compared against large-cap stocks. But in this short 1-year context, I’m not sure that’ll matter. In one given year, the large-cap vs. small-cap preference is a 50-50 coin flip.

The Proudest Monkey

At the end of 2021, I bet that one of the Best Interest patrons will see that their three stocks performed significantly better than average, while another patron will drastically underperform the field.

It will be tempting to ask, “Is one of those patrons more skilled than the others?”

Of course, the answer is no. We already know that. These were random choices that the patrons weren’t even aware they were making.

While the real stock market isn’t quite as random, it is still closer to pure randomness than it is to pure skill. It’s better to be lazy than to hope that you’re skilled, and an MIT study backs up that idea.

Learn Through Practice

Nothing teaches a lesson like having skin in the game. If choosing stocks makes you nervous, my hope is that this fun year-long exercise will help you learn that (despite not having skin in the game yourself). I have $1650 in this game, and it’ll be fun to see what happens to that money!

Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.

-Jesse

Want to learn more about The Best Interest’s back story? Read here.

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