Family stock-picking competition

 

While moderating the Mary Holm event at the Central Hawkes Bay Readers & Writers book festival this year, the topic of educating children about investing came up. 

A lady in the audience said that her family had embarked on a competition to see who would pick the best share portfolio. Each member of the family (parents and the young children) had opened a Sharesies account and invested $20 into it. They had then picked which shares they would like to buy. One of the useful features of these platforms is the ability to purchase "partial shares", so if the price is $10 but you only want to invest five, then you can buy half a share.

The idea was to see which portfolio had performed the best by the end of the year.

We thought that this was indeed a great way of introducing our children to the world of investing. They have often asked me "so what do you actually do daddy?" 

Unlike that of their farming uncle, my work must seem completely intangible. While I am not a stock-picker and investment management is just one part of my role, this competition should help provide some understanding as to what it is that I do for a living.

For me it is an interesting exercise to illustrate the impact of chance on investment profits - and loses!

There have been numerous studies suggesting the futility of relying on education, experience and skill to pick stocks. Indeed, in 1990 a group of school children beat the market (see my previous blog on passive investment) and almost all mutual fund managers.

The others would also likely pick names that they knew or producers of things that they liked.

This simplistic strategy has proven very successful in the past. 

The legendary fund manager, Peter Lynch, ran the Fidelity Magellan fund for thirteen years and averaged an incredible 29% per year growth.

One famous pick came from asking his wife which brand of tights she and her friends preferred.

So while it may appear a foolish to enter such a contest (where a win for daddy is met with a shrug and a loss would be met with incredulity and mocking) there is perhaps less for me to fear than you might think.

The portfolios

So in mid June this year we started our own competition. The selections were as follows:

Mine. Equal amounts in Amazon, BHP (commodities), a Real Estate investment trust and a Clean Energy fund. 

Rationale: 

-  Amazon. In the 1980's there was a saying that "a purchasing manager never got fired for buying IBM", it was a safe choice for getting the job done. So to me Amazon is a pretty safe bet (it has averaged almost 27% growth per year since it first floated on the stock market in 1998).

- BHP. Countries looking to build their way out of the COVID slump: they need a lot of metal ore etc.

- Real Estate. Another market fuelled by the QE from central banks (see previous blog).

- Clean Energy. Should be a beneficiary of the move to reduce carbon in the atmosphere.

My wife's. Equal amounts in Blackrock, a retirement housing provider, a sustainable food producer, and the port of Tauranga.

Rationale:

- Blackrock. The largest fund manager in the world. Will do well regardless of the market direction.

- Retirement housing. Aging population.

- Sustainable food producer. Another hot topic.

- Port of Tauranga. Heard it mentioned during an in interview on the radio.

Our eldest (aged 9). Half into Amazon, the rest split equally between Alphabet and Kraft.

Rationale.

Amazon. She loves books.

Alphabet. She thinks that Google is great

Kraft. The only thing that she loves more than books is chocolate.

Our middle child (aged 8). Equal amounts into Boeing, Infratil, Pfizer, Johnson & Johnson.

Rationale

Boeing. A love of army stuff (and he hasn't yet read my ethical investing blog!)

Infratil. He also loves building things.

Pfizer. Hears a lot about COVID and the vaccine producers.

Johnson & Johnson. Similarly, thinks lots of people need soap and cleaning stuff.

Our youngest (aged 6). Equal amounts into John Deere, Estee Lauder, MacDonald's and Pfizer.

Rationale

John Deere. Her uncle's preferred brand of tractor.

Estee Lauder. Loves nail polish and so on.

MacDonald's. Hears a lot about it from her friends (but her cruel parents never seem to go there)

Pfizer. As with her brother, she hears a lot about the vaccines.

Positions at the first check-in (30th of June)

We agreed that we'd check the progress monthly at most. However due to initial excitement, we did check in at the end of June.

1st Me, 2nd eldest, 3rd youngest, 4th middle, 5th mummy

Positions at the second check-in (12th of August)

What a change! There were audible gasps around the room when I reported that I had dropped to third! I suppose that this may have been from fear as this was meant to be my profession and what our livelihood depended on. I prefer to look at the positives and ponder that perhaps it means that Dunotter will be even more successful under the stewardship of the next generation!

In fifth place: Mummy. Performance of -4.77%. 

The retirement housing provider had fallen 40%....

In fourth place: Our eldest. Performance of -1.71%. 

While Alphabet was up over 12%, Kraft and Amazon were down.

In third. Me. Performance of +2.02%. 

BHP was up almost 13%. the two funds were also up, but Amazon's fall hurt me.

In second place, our middle child. Performance of +5.7%. 

Despite Boeing and Infratil both falling, Johnson & Johnson was up over 7% and Pfizer over 22%.

In first place, our youngest! Performance of +10.8%. 

John Deere up 12%, Estee Lauder up 7%, MacDonald's up 2% with Pfizer adding the real boost. 

Positions at the second check-in. After 1 year (10th of June 2022)

Over the past year the World MSCI (the benchmark index for Growth/Aggressive investing) has fallen 2.13%. This being the benchmark that most fund managers try to beat, any improvement on this is impressive - the obvious caveat being that this is only one years' performance of course.

Just one change in position from last August. We also added $10 to each pot and made new picks.

In fifth place: Our eldest. With Amazon down over 30% since purchase, they fall from fourth to 5th. Overall performance -11%. Added $5 to Alphabet (down 4% since purchase) and put $5 into Exxon "everyone is going to need oil, daddy"

In fourth place: Mummy. The retirement home is now down 47% but the food company is up almost 28%. Overall performance -8%. Put $5 to Amazon and $5 into Coles (as a different Supermarket to our youngest, below)

In third place: Me. Performance: Flat. Amazon's fall hurt me too. BHP is doing well. I put the whole $10 into Xero which seems very undervalued right now.

In second place: Our middle child. Even in such a turbulent year, three of their four picks are in profit. Pfizer is up over 37%. Overall performance: +8%. Outperformed the World MSCI by almost 10%. Added $5 to Pfizer and put $5 into Netflix.

Still smashing everyone in first place: Our youngest. I think I'll add them as one of my sources of research. Three of the four in the green. Pfizer being the stand-out. Overall performance for the year is a very impressive +18%. Outperforming the World MSCI by a quite incredible 20%. Added $5 to Pfizer and put $5 into Woolworths (for exposure to Supermarkets).

Lessons so far. 

1. Picking what you like can work very well

2. Amazon doesn't always go up in price.

3. Even with the fuel of QE in the markets, significant losses are still very possible!

I'll be updating this blog over time and so will let you know how we get on.

 

Dunotter disclosures

Disclaimer: This communication is purely meant as information for general interest. It is in no way to be taken as financial advice or relied upon in any way for investment decisions.