Raven Chimp Fund still likes KLOC!
Random dart-throwing builds winning Internet portfolio
Can you beat this system? Wall Street fund managers are lagging
By Dr. Paul B. Farrell, CBS MarketWatch StockWatch
Last Update: 4:33 PM ET Jan 29, 1999
LOS ANGELES (CBS.MW) -- An Internet investor recently sent me a note after I wrote
about the 11 Internet indexes currently available for portfolio building. We linked to a
Business Wire press release on Yahoo offering a 12th index, the MonkeyDex index of 10
Internet stocks. The column below came about as reflection on this strategy. As with most
humor, however, this column is a vehicle for raising some serious issues about investing, so
before you read it please consider these key points:
Point #1: Asset allocation vs. stock-picking
In a celebrated 1991 study, Ibbotson Associates proved that over 90 percent of a
portfolio's returns were a function of asset allocations, and less than 10 percent was
dependent on the choice of funds.
Point #2: Indexed funds are cheaper
Index funds have several advantages over active managed portfolios: Lower expense
ratios, lower turnover resulting in lower capital gains taxes, and they are typically no-loads.
Point #3: Active management vs. indexing
Research studies generally indicate that actively managed portfolios fail to outperform
computerized index portfolios. In other words, active stock-picking and trading may not add
value to a portfolio, which may explain why over 80 percent of all funds fail to beat their
indexes.
Point #4: Random selection isn't always random
Random selection of securities can be a valid selection process. The probabilities of
"randomly" creating a high-performing portfolio are obviously increased if your selections are
confined to a group of securities that are already high-performers.
Point #5: In indexing, it's the target not the dart-thrower
And in a random selection like this, it's irrelevant whether the dart-thrower is a monkey a
six year-old child, or a Wall Street broker. Anyone can hit a bunch of winners if they are
throwing darts at a target loaded with winners.
Exploring this dart-throwing index helped me again realize the importance of asset allocation
and diversification of portfolio risks. The three Internet sector funds are, in spite of their
limitations as higher-risk sector funds, performing remarkably well, as you'll see below. And
yes, these funds do have a place in an aggressive portfolio. First, however, make sure you
begin with your ideal asset allocations and limit your exposure to higher-risk Internet funds
and stocks accordingly. And for most portfolios, 5 to 10 percent is probably your limit.
Monkey's random stock-picking strategy works
The Internet Stock Review recently announced the "MonkeyDex," Wall Street's first index of
publicly traded stocks selected by a chimpanzee. That's right, and this chimp's making a
monkey out of Wall Street. The 10 Internet stocks in this index were selected by Raven, a
dart-throwing, 5 year-old chimpanzee. Raven is a well-known star of film and television who
decided to make a career move, and is now competing head-on with America's 5-star fund
managers for the honors as best Internet stock-picker of 1999.
Given the current intensity of Internet mania, one of the exchanges may even pick up this new
index for their option traders. If not, perhaps individual investors disappointed with their
Wall Street broker's advice might consider using these 10 stocks to build their own mutual
fund.
Raven's index of Internet stocks may be just as valuable as the other 11 Internet indexes we
reviewed earlier. In fact, if Raven's portfolio continues its current trend, it may just wind up
as successful as the portfolios of the three major Internet funds: The Internet Fund, Munder
NetNet and WWW Internet Fund.
Monkey's unique dart-throwing technique
The mathematically inclined among you are no doubt itching to know the chimp's secret
methodology. Actually it's a sophisticated form of technical analysis. Raven threw 10 darts at
a dartboard of 133 pre-selected Internet companies. Note that any investor in the world could
probably produce the same results by pasting our 11 Internet indexes on a garage wall and
throwing darts at them.
We're told that his numerous misses were understandably excluded from the portfolio. Such
an exclusion decision, of course, is consistent with other more advanced methods of
stock-picking because portfolio managers rarely discuss their mistakes unless pressed.
Both Roland Perry, editor of the Internet Stock Review and David Allsberry, animal trainer
with Boone's Animals For Hollywood, assisted in Raven's dart throwing technique. Perry
noted that "Raven had no prior knowledge of how any particular Internet related companies
have been performing." That, of course, is another way of saying he played on a playing field
without handicapping his Wall Street competitors.
Monkey's talents rival Wall Street pros
Perry also added that Raven "has talents far beyond what we ever dreamed possible and we
feel certain that his picks will surprise many on Wall Street. Only time will tell how his picks
pan out, but this much we can say -- he is storming right out of the gate with picks like
CMGI, which is up 95 percent in six trading days.''
We felt compelled to do an independent review of Raven's portfolio. And yes, it looks like
he's making a monkey out of the best Internet fund managers. Here's the comparative results
on a year-to-date adjusted total return basis for the funds and an unweighted portfolio for
Raven:
Munder NetNet (MNNAX)
+ 32%
WWW Internet Fund (WWIFX)
+ 38%
The Internet Fund (WWWFX)
+ 51%
Raven's ChimpFund
+ 50%
So it looks like Raven is seriously in the running for the 1999 championship Internet
stock-picker, beating two of America's top three Internet fund stock-pickers, and coming a
close second to last year's winner.
Chimp is making a monkey out of Wall Street
How Raven did it, of course, is a very valuable lesson for all investors in America. Some say
it's all in the wrist, we'll never know for sure. But one thing is certain, this extraordinarily
gifted chimp hit 10 winners from among the 133 possible Internet stocks in his unique
dart-throwing strategy charts. First, he hit on a couple really big winners, CMG Information
(CMGI) and the portal Lycos (LCOS), which have about doubled since the first of the year.
In addition, Raven also picked several other well-know Internet brands that have been up in
the range of 25 percent year-to-date: AudioHighway (AHWY), ISS Group (ISSX), Netspeak
Corp. (NSPK), and OnSale (ONSL). And to round out his portfolio, Raven hit on four
smaller, yet positive stocks with gains averaging under 10 percent, all tracking the general
upwards thrust in Internet stocks this year: E-commerce pioneer iMall (IMAL), online people
locator Kushner-Locke (KLOC), Australia's leading ISP Ozemail (OZEMY) and search
developer Inktomi (INKT) whose shares just split.
Can you make a monkey of Wall Street?
Bottom line: Even a dart-throwing monkey can match compete favorably in the Internet sector
fund and make money in the Internet mania jungle. And that, is yet another super argument
for do-it-yourself investing without ever using a full-commission broker or financial advisor.
After all, if a monkey can do build a high-performing portfolio of Internet stocks, anyone
can.
In fact, here's our contest: I will bet that any investor in the world today could simply paper
their garage wall with the 11 Internet indexes we reported on earlier, throw darts to pick 10
Internet stocks, and build an Internet fund just as well as or better than Raven's and the other
three Internet funds. In fact, we'll send a copy of my book Mutual Funds on the Net to the top
three winning portfolios who (a) swear they in fact used this methodology and (b) send us
their winning portfolio of the 10 Internet stocks before February 1, 1999, with individual
stock and total portfolio returns as of this date.
One final note: You will hear from us, but you may, however, never hear from Raven again.
Word is that, like the other Internet stock and fund managers, he's getting so rich, he may
may have slipped quietly back into the jungle, alone. After all, with a track record like his, he
may be able to buy an island and retire with his own banana plantation. We're also certain he
won't go public with a new mutual fund. Monkeys just don't have an ego big enough to
become a mutual fund manager.
Quote the Raven, nevermore. |
