Back before I first became the global success I am today, I began looking into investing. Among the things you can’t miss when you enter that world looking to learn is the endless promotions from a company called The Motley Fool, advertising their subscription service, in which they give you a stock pick or two a month, and which they trumpet as having a stellar average return, far in excess of the market average and most common benchmarks like the S&P.
Welllllll there’s just one thing. I noticed one word…
‘Average’
A lot of dishonest people try to slide things by others, in life in general, by showing great “averages”, because “averages” are easily inflated by rare outliers.
For instance, consider this series of stock returns of hypothetical investments:
Investment 1: -2% return
Investment 2: -1.1% return
Investment 3: 0.7% return
Investment 4: 58% return
Investment 5: -0.2% return
Investment 6: -2.1% return
Investment 7: -1.3% return
Investment 8: -4.2% return
Investment 9: 0.2% return
Investment 10:-7.5% return
These ten investments, together, average about a 20% return, about 2.5 times the S&P (which, as a rule of thumb, returns 8%/yr.) I could promise to give you advice averaging a 20% return. But, notice: all the stellar returns were from one single investment, it’s not like most investments did well at all. So here’s the thing: How religiously will you follow my investing advice? If you happened to be on vacation the week I recommended investment 4, and slavishly followed the rest of my advice, your return would be about -2%. That’s right, you could miss just that one key investment, and instead of getting 20% return, you’d actually lose money.
Let’s say you only follow 2/3 of my tips, you’re not 100% on the ball. That means your odds of missing that one good investment are about 1 in 3—by not buying absolutely every one of my picks, you’d have a 1 in 3 chance of not only not even making close to 20%, but in fact, losing money.
And, remember, another pitfall of investing: those are past results. It’s a cliche in the investing world that “past performance is not indicative of future results.” That big gain already happened, you missed it. You can’t forget that, it’s the most important thing: not what happened before, but, is it worth banking on it happening again? Based on those 10 investments, would you expect the next 10 to have even 1 that repeat of that single anomalous outlier? It doesn’t seem too likely, does it?
This is a very simplified example for illustration purposes, but I suspected something like this was going on with the Motley Fool’s track record.
Sure enough, I did the math…
…and most of the picks that inflated Motley Fools average returns to stratospheric levels were picked before 2004, and, overall, comprised less than 2% of their picks. If you started investing a few years after 2004, or only went with most of their picks, you easily might have trailed the S&P. In fact, while their average return is astronomical—I forget exactly what the figure is right now, I believe it’s a few hundred percent—the fact is, their *median* return, the dead center of the distribution of their picks…. made just about NOTHING overall. You HAD to be invested in 100% of their picks, starting from before 2004, to get the average return they advertise. In a population of people randomly occasionally straying from buying 100% of their picks, statistics say while the average *return* is high overall, we could expect the average *investor* to *lose* money.
But, the nice thing about being a software engineer is, you don’t have to take my word for it.
I found a list of every investment pick The Motley Fool has ever made, and the return as of about 2022. I put them all in an Excel spreadsheet so you can filter and see what real-world performance would have been like if you happened to miss, say, just the top 2% of their picks.
My personal opinion, which Is Not Financial Advice and you should not listen to it: Motley Fool seems more to me like a marketing operation than an investment advisory service.
The Excel file…
…isn’t embeddable here since it’s not a text file. You can download it from the repo at https://github.com/kupietools/Motley-Fool-recommendations-performance-analyzer. The README and LICENSE files are embedded below.
