Broker Check

As Easy as a Game of Darts

October 01, 2010

We are over one decade into the twenty first century and what do we have to show for it? From an investment perspective: next to nothing. The perennial money makers -- stocks and real estate – have not done a lot which has led many to dub this the lost decade. From the beginning of January 2000 to the end of the December 2009, the S&P 500 generated a total return of -9.1% while real estate as measured by the Case Shiller National Home Price Index generated an inflation adjusted return of 2.7%. In December 2009 the headline on the Wall Street Journal read, “Since End of 1999, U.S. Stocks’ Performance Has Been the All-Time Clunker; Even 1930’s Beat It.” But remember 1999? Now those were the good old days. Stocks were soaring, especially those with a .com at the end, profitable or not. Whether you were an Ivy League economist or toddler using an online trading system; the potential for making money was as easy as throwing a dart at a list of internet stocks.

1999 was quite an eventful year. We experienced tragedies such as the Columbine shooting as well as the public hysteria surrounding the pending doom associated with Y2K. However, the one thing that stood out the most to me was the performance of the equity markets. In 1999, the tech heavy Nasdaq closed up nearly 86%, capping a 5 year rally that began in 1995 amassing a total return of 441.16%. The market appeared to be going nowhere but up.

Raven Thorogood III was a 5-year-old actress having starred in three feature films, several TV specials and numerous commercials. On Thursday, January 7, 1999 Raven threw 10 darts at a dartboard of 133 internet related companies. Within six trading days one of her picks, was up a whopping 95%! Roland Perry, editor of the Internet Stock Review immediately noted that Raven “has talents far beyond what we ever dreamed possible, and we feel certain that her picks will surprise many on Wall Street. Only time will tell how her picks pan out, but this much we can say: She is storming right out of the gate…” As the year progressed Raven didn’t disappoint, in fact Raven proved Mr. Perry right. According to George Fisher, author of The Streetsmart Guide to Overlooked Stocks, by December 30, Raven’s portfolio of ten randomly selected stocks had outperformed more than 6,000 internet and technology money managers earning an astonishing 213% return. “She quadrupled the performance of the Dow and doubled the performance of the Nasdaq composite,” said Mr. Perry. In fact the star of the 1998 hit movie, “Babe, Pig in the City” ranked 22nd best in the United States amongst other professionals and money managers. The headline on Market Watch read, “Chimp ’99 champ! Makes Monkey of Wall Street.” That’s right; Raven Thorogood III was a chimpanzee.

In a bull market, it is likely easier for just about anyone to potentially make money. In this case all it took was a dart and a monkey. In a rising market, picking random stocks may be lucrative, but typically only for extremely short amounts of time. However, for the most part this strategy should be viewed as entertainment as it technically isn’t much of a strategy at all. At that time Raven’s numbers were so impressive they created an index based around her picks, the Monkeydex. It was even accompanied by a website to track the Monkeydex’s performance. However, nothing lasts forever and as quickly as the markets had rallied 2000 marked the beginning of a different trend.

By August of 2000, Money Magazine reported that the Monkeydex was down 34% while the Nasdaq was up 3.37% on the year. The Nasdaq would ultimately end the year down 39.29%. The same stock Raven had made over 95% on in just a matter of days saw its value drop from $165 per share in early 2000 to just pennies. By the end of 2002, two of the ten Monkeydex stocks had vanished, three traded for less than a dollar and one was hovering around $3. From the beginning of 2000 to the end of 2002 the Nasdaq plummeted 67.18%. Unfortunately, there is no further information regarding multiyear performance of the Monkeydex. The website, disappeared, much like the vast majority of the stocks in Raven’s portfolio.

Despite the S&P 500 being up 8.7% in September, the recent consumer based indicators have been mixed as confidence (sentiment unexpectedly dipped in early October, according to Rueters), employment (95,000 jobs were lost in September) and housing data (banks repossessed a record 102,000 homes in September, according to RealtyTrac) all demonstrate that recent governmental intervention is proving to be unsuccessful in producing a real and sustainable consumer recovery. While some continue to claim the market (as measured by the S&P 500) is undervalued on a P/E basis, that metric will likely be fighting the gravitational pull of slowing growth. Some analysts estimate that the third quarter of this year will likely represent the last quarter of double digit EPS growth for the next one, maybe two years in the S&P 500. Which begs the question, if growth slows is the market truly undervalued?

Any monkey with a dart can potentially make money in a rising market. However, it’s those who aim to protect those gains by minimizing the downside that can potentially do better in the long run. Numerous fundamental flaws still remain, but recessions and bear markets don’t last forever. There is a light at the end of the tunnel, and with every day that passes we get that much closer to it, but we aren’t there yet so proceed with caution.