Train a Monkey to Throw Darts or Pick the S&P 500 Index? A Look at 2014’s Performance

Good luck!

“Maybe life is random, but I doubt it.”
–Steven Tyler

There’s a news radio station in Fort Worth that has almost all of its daytime weekend programming related to money, investing, and personal finance. It’s almost like the programming folks at CNBC decided to take over this radio station on the weekend, because, unless the Texas Longhorns are playing, you can tune in to this station and listen to money advice to your heart’s content.

I imagine that if someone listens to those shows long enough, he’ll become convinced that he knows more than the average Joe and can go into the markets and actively trade and make a mint.

Unfortunately, this would likely result in a sad ending for the listener, as 64% of individual stocks underperform the Russell 3000 index in their lifetimes.

Last year, I evaluated how well the S&P 500 index did compared to randomly picking a stock out of the components that make up the index. In 2013, 51.6% of the components of the S&P 500 underperformed the index as a whole, leaving individual stock pickers with thinner wallets than their index investing counterparts.

But, just like fans of all sports teams except the champion, there’s a rallying cry: “Wait until next year!”

So, 2014 has now come and gone. The S&P 500 performed pretty well, but not as well as 2013, gaining a dividend adjusted 13.69%, compared to 2013’s extraordinary 29.6% gain.

Since 2014 wasn’t as good for the S&P 500, does that mean that it was a stock picker’s market rather than an indexer’s market?

2014 Performance of the S&P 500’s Stock Components by the Numbers

To compare the performance of the components, I took the 486 stocks which remained in the index throughout all of 2014, eliminating either new entrants or spinoffs. I then looked at the opening prices on January 2, 2014 and the closing prices on December 31, 2014 to see how well each stock performed over the past year. If the dividend reinvested performance was better than the 13.69% average, then it was a winner. If not, it was a loser.

In total, 240 stocks outperformed the average, or 49.38% of the components exceeded the 13.7% gain in 2014 – the best in the 3 years I’ve been evaluating.

If you picked a winning stock, you probably got a return between 10% and 50%, and even if you picked a “losing” stock, you likely still turned in a gain, as 120 out of the 486 stocks stocks showed a loss on the year.

17 stocks lost more than 30%, while 4 stocks gained more than 90%.

Let’s look at the David Letterman Top 10 and the Bob Uecker Bottom 10 stocks for 2014.

The top 10 S&P 500 stocks for 2014

Ticker Change
LUV 124.51%
EA 105.31%
EW 93.94%
AGN 91.95%
DAL 80.45%
KR 63.55%
MU 61.49%
VRTX 60.39%
MNST 59.62%
MAR 59.15%

The bottom 10 S&P 500 stocks for 2014

Ticker Change
FCX -38.02%
GNW -45.05%
AVP -45.50%
ESV -47.58%
DNR -50.15%
NE -55.35%
DISCA -61.81%
RIG -62.87%
APH -69.68%
TMK -80.25%

This is the first year in three that I’ve been doing this analysis where you had about even odds, statistically speaking, of making a lucky throw of the dart. Of course, your trained dart-throwing monkeys might not always pick the right stocks, as Paula Pant explains in her experiment.

Throw a dart, though, for 6 years with a 49.38% chance of hitting a winner each year, and you’ll have a 1.45% chance of being a winner all six years.

Furthermore, as is usually the case, it was a few stocks that really pulled up the index. If you had your trained monkey throwing a dart at the dartboard and you picked a winner, then you outperformed the index, on average, by 15.96%; however, if that monkey picked a loser, then you underperformed the index by an average of 17.10%. So, while on average, you had a better shot at picking a winner compared to the index, the magnitude of your error if you didn’t train your dart throwing monkey well was greater.

Those aren’t odds I like.

Still tempted to invest in individual stocks? Let’s talk about it in the comments below!

Massive hat tip to Brian Remson for pointing out the methodolgy error in Yahoo Finance’s dividend adjusted closing prices for the S&P 500. His research meant that the monkey lost again this year, as, using Yahoo’s numbers, 52.88% of stocks would have beat the index. Dividend reinvestment is important to your investment performance!

Published by

Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

4 thoughts on “Train a Monkey to Throw Darts or Pick the S&P 500 Index? A Look at 2014’s Performance

  1. I follow a couple dividend stock bloggers, and while I’m intrigued by their approach it is not one I’d take on myself. With one small exception: we just started fully participating in our company’s employee stock purchase plan. We get a good deal (15% off of the lower of two prices: first day of 6 month purchase period, or last day). We could sell immediately, but that would mean short term capital gains on the entire gain (including the 15% discount). For now, we plan on holding each purchase of stock for rolling 18 month periods, to get to claim long term capital gains.

    What do you think? Better to just sell right off the bat and apply it to our asset allocation (all index funds)?

    1. That’s a question I cannot answer without knowing more about your situation and having you under contract. I would face liability issues otherwise. Kind of like asking your doctor to tell you whether you broke your foot without going in to his office for an x-ray. Sorry!

  2. It\’s hard to beat the S&P in the long run, and since I don\’t planning on cashing out my 401K anytime soon, so I put it in the S&P 500 index fund available through the investment company that we use here at work.

    I might miss out the big gain, but it\’s will balance out, and I probably I receive a big shock, especially with what going on in Europe right now.

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