On Picking Stocks and Mutual Funds: An Experimental Proposal

[Important disclaimer: I am not a registered investment advisor. If you choose to try the experiment described below, which is shared with everyone for free, the risk is yours alone.]

Lots of people have jumped into the stock market lately, many of them with little experience. That isn’t stopping them, though; they’re creating Robinhood accounts and trading penny stocks at a blinding rate. I’m writing this to propose an experiment individuals can use to evaluate their own skills at picking stocks and mutual funds. This experiment does require some experience investing, but not much.

First, divide your investment capital into three parts of equal size. With the first part, buy either QQQ or SPY, or equal amounts of each. These are ETFs which track well-known stock indices: the technology-heavy NASDAQ 100 and the broader S&P 500, respectively. This chart shows how the S&P 500 has performed over the last five years.

stock chart

This first third of the investment money is analogous to a control group; it is the standard by which we measure the performance of the other two-thirds.

The second third is to be invested in no-load, open-ended, actively-managed mutual funds. You should try to choose the best ones you can find. Two that I’ve bought shares of, myself, are TRBCX (a fund which invests mostly large-cap blue-chip stocks), and WAMCX (a fund investing in small-cap, rapidly-growing companies’ stocks).

The final third is made of stocks you pick and buy/hold/sell yourself, using whatever criteria you choose. If you run this experiment for six months (or longer), and this third is the largest at the end of this period, you have good evidence that your stock-picking methods work well, justifying continuing investing in this manner.

If, on the other hand, your hand-picked mutual funds do best, then the data supports the idea that you’re a good fund-picker, but should probably not invest in individual stocks.

Finally, what if SPY and/or QQQ do best? If that is the case, I wouldn’t try to beat the market with my own picks, but would simply invest in open-ended index funds, or ETFs.

I’m trying this experiment myself. So far, my hand-picked mutual funds are doing best. If the running of this experiment continues in this way, I’ll abandon the picking of individual stocks, in favor of mutual funds. Of course, it’s always possible to study and learn new things. If this running of the experiment yields the answer “funds,” there’s nothing stopping me from studying stock-picking some more, and then repeating the experiment to see if I get better results for the choosing of individual stocks. One could also abandon the experiment, but continue to invest in those particular stocks which did well.

There are some types of investment I haven’t mentioned here. Cash, money market funds, CDs, and bonds were not mentioned because interest rates are at historic lows, limiting the return one can get from such investments. As for derivatives, such as options or futures, those have not been included simply because I have no experience with derivatives. Traditional hedges against inflation, such as gold and silver, are not included because inflation is almost non-existent.

One last thing: Robinhood’s customers will have a hard time doing this experiment, for that company does not offer mutual funds. Schwab does, though; that’s the broker I use — and the one I recommend. You can find them online at http://www.schwab.com.

Have you noticed what silver’s been doing lately? The price of silver is literally on fire!

silver is literally on fire

Because of the price of silver being literally on fire, they will not be buying and selling troy ounces of metallic silver when the markets open in New York tomorrow morning. Instead, they will be selling “oxide ounces” of silver oxide, in sealed-plastic capsules of this black powder, with an oxide ounce of silver oxide being defined as that amount of silver oxide which contains one troy ounce of silver.

silver oxide capsule

A troy ounce of silver is 31.1 grams of that element, which has a molar mass of 107.868 g/mole. Therefore, a troy ounce of silver contains (31.1 g)(1 mol/107.868 g) = 0.288 moles of silver. An oxide ounce of silver oxide would also contain oxygen, of course, and the formula on the front side of a silver oxide capsule (shown above; information on the back of the capsule gives the number of oxide ounces, which can vary from one capsule to another) is all that is needed to know that the number of moles of oxygen atoms (not molecules) is half the number of moles of silver, or (0.288 mol)/2 = 0.144 moles of oxygen atoms. Oxygen’s non-molecular molar mass is 15.9994 g, so this is (0.144 mol)(15.9994 g/mol) = 2.30 g of oxygen. Add that to the 31.1 g of silver in an oxide ounce of silver oxide, and you have 31.1 g + 2.30 g = 33.4 grams of silver oxide in an oxide ounce of that compound.

In practice, however, silver oxide (a black powder) is much less human-friendly than metallic silver bars, coins, or rounds. As you can easily verify for yourself using Google, silver oxide powder can, and has, caused health problems in humans, especially when inhaled. This is the reason for encapsulation in plastic, and the plastic, for health reasons, must be far more substantial than a mere plastic bag. For encapsulated silver oxide, the new industry standard will be to use exactly 6.6 g of hard plastic per oxide ounce of silver oxide, and this standard will be maintained when they begin manufacturing bars, rounds, and coins of silver oxide powder enclosed in hard plastic. This has created a new unit of measure — the “encapsulated ounce” — which is the total mass of one oxide ounce of silver oxide, plus the hard plastic surrounding it on all sides, for a total of 33.4 g + 6.6 g = 40.0 grams, which will certainly be a convenient number to use, compared to its predecessor-units.  

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[This is not from The Onion. We promise. It is, rather, a production of the Committee to Give Up on Getting People to Ever Understand the Meaning of the Word “Literally,” or CGUGPEUMWL, which is fun to try to pronounce.]