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Evaluating The Motley Fool Portfolios

     The Motley Fool has become one of the most popular online forums and investment oriented web sites for individual investors. At least part of this popularity has resulted from strong performance of a Motley Fool real money portfolio discussed on their web site and in their books. "How the Fool Beats Wall Street's Wise Men and How You Can Too" is the subtitle of The Motley Fool Investment Guide.

     Performance evaluation can be complicated and conclusions are often subject to debate. In marketing and evaluating their own performance, fund managers and sponsors have a tendency to focus on successful funds and periods of outperformance, while ignoring or underemphasizing previously unsuccessful funds and periods of underperformance. As a result, many performance claims are subject to survivorship bias. For this and other reasons, it is prudent and often illuminating to independently evaluate performance or seek unbiased interpretations of performance.

     It is important to note that The Motley Fool has been in existence for approximately five years and the longest track record for any of the Motley Fool real-money portfolios is less than five years. Experts generally agree that longer track records are required to determine whether outperformance or underperformance can be attributed to skill as opposed to luck. In fact, Peter Bernstein states the following in Measuring Sticks in Worth Magazine (September 97). "Results over short periods of time, even those as long as two or three years, can be meaningless. Luck counts much more than skill in the short run."

     In an attempt to objectively evaluate the past performance of Motley Fool "real-money" portfolios, Investor Home has gathered a substantial amount of information on current and past Motley Fool portfolios. The following tables are not complete and should not be considered comprehensive. (See references below). However, the following tables contain relevant information that investors can consider in evaluating the performance of Motley Fool portfolios through 1998. See The Motley Fool web site for current information on the current portfolios. All of the following information about the portfolios originates from information found in America Online Forums or web sites maintained by The Motley Fool or from information provided by Motley Fool staff.

Table 1
(as of 12/31/98)
Motley Fool Real-Money Portfolio Summary
PortfolioStart
Date
Start
Value
Status Historical performance
Motley Fool #11993$15,000ClosedUnderperformed
Motley Fool #2 *8/4/94$50,000OpenVery strong outperformer
Running With the Market8/95$50,000ClosedDown more than 50% in less than 6 months
Boring Portfolio1/29/96$50,000New
Managers
Significantly underperforming
Drip Portfolio7/28/97$500 +
$100/month
OpenUnderperforming
Cash-King Portfolio *2/3/98$20,000 +
$2,000/6 months
OpenAhead of the S&P 500
Foolish Four Portfolio12/24/98$4,000New 

Table 2
(as of 12/31/98)
Motley Fool Portfolios
(% Total Return)
1995 1996 1997 1998 1/29/96-
12/31/98
8/4/94-
12/31/98
Motley Fool #2 68 43 26 199   904
Boring Portfolio ** 9 5 32
S&P 500 38 23 33 29 108 194

*In the fourth quarter of 1998 the Motley Fool renamed these two portfolios. "The Fool Portfolio" is now called the "Rule Breaker Portfolio" and the "Cash-King Portfolio" is now called the "Rule Maker Portfolio."
**As of 12/30/98 (the Boring portfolio is no longer updated daily by the Motley Fool)

Red indicates underperformance versus the S&P 500. Green indicates outperformance versus the S&P 500.

     Table 1 includes information on seven real-money portfolios that have been publicly documented by The Motley Fool. Three of the portfolios began with investments of $50,000 while the remaining four portfolios have had investments of less than $50,000 combined. Tables 2 includes annual and historical return information on the two remaining $50,000 funds, both of which have existed for more than two and a half years.

The Motley Fool Investment Guide states that The Motley Fool originally began as a newsletter. Curiously though, the book fails to mention the fact that a real-money portfolio accompanied the newsletter. Several years ago, the "first Motley Fool Investment Portfolio" was mentioned on a web page (see reference below), but apparently that web page no longer exists on the current web site. That fund underperformed and was closed in the summer of 1994 prior to the introduction of the second (or "online") portfolio.

The "Running With the Market" portfolio was apparently evaluated regularly before being closed in early 1996. (See Cherry-Picking for information about survivorship bias, creation bias, and other performance issues.) The "Boring Portfolio" was started in January 1996 and was evaluated daily through September 1998. However, according to The Motley Fool the fund has new managers as of October 1, 1998. The Drip Portfolio began in July 1997, but at less than 1% of the value of the second Motley Fool Portfolio, it is insignificant. The "Cash King" Portfolio (now called the "Rule Maker Portfolio") began in February of 1998 and is performing well thus far. The Foolish Four Portfolio became a real money portfolio with an initial investment of $4,000 on 12/24/98. Prior to that it was tracked as a model portfolio (See also Dow Dogs and the Foolish Four).

Through 1998, the second Motley Fool portfolio (now called the "Rule Breaker Portfolio") has had outstanding performance, but the Boring portfolio has significantly underperformed the market during its shorter lifetime. On an annualized basis, the second Motley Fool portfolio had returned approximately 69% versus approximately 28% for the S&P 500. The Boring Portfolio has returned roughly 10% per year annualized versus 28% for the S&P over the corresponding time period. The second Motley Fool portfolio was particularly strong through the second quarter of 1996 and in 1998 but also underperformed for four straight quarters from July 1996 through June 1997.

The second Motley Fool portfolio outperformed the market in its first few years thanks to $5,000 investments in America Online and Iomega that each yielded many times the initial investments. Iomega has since given back much of its gains, but America Online and a more recent investment in Amazon.com have continued to yield excellent returns for the portfolio. America Online and Amazon.com were the best performing stocks on the NYSE and NASDAQ in 1998 with spectacular gains of 585% and 966% respectively. Interestingly, The Motley Fool has significant relationships with both companies. On 4/7/97 Interactive Week reported that America Online had invested roughly $500,000 in seed money into The Motley Fool "in April 1995 and has an option to purchase an ownership stake of less than 20 percent through 2005" and the Fools market their books through Amazon.com.

The Motley Fool documents performance of their real-money portfolios in their America Online forum (Keyword Fool) and on their web site on a daily basis. Actual returns, net of commissions, along with comparisons to the S&P 500 and NASDAQ indexes are included. Extensive commentary on the portfolios and the stocks in the portfolios are also made available on a regular basis.

The Motley Fool deserves a great deal of credit for openly supplying a vast amount of information on a timely basis. While many investment industry participants offer model portfolios or other forms of advice, few actually maintain real-money accounts in public view (in effect, putting their money where their mouths are). The Motley Fool reports include results net of costs and they have a policy of announcing trades before placing orders.

Included with the reports are comparisons to the S&P 500 and NASDAQ indexes. However, prior to 12/31/98 the Motley Fools index comparisons apparently under represented the index returns. Reported index returns were apparently calculated by dividing the index beginning and ending value. This ignores dividend payments which must be reinvested in order to determine the appropriate index comparison. On a daily basis the difference is insignificant, but over periods of several quarters or years the difference can be significant. A Motley Fool report on 12/31/98 stated that the S&P 500 index returns would be reported with dividends for all their portfolios beginning on January 4, 1999. The NASDAQ comparisons apparently will continue to ignore dividend reinvestment and their portfolio archives prior to that date apparently continue to list the index returns without dividend reinvestment.

Additionally, if the goal is to offer viewers complete comparability with alternative investment opportunities such as mutual funds, there is other useful information that could be calculated and disclosed without much further effort. For example, in addition to the previously noted discrepancy in their index reporting, tax information (breaking down capital gains and dividends annually) and some kind of a risk measure (i.e., standard deviation) would be useful for investors.

The Motley Fool portfolios are apparently non-retirement accounts and are therefore subject to taxes. Supplying capital gains and dividend information would allow a more meaningful comparison with index funds. Index funds generally have a significant tax advantage that investors should evaluate. See The Vanguard Group's Indexing's Tax Advantage. Investors duplicating the second Motley Fool portfolio in non-retirement accounts would have been subject to tax payments that would have significantly reduced their after tax returns. Specific tax payment amounts would have depended on individual circumstances.

Similarly, information about the risk of the portfolios would be useful. A portfolio that fluctuates less is considered superior to a portfolio that fluctuates more, all other factors being equal. For this reason, risk measures such as standard deviation are used to evaluate portfolios. (See Benchmarks & Performance Evaluation.)

The S&P 500 is a common benchmark used for comparison purposes but in many cases it is less relevant for comparison with portfolios that include small-cap stocks. The Motley Fool compares their portfolios with the S&P 500 as well as the NASDAQ index. The NASDAQ index is commonly used as a proxy for technology stocks, but for several reasons it is not an ideal benchmark. The common characteristic of stocks in the NASDAQ index is that they are listed on that exchange. While the majority of stocks in the index are small-cap stocks, the index also includes large-cap stocks that are also included in large-cap indexes. America Online and Iomega are two stocks in the second Motley Fool portfolio that moved from the NASDAQ to the NYSE. See The Vanguard Group's Remember that the Standard & Poor's 500 is not "The Market".

Benchmarks commonly used for comparing portfolios that include both large and small-cap stocks are the Russell 3000 and the Wilshire 5000. The Russell 2000 is commonly used as a benchmark for small-cap stocks. Portfolios selected based on factors such as growth and value can also be compared to specialized indexes of comparable stocks. Similarly, internet stocks can be compared to an index of internet stocks. The second Motley Fool portfolio could be viewed and evaluated as two separate portfolios. One component made up of the Foolish Four, which is best compared to the DJIA, and the other made up of other stocks which could be compared to an appropriate benchmark that accurately reflects the pool of securities.

The Performance Presentation Standards (PPS) of the Association for Investment Management and Research (AIMR) represent a comprehensive method of reporting performance. The PPS are recognized in the investment community as a comprehensive set of standards that allows for accurate and comparable reporting of funds. The PPS include a defined set of mandatory requirements and disclosures. The following are some examples:

  • All real money accounts must be included in at least one composite. (A composite is made up of a set of individual portfolios or asset classes. The composite return is intended to be a single value that reflects the overall performance or "central tendency" of the set).
  • A complete list and description of each composite must be disclosed.
  • No linkage of simulated and model portfolios.
  • Exclusion of terminated portfolios from the composite for all periods after the last period they were in place, but inclusion for all periods to termination.
  • Use of external risk measures such as standard deviation is recommended.

See also


References

Motley Fool Portfolio #1
  http://fool.web.aol.com/school/sch_02f.htm (accessed and printed 5/21/96)
"The Fool's School: How To Invest What You Have: Between $15,000.00 and $50,000.00"
Included the following: "THE INITIAL SIZE of our first Motley Fool Investment Portfolio was $15,000. That was back in the Dark Ages, when we were a print publication. We put $15,000 in about 15 different stocks and killed ourselves in paying commissions."

"Running With the Market"
  http://www.fool.com/foolport/1997/foolport970210.htm
Included the following: "Despite the wildly unsuccessful project we aired in 1995 called Running With the Market, a real-money portfolio that finished down more than 60% after less than six months, the company's reputation as a hip company run by savvy investors has not changed."

  http://208.206.41.244/game/archive/tpa%5F142.htm (accessed and printed 3/27/97)

"The Motley Fool's Today's Pitch" (Pitch #142)
Included the following: "Last week, the Running With the Market Portfolio closed out its Foolish run in the Motley Fool Hall of Portfolios. Some hard lessons were learned in its five-month run and just over 50% loss, but I daresay every Fool who participated in the RWTM folder (except Dave and Tom, *ouch*!) learned many lessons about investing. . . This week, MF Boring takes on the mantle of Foolish responsibility and accountability as he opens the MF Boring Portfolio. As the name implies, Greg's approach to investing is slow and steady, Foolishly cautious, and yet Foolishly aggressive at the same time."

  Fool Portfolio, 9/21/95: Money Lost, Market Beaten - Accessed from America Online.
Included the following: "And the aim is to account for every single portfolio move that we make under the same brand today that we offered up to the nation yesterday and last year. Note that when Dan Running watches Read-Rite tumble, he answers for it. When MF DowMan sees a stock in his IFG Portfolio slip, he presents it. When MF Templar struggles through a tough week in the Neocontrarian folder, he speaks of it. Don't expect hidden brands anytime soon! We don't want to ever, popular as it may be, rename ourselves. We aren't looking for quick hits, relaunches, new brands, promotion that precedes performance, confused financial statements. . ."

  http://www.fool.com/foolport/1995/foolport951006.htm
  http://www.fool.com/eveningnews/1995/eveningnews951017.htm

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