Strategy Lab Open / Portfolio Simulation
You may have heard of MSN’s Strategy Lab contest, but you may not be familiar with a parallel contest that ran for the last two rounds, the Strategy Lab Open. The SLO winner earned a slot in the next round of the Strategy Lab. SLO was a unique contest in that the winners were selected based on a combination of portfolio performance and the ability to explain the investment approach in a blog.
I played in both SLO rounds and found it to be a valuable experience. I’ve followed financial markets for many years, but until about two years ago had only invested through mutual funds. When I read about SLO, it seemed like a great opportunity to practice and evaluate my ability to manage a stock portfolio vs. mutual fund investing.
The portfolios for the contest were run through Marketocracy. M* has a number of diversification and compliance rules, along with brokerage commissions and management fees designed to simulate running a mutual fund. For the contest, we were limited to long-only funds and had to comply with M* rules.
I quickly discovered that portfolio management (setting buy and sell prices, asset allocation, buy/sell strategies, etc.) is a very different skill set than stock picking.
Over the course of nearly a year, I held 32 different stocks, 14 winners and 18 losers. All were picked and pitched on CAPS as well. I also got much more comfortable and confident in using strategies like trading around a core position to enhance gains (or limit losses). That involves selling off part of a holding after a run up and then looking to buy it back at a lower price. Many of my lessons learned are summarized in this post from last fall and I posted a wrap-up just before the contest ended.
I also found that the virtual portfolio provided a good outlet for those times when you know you should be patient, but feel like you just have to do something – I could tweak with play money while leaving my real portfolio alone. It was also valuable as an intermediate evaluation between a watchlist and actually buying a stock.
One of the surprises was how helpful the blog was to the investment process. Putting the arguments for buying the stock, the risks, buy and sell target ranges, expectations, etc. down in writing really helps clarify the decision process and provides a reference when re-evaluation is needed. A journal, blog, or CAPS pitches can all serve this purpose. That’s one reason why every stock I own has a fairly detailed CAPS pitch and many have pitch updates.
Bottom line, with a little bit of discipline, some learning and a time commitment for research and portfolio maintenance, an individual investor can beat typical mutual fund results. We don’t have the time and research resources the pros do, but we do have some advantages – we can buy and sell without moving the market; we can invest in small caps that wouldn’t move the needle at a big fund; we can be patient; we don’t have to fight a management fee headwind…
For anyone who’s just getting their feet wet in investing, I highly recommend playing with one of the many portfolio simulation games available on line. The practice is valuable experience that goes a long way towards building confidence and learning to deal with inevitable mistakes. In addition to Marketocracy, many CAPS players have blogged about updown.com, Marketwatch runs Virtual Stock Exchange and I’m sure there are many others. Like any skill, I believe portfolio management improves with practice. That’s something you can’t get on CAPS. Not a dig at TMF, just an observation that CAPS is a stock picking tool (and a good one), not a portfolio simulator.
Unfortunately (or fortunately for my free time), the sponsors of the Strategy Lab Open aren’t continuing with a third round, although they may start up again at some point in the future.
And if you’re curious about how I did – about the 25th percentile among active players. For the nearly full year, the portfolio was essentially flat – which was significantly better than the S&P. Adjusting the start and finish points to match the pro game, I beat four of the six players in the most recent Strategy Lab round – including the Fool’s own TMFEldrehad, aka the CAPS Commando.
Finally, the winner of SLO2 is CAPS player vanmeerten. He racked up an amazing 30+% gain over 5 ½ months in a down market – keep in mind, the diversification rules didn’t allow loading up to gamble on a single silver bullet stock.
Congratulations Jim, and good luck in the next Strategy Lab round.