ITA Wealth Management

Nearly six years have passed since the initial debate between two individuals over whether a portfolio based on individual stock selection can double in five years.  To attain this performance level a portfolio must generate an annual return of 14.9%.  For several weeks the debate was mainly between the developer of a software program Take $tock and a college professor from Michigan.

The discussion/debate went something like this.  The professor argued how difficult it is to outperform an index such as the S&P 500 while the software developer contended that following his program, an investor could double their money in five years.  Those are two very different standards as the S&P 500 does not have a historical record of doubling in five years.  To double in five years requires an annualized return of 14.9% and the long-term performance of the market is  closer to 9%.  The current bear market has now lowered that percentage.  So we had two positions.  1) Follow the guidelines of Take $tock and you can double your money in five years.  2) It is difficult to outperform the S&P 500 let alone double your money in five years.

How to settle the debate was a challenge I was interested in so I offered to invest a non-trivial amount of money using the principles laid out by T$.  If the portfolio did not double in five years, the software developer would pay me $100 and if it did double, I would pay him $100.  This is a wager I was interested in losing as I knew I could well afford the $100 if the portfolio doubled in five years.

One needs to know a little about the software program, Take $tock.  The software will rank a stock using three standards, Quality, Mood, and Price.  1) Many parameters are involved in determining Quality and I will not go into them.  Suffice it to say, the program does identify high quality stocks.  2) A “mood indicator” identifies if the current P/E near its historical P/E value.  3) Price is the third factor and the software uses a detailed calculation to see if the stock is properly priced.

These three indicators are color coded green, yellow, and red.  An “all green” stock is preferred.  Note:  When one is using the program, it is possible to override some of the parameters.  In this wager, the agreement was to not do so unless special permission was granted by the software developer.  The argument was – follow the conservative guidelines of T$ to see how well it performs over a five-year period.

The wager agreement permitted purchase of stocks that only had an “all green” rating and to sell the stock if the Quality Rating dropped into the red zone.  Otherwise, I was to hold the stock even if its Quality Rating moved into the yellow zone.  The portfolio was fully populated on October 31, 2003 so that became the starting date.  The wager ended on October 31, 2008.

The data for all transactions is still available on Bivio. I don’t know how long this information will be available.

Did the ICLWager Portfolio double in five years?  Not even close as it managed an IRR value of 1.9% while the VTSMX benchmark ended with an IRR of 0.7%.  The portfolio did outperform an appropriate benchmark, a rather remarkable result considering most mutual fund managers are not able to do this in any give year let alone a five-year run.  However, the portfolio fell short of the wager goal, that of doubling in five years.  If anyone has questions, I will try to answer then for you.

Photograph:  Sculpture in Amsterdam, Holland