Van Meerten's picks

The Lake Wobegon effect on your stocks

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Everyone is trying to be number one. Who will bring back the most gold metals in the next Olympics, who will win the Super Bowl or the World Series. You hardly ever hear anyone predict who will win silver or bronze. Those athletes will be among the best in the world, probably only a nanosecond off the times of the best but never be interviewed and never be on a Wheaties box.

Garrison Keillor invented a town called Lake Wobegon where all the children are slightly above average and it would be a wonderful place to live. What lessons can we learn about being just slightly above average?

During my lifetime I've had two Lake Wobegon happenings I'd like to share with you. The first involves sports. The younger guys at my firm wanted to start up a softball team and compete in a Financial Services League. As a joke they asked me to join. Being over 50 at the time, it was a joke but I decided to join anyway. Besides, I knew that all the teams went out for beer after the games and that would be a good opportunity to socialize with people from other firms.

Most of the guys on the teams were under 30 and had played baseball in college, many on full scholarships so I didn't think I'd get any playing time, I was really just there for the beer. Some of the guys could really knock the cover off the ball. There were some utility lines behind center field and we had one guy that often hit the ball over not only over the center field fence but sometimes over the utility lines as well. What competition!

The team was young and they made sure the old man got to play at least one inning a game and often some of the guys felt more responsibility to a date or a popular happy hour so they had to put me in just to have enough bodies to play. Everyone else hit for the fence. I knew I couldn't do that, so I just wanted to get on base. I knew I could put a soft pitch over the shortstop's head and into the grass so that's what I did. Always I'd settle for a single and the only doubles I got was when they over threw first base and the ball went into the parking lot so I got an automatic double. No one noticed me, they watched the guys hitting over the utility line. Somewhere mid-session I saw the guys all gathered about the wife who kept the score pad and they were all laughing. When I asked what was so funny I was told that I was the only guy in the league with a 1000 batting average; mostly singles, a few doubles on errors and no triples or home runs. I didn't have to buy beer that night. Superior performance but only slightly above average.

So what has that got to do with stocks? When I opened my first portfolio on Marketocracy I didn't know a lot about portfolio management. I had put most of my clients into managed money or recommended 5 star funds. I let the research department find stock picks for me. I ran across the S&P 500 club, guys that invested only in S&P stocks but trying to beat the S&P 500 average. That seemed a pretty tall goal since it's commonly been said that 85% of all the professionally managed mutual funds haven't done that.

The guys often blogged that none of them ever had a S&P 500 fund in the M100 and never would. I joined and decided that I'd look for stocks that where beating the Average and each week cull off the ones that lost money. Now 4 1/2 years later I'm still #25 in the club with pretty average performance compared to the other 81,000 Marketocracy portfolios. I'm not in the 50 percentile for any period but what are my overall stats?

VMFIV has beaten the S&P 500 average for every measurable period and had a 38.38 percent return for the 4 1/2 years, only an 8.38% annual rate of return. The S&P 500 has had a 20.16 percent return over the same period. 38.38 divided by 20.16 = 1.903. I've beaten the S&P 500 average by over 90% by being "just slightly above average".

Lesson - Quite hitting for the fence and weed out the losers. Be satisfied by having a portfolio that is "just slightly above average" all the time and you will be the winner in the end.